Whenever I look to purchase a property for myself or my clients, one of the first things I always take into consideration is scarcity.
Basic economics will tell you that if there are more buyers than sellers, that property, stock, or asset of any kind will increase in value. That’s why it’s so important to understand the concept that not all property is created equal.
If we look at the ways our cities have developed over the past 50 years or more, it’s clear that there has been a very large shift in the way we live. As Australia opened up its borders to new migrants, the vast majority have chosen to move to the larger cities, predominately Sydney and Melbourne.
This has seen house prices in those two cities grow at a rapid rate and that has only been accelerating over the past decade.
More specifically, we can see that within these cities, the inner ring suburbs continue to perform incredibly strongly and consistently. When you look at who wants to live in those suburbs and why it’s no surprise to see why these suburbs have outperformed.
Generally speaking, suburbs that are within 10-15km of the CBD and close to water, will attract the most people. At the same time, these areas are also the ones that have the highest scarcity factor.
These more established suburbs with better infrastructure, access to shopping and amenities and plenty of jobs are normally closer to the CBD and water and that’s where the wealthy and those that can afford it want to live.
This same group of people are also prepared to pay a premium to live in those inner-city areas for the lifestyle factor alone.
It’s for that reason that these inner-city areas will always be the best-performed areas for capital growth. While there are certainly regional areas or even outer suburbs that you can find that will outperform at times, you would be hard-pressed to find an area that can show a track record of performance that is the equivalent of many of the inner-city locations around Sydney. That’s why these blue-chip suburbs make for excellent investment opportunities.
On the flip side, this high demand has created a situation where these suburbs now have very low rental yields.
As investors, it’s important that you can service any debt that you take on as it means you’re going to be able to hold the property for a long period of time and make the most of the substantial capital growth that’s on offer.
One way to do this is to focus on apartments in smaller unit blocks and not buy established houses in these blue-chip areas. This way you can get the best of both worlds. You’re buying into the highest growth areas while also having the added benefit of being able to boost that rental yield.
While apartments in Sydney are more common than larger blocks of land, you only have to look at the small number of new apartments being built in areas like the Northern Beaches or Eastern Suburbs, to know that there is by no means an oversupply.
By focusing on buying scarce assets in high demand areas, you’re giving yourself the very best opportunity for long-term capital growth and that is one of the most effective ways to build a substantial property portfolio.