When you’re trying to build your property portfolio, one of the main factors that will determine how quickly you can expand will be how much your individual properties appreciate in value.
However, over the course of any market cycle, there are always going to be both winners and losers. If the average return for property over a long period of time is 5%, then there are going to be some areas that make a lot more than that and others that will make nothing or even go backwards.
The way I have always done this is by buying in blue-chip locations. History shows us that high-quality suburbs have consistently outperformed the rest over not just years but decades. There are also a number of reasons why this is the case.
Firstly, in these types of locations, there is a very limited supply of land. Think about the Eastern Suburbs of Sydney for example which has a set amount of land with nowhere else to expand. Then combine this with the huge influx of people the city receives every year in the form of immigration. This alone means supply and demand are always going to be in the homeowner’s favour.
However, there is another factor that often gets overlooked when it comes to property and that’s affluence.
When we think about these locations like Bondi, Bronte, Rose Bay or Paddington we already know the types of people who are looking to buy there or already own property there. They are typically very wealthy people. They might have high-paying jobs or businesses that are successful. No matter what it is, they are the types of people who are able to purchase $5 million homes. At the higher end of the scale, there are buyers out there paying cash for $50 million homes and they are very comfortable doing it.
It’s also this level of affluence that will ultimately be the reason values in these locations will continue to rise. While these house prices are very high, for a business owner or successful professional, they will likely continue to see their incomes rise over time. That in turn will keep fuelling demand and mean that there is more room to grow for property prices.
On the flip side, let’s compare the price increases in some of these regional areas or even smaller capital city markets. In recent years, regional prices have boomed. There was also a huge influx of investors who were buying into these regional areas and coastal hotspots.
While that no doubt drove up the price of these locations, the reality is that as soon as these investors stop buying, that will likely be the end of most of the growth. Because when it comes time for the locals to buy who are just on average incomes, they will simply not be able to afford to pay the high prices. This will mean values will stagnate or at worst fall back down to a level that locals can afford.
When you’re looking to invest always look at what a location has done over a long period of time. You shouldn’t be aiming to try and make a fortune over night. Focus on buying well in areas where there is affluence and with the power of leverage and compounding, your high-quality investment will ultimately come out ahead.