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October 22, 2010

Is cheap always good?


Just because a property is affordable doesn’t mean it’s a good investment for the future.

BY MICHAEL YARDNEY

The term ‘sea change’ became popular in property circles to describe urban families packing their belongings and making the pilgrimage to various parts of our extensive coastline.

One of the most popular destinations for sea changers was Queensland’s Gold Coast, which for decades claimed the title of Australia’s fastest growing region… until recently that is.

In a recent study demographer Bernard Salt explained that the Gold Coast has been bumped to the number two spot as Australia’s fastest growing region – with 17,000 new residents over the year to June 2009, compared to the western outskirts of Melbourne where the municipalities of Wyndham and Melton which attracted 18,000 new residents in the same period.

Salt makes the point that although Melbourne’s western suburbs lack the Gold Coast’s glamorous highrise skyline, canal estates and bikini-clad meter maids (with the area instead being most famous for the nearby sewage farm), they boast one big drawcard – affordability.

Salt says that although Melbournians have traditionally favoured the more undulating eastern suburbs as opposed to the flat basalt plains to the city’s west, they’re now starting to appreciate, “the proximity and affordability” on offer in the likes of Melton and a revamped Werribee.

But, is this the place to buy an investment property?

The answer is clear – definitely not. Just like the sea change locations and other ‘hotspots’ were never the right place to buy investment properties in the past.

Sure sea change properties were all the rage not that long ago. But very few people enjoyed the same level of capital growth when buying on the Gold Coast, the Sunshine Coast or Mandurah that other investors were able to achieve when buying well located inner suburban properties in our capital cities.

Undeniably affordability will becoming a critical factor in many homeowners’ buying decisions, so while these new suburbs may be a great place to live – that’s not where you will find ‘investment grade’ properties.

Remember, investors should be looking for asset growth and we know that in general it’s the land component of a property that appreciates. This means for an investor who is looking for capital growth, they want the land-to-asset ratio to be as high as possible.

Think about it…

When you buy a new house on a block of land in one of the new outer suburbs, you may find the land, the bit that appreciates, could be worth less than half the total property value.

There are plenty of other reasons I suggest investors avoid buying houses in these new estates and they all relate to the probability of poor capital growth.

Firstly, new homeowners in these ‘mortgage belt’ suburbs are more interest rate sensitive, as they tend to have less disposable income than people who live in more affluent suburbs.

Secondly, there’s rarely a scarcity factor about properties in these locations. Many properties look the same and there’s always another estate with more similar houses and more land just across the road. Of course, scarcity is one of the major reasons properties increase in value.

Another reason I would steer clear of these areas is the demographics. While they’re great for young families, there isn’t the same demand from a diversity of tenants as there is in the inner and middle ring suburbs.

It should be fairly obvious by now that ‘physical growth’ of a suburb – that is more people moving in – doesn’t relate to ‘capital growth’ (an increase in value) which is affected by supply and demand.

For my money you can find better investment properties elsewhere.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. Subscribe to his e-magazine at www.propertyupdate.com.au. For more information about Michael visit www.metropole.com.au.

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2 Comments

  1. Hi Michael, I know of properties in the Gold Coast that have had better growth than certain major city property types, just as the reverse is also true. It all comes back to buying the right type of property not the area that you buy in. Over the coming years I believe you will see many of your inner city Melbourne baby boomers retire, sell up and move to where they always dreamed of living. The places that they holiday like the Gold and Sunshine Coasts.

    Comment by Rob — October 22, 2010 @ 11:13 pm

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