What's Location Got To Do With It?

This is Part 2 of a 4 part series on what the experts we’ve interviewed on The Elephant in the Room property podcast think is really going to happen in 2019.

One thing that has come through loud and clear is that Australia is not one big property market and that even within Sydney and Melbourne the effects of the market downturn are not uniform.

Location location location

It’s well accepted that the location makes up 70% - 80% of a property’s value and is also responsible for around the same proportion of its performance. Sensible reporting by the media would mean taking the time to understand that established markets are not as susceptible to price falls as new stock.

History has shown this to play out in previous downturns. Data expert Kent Lardner gave us a great illustration back in episode 6.

“We were looking to buy our first property out at Coogee, in the Eastern Suburbs of Sydney, just a unit, and I noticed something [in the median price data] that’s really interesting. It was just a flat line through the tough times in the eighties.

“A lot of suburbs really dipped in the eighties. But Coogee and a lot of the Eastern Suburbs of Sydney stayed flat. So what that told me was, why did that happen?

“Then you start to realise, well look if it’s old money or people are not highly leveraged, when things go bad, they don’t need to sell.”

Kent’s example is particularly interesting because he refers back to the 1980s, when there was a recession and interest rates were around 17%. Recent headlines have compared our current situation to that period. This is a reminder that the market fundamentals of supply and demand play out throughout all stages of the property cycle. If owners are not pressured to sell, supply will be limited.

What are A-grade assets so important?

While location the is key to around 80% of a property’s performance, the asset itself makes up the balance. A-grade properties can see price rises even while the market as a whole is in decline. This is because certain properties are in short supply and highly desirable, which means they will get competition from buyers even when clearance rates are low. I saw it myself at an auction in Sydney’s Lane Cove in December, which is normally a terrible time to auction, even in a hot market. Twelve registered bidders, six of whom bid and a sale price well in excess of the reserve - just like in the boom.

While prices are falling elsewhere, A-grade property in blue-chip suburbs can go up in value. For example, a small cottage in Balmain sold in December 2018 for 4% more than it last sold for in 2016. However, even in good suburbs, C-grade property can lose money. A house in Enmore also sold in December, this time for 9% less than it last sold for exactly 2 years earlier. This property was severely compromised due to its location opposite an electrical substation. Somebody paid too much for it in the boom.

In episode 17, Surry Hills-based sales agent and auctioneer Mark Foy really spelt it out.

“What we're finding in the market at the moment, your A-grade properties are still selling for A-grade prices. It's your B- and C-grade properties that were getting A-grade prices in 2014, 15, 16, 17, that aren't anymore.“

On the supply side, the key concept that every buyer needs to grasp is that of scarcity. An A-grade property is something that is in short supply and high demand - regardless of market conditions. Peter Koulizos talked about how gentrification and scarcity are linked.

This is nothing new - historically scarcity is what drives higher price growth over the long term. We also discussed this with John Lindeman in episode 26.

“I've studied the Australian housing market and I've gone right back to 1901 and looked at the overall performance of the market, which areas have performed better than others. If you're buying for long-term growth, you need to buy in a capital city.

“And which parts of that capital city: it's always the well-established areas that go up, percentage-wise, more than the others; and then, within those, if you want to narrow down further, it's areas that have some unique benefit. Like, say, if you're looking at Sydney it would be properties with a harbour view because there's only a limited number of those.”

Our message is clear: whether you are buying a home to live in or an investment property, capital growth really needs to be a major consideration. If you have your eye on the long term and buy a quality asset in a sound location, you will be less panicked on the downward run of any cycle.

2019 could be your year if you are ready to buy. For people put off by the boom, it’s time to take advantage of market conditions. Your biggest challenge may well be getting your finance sorted, so I’ll cover that in Part 4. But first, in Part 3, I’ll discuss the potential impact of changes to negative gearing.