Why Blue Chip Is Not All That It Is Cracked Up To Be

Like so many things in life, some things are considered “better” than others without much justification for that point of view at all.

Seemingly, you’ve made it if you are driving around in a Mercedes S-Class, regardless of whether you are paying for it on a personal loan with astronomical interest rates.

People who drive around in a Holden Barina for years, on the other hand, are considered to be middle of the road.

Of course, it’s all a matter of mindset, but it’s also about determining whether you want to be wealthy or whether you want to appear to be rich.

Appearing to be rich usually involves buying things that you can’t afford, such as that Mercedes, as well as properties in locations that are more about bragging rights than potential capital growth.

Let me explain further.

Blue chip baloney

I guess what I’m really talking about is the desire for many people to own “blue chip” real estate.

These are the properties located in the most desirable suburbs, where only the moneyed few have ever been able to afford to live. Some savvy business people and property investors have ended up living there, but I bet my bottom dollar they didn’t do that by biting off more property than they could financially chew at the beginning of their journeys.

Let’s consider two examples to illustrate my point.

I bought a property in Carrum Downs in Victoria that the original owners bought way back in 1998 – so about 21 years ago.

Now, for those of us who aren’t from Victoria, Carrum Downs is 36 kilometres south-east of Melbourne's CBD and is actually located within the City of Frankston local government area.

Back in 1998, it would have seemed like it was on another planet, such was the perceived “distance” from the city.

They paid $91,000 for a house and land in 1998, which was an affordable price point back in those days given the median house price in Melbourne was about $155,000.

Today, it is worth $550,000, which remains in the affordable price bracket for potential buyers and therefore it remains in strong demand.

The real upside to this holding, however, is that in that 21 years the property’s price has soared to now be worth six times what was originally paid for it.

You have to agree that is an amazing return for a property that was probably viewed as being somewhat “inferior” back in the day.

Now, let’s take a look at a property that was bought in one of Sydney’s most desirable suburbs – Coogee – at the same time.

Lots of people like to dream about owning a property in Coogee, but even in 1998, the prices were higher than the average property punter could afford.

Back then, a two-bedroom unit that was one street back from the beach was bought for $315,000. The median unit price in Sydney at the time was about $228,000, so this property was still expensive for the time. 

It recently sold for $825,000, with the current owners benefitting mostly from the Sydney market upswing midway through this last decade.

The thing is, the capital growth on the property over that period of time was far less than the more affordable property bought at the same time in Carrum Downs.

In fact, the Coogee unit increased in price by about 2.6 times over the same period.

So, we have two properties bought at the same point in time, but with vastly different purchase prices.

One was in a location that was probably considered a bit so-so, while the other was somewhere that many people have long had a desire to live.

You could have bought nearly four houses in Carrum Downs for the same price as the one unit in Coogee in 1998 and today have equity of about $1.5 million!

At the end of the day, it was the more affordable property that realised the most capital growth over 21 years.

Why?

Well, it’s because it was priced in a bracket, both then and now, that was achievable for many more potential buyers.

As we all know, more demand than supply pushes up prices, so when you have a property that is affordable to the many, rather than the few, capital growth usually follows.

Across the country, there remains a plethora of affordable locations with solid capital growth potential over the medium- to long-term.

The key is to know their whereabouts so you can buy with confidence and with a steady eye on the profitable years ahead.