The property investment conundrum...

[bugmenot]

Hi all,

Hoping you can help clarify a conundrum I have been nutting over. I have spoken to many "experienced property investors" about this and noone seems to be able to give me a straight answer.

The conundrum I have is this. The generally accepted rule of thumb for property investing (at least in Melbourne) is to buy a property within 10 kilometres of the CBD. These properties are said to appreciate better over time compared to middle and outer suburban properties. Eg; If you are after capital growth, as a rule, you should look within the "10k zone".

The problem with that rule however is that if all properties within 10 kilometres of the CBD experienced continually compounding growth, at a greater rate than their outer suburban partners, the price gap would grow exponentially.

Can anyone explain this simple problem to me? Maybe I am too enquisitive or too silly to realise a basic mistake in my reasoning?

Thanks for any light you can shed.

 

[marklar]

Supply and Demand. While there's a demand for property in the 10k zone, prices will remain high and continue onward and upward. Once they are no longer affordable or poor value for money, people will move further out, reducing demand.

m.

 

[robots]

hello,

my name is professor robots, just a quick introduction, i am one of five on the planet who predicted the recent bOoM

growth in inner or outer suburbs/towns can be very similar and what is in the package is very important, every suburb/town has desirable properties and therefore multiple buyers

that maybe a house in Bendigo or Lakes Entrance, unit in Footscray, or Lysterfield, or Sunshine

those sort of statements are traditionally pushed on the seminar circuit by promoters, a bit mischievous

in the near future i hope to put out a newsletter on property in the style of Dr Doom, maybe Dr Boom (since i got the associate professorship from Melbourne University now)

Thankyou
Professor robots

 

[bugmenot]

hello,

my name is professor robots, just a quick introduction, i am one of five on the planet who predicted the recent bOoM

growth in inner or outer suburbs/towns can be very similar and what is in the package is very important, every suburb/town has desirable properties and therefore multiple buyers

that maybe a house in Bendigo or Lakes Entrance, unit in Footscray, or Lysterfield, or Sunshine

those sort of statements are traditionally pushed on the seminar circuit by promoters, a bit mischievous

in the near future i hope to put out a newsletter on property in the style of Dr Doom, maybe Dr Boom (since i got the associate professorship from Melbourne University now)

Thankyou
Professor robots

Thanks Robots. Good to hear someone talking sense.

Anyone who believes the tripe, answer me the following:

Property 1. Purchased for 1 million in inner 10ks. Appreciates at 9 percent per year.

Property 2. Purchased for 1 million in outer 10 ks. Appreciates at 7 percent per year.

Fast forward 20 years and maintain the same rule of thumb growth rates, the inner city example will be exponentially more expensive due to compounding growth. This is simply not the case, as a rule of thumb.

 

[bugmenot]

Supply and Demand. While there's a demand for property in the 10k zone, prices will remain high and continue onward and upward. Once they are no longer affordable or poor value for money, people will move further out, reducing demand.

m.

Sorry Marklar but you have failed to properly address the falacious mathematics behind this apparent urban myth.

The simple truth is that the inner 10k properties are not astronomically higher priced when compared to the outer 10k properties. They are, and will be, X percentage higher priced, and this percentage will stay approximately the same throughout the years (as opposed to increasing exponentially). IMO of course.

 

[white_goodman]

people should really focus more on income streams (rent) as a % of price rather than expected capital growth, residential property is still due for a major dip in this country despite the supply side control... is still very much subscribing to the 'greater fool' theory.. and yes bugmenot is correct on the maths..

 

[Gunlom]

As a long term Property nut, I see it as this..

These figures are merely an example

If property in the CBD is worth $1M, then a property 10km out, will be worth $800k, and one 20km out will be worth $600k , and one 30km out will be worth $400k

it's all about the ratios, every city is different, with different suburbs, will have different factors, they all generally move together, barring, new roads and different infrastructure being build in the area, which will affect prices...

Look at the IP, for that price what could you buy for that, if its about 80% of a better suburb, closer to the CBD, then that ratio will stay the same over time..... barring any major changes....

hope it helps

ps - I could not agree more with white_goodman. cashflow is KING. Don't just hope for capital gains..... you can't eat or pay bills with it, without re-financing, but cashflow can !!

 

[tech/a]

Who pushes this rubbish.

Simply look for a reason why demand will increase in ANY area.
New freeway
New developement release.
New infrastructure
Lack of inventory.

Its not that complex.

 

[Soft Dough]

hello,

my name is professor robots, just a quick introduction, i am one of five on the planet who predicted the recent bOoM

A/prof is a permabull

Of course he predicted that Kevin wanted to buy votes and so propped up the property market, with an un-necessary and once again poorly targetted spending of tax payers money, showing once again lack of JUDGEMENT of the current labor party.

Pity any fall will find him wanting, with permagg on his face.

A/prof will hopefully find the next 12 months interesting, I hope I will

 

[cutz]

In my area, inner melbourne the rental yield on a house is around 2.5%, look further out and and yield seems to increase, so i guess on face value that's the tradeoff.

 

[jbocker]

As a long term Property nut, I see it as this..

These figures are merely an example

If property in the CBD is worth $1M, then a property 10km out, will be worth $800k, and one 20km out will be worth $600k , and one 30km out will be worth $400k...

Hey I am going to drive 50km out and get some houses for free!!! Hee Hee. I get what you mean Gunlom.
There is an important consideration to the "conundrum" bugmenot. It is over time the inner properties dont grow expodentially in dollar terms. The size of the land gets smaller with residential zone changes in the inner suburbs. So the land gets smaller AND the property value increases, therefore the expodential difference is hidden by size of the land. Calculate $ per sq metre may be the best way to compare the growth rates.

 

[skc]

Thanks Robots. Good to hear someone talking sense.

Anyone who believes the tripe, answer me the following:

Property 1. Purchased for 1 million in inner 10ks. Appreciates at 9 percent per year.

Property 2. Purchased for 1 million in outer 10 ks. Appreciates at 7 percent per year.

Fast forward 20 years and maintain the same rule of thumb growth rates, the inner city example will be exponentially more expensive due to compounding growth. This is simply not the case, as a rule of thumb.

People are not answering your question, are they?

Using the your example, the inner property will worth $5.6m, while the outer property will worth $3.87m. The ratio changes from 1:1 to 1:0.69.

Can that really happen? I believe so, but only if you have 20 consecutive years of growth. To get the real number you will need to see what are the capital growth (or reduction) rates in times of recession. May be the inner suburbs fall at a faster pace. Given that there will be (on average) a recession once every 3-5 years, this may even things out over the long term and maintain some sensible ratio.

Do a search in ABS (Aussie Bureau of Stats) which may contain median house prices through the years.

 

[Soft Dough]

People are not answering your question, are they?

Using the your example, the inner property will worth $5.6m, while the outer property will worth $3.87m. The ratio changes from 1:1 to 1:0.69.

Can that really happen? I believe so, but only if you have 20 consecutive years of growth. To get the real number you will need to see what are the capital growth (or reduction) rates in times of recession. May be the inner suburbs fall at a faster pace. Given that there will be (on average) a recession once every 3-5 years, this may even things out over the long term and maintain some sensible ratio.

Do a search in ABS (Aussie Bureau of Stats) which may contain median house prices through the years.

plus it is easier to compare established suburbs over time, but just >10km vs <10km is hard as there are a lot of Mcmansions built on the outskirts of cities which can distort what is really happening.

ie there is nobody on this forum who can accurately answer your question, but I agree that it would never be sustainable to have differing compounding interest rates

IN FACT to maintain a percentage difference as suggested by previous posters, the growth rates for innercity would need to be LOWER as it is starting from a higher base rate.

 

[BradK]

people should really focus more on income streams (rent) as a % of price rather than expected capital growth, residential property is still due for a major dip in this country despite the supply side control... is still very much subscribing to the 'greater fool' theory.. and yes bugmenot is correct on the maths..

White Goodman,

The most sense I have heard about property. Would you kindly head over to the 'House Prices to Keep Rising for Years' thread to kick some a$$?

Thanks
Brad

 

[Wysiwyg]

I have put together a list of criteria that I would address when looking at residential property to invest in. Feel free to add more ideas?

1) What is the neighbourhood like -- quiet, loud, aggressive, thieves, gangs, druggo's, young families, elderly folk, single workers, blue collar/white collar workers?
2) How close are:
- shopping centres
- schools
- sports fields
- parks
- pools
- clubs
- beaches
- rivers/creeks/lakes
- industrial sites
- rubbish dumps
- old mine shafts
- flood plains
- down prevailing wind from large industry

3) What is the planned development for this area? (roads, land, industrial, marine:- see local council)
4) What are the primary local and regional industries?
5) How modern is the property?
6) What is the land height above sea level? (flood history, ground soak, encroaching sea)
7) What immediate, near term and long term repairs/enhancements need to be made, if any?
8) Council rates figures and history? (see local council)
9) Rent figures for dwellings of similarity in this area?

 

[Tysonboss1]

Hi all,

Hoping you can help clarify a conundrum I have been nutting over. I have spoken to many "experienced property investors" about this and noone seems to be able to give me a straight answer.

The conundrum I have is this. The generally accepted rule of thumb for property investing (at least in Melbourne) is to buy a property within 10 kilometres of the CBD. These properties are said to appreciate better over time compared to middle and outer suburban properties. Eg; If you are after capital growth, as a rule, you should look within the "10k zone".

The problem with that rule however is that if all properties within 10 kilometres of the CBD experienced continually compounding growth, at a greater rate than their outer suburban partners, the price gap would grow exponentially.

Can anyone explain this simple problem to me? Maybe I am too enquisitive or too silly to realise a basic mistake in my reasoning?

Thanks for any light you can shed.

Firstly Capital gains are unpredictable, I focus on yeild and take capital gains as a bonus,

Capital gains are made up of 2 parts = 1 part inflation and 1 part growth in demand.

the portion of capital growth caused by inflation will be the same no matter where the property is, the portion caused by growth in demand will be differant in every location, some will actually have demand growth go backwards.

It makes sense to me that property in the inner suburbs will have higher growth in demand as the population continues to grow, because there is no more land left in these areas so the only way is up,

Areas in inner city will be rezoned for higher density which will increase the value of that land. Houses will be bulldozed to make way for apartments, meaning people that the people that want to live in houses / town houses will have a dwindling supply and have to compete for an ever decreasing supply of houses and will see higher prices in those areas,

offcourse some of this excess demand will flow out into the suburbs to, but the suburbs are much larger are and the demand dilutled. think of the city as a dart board, the further you get from the bullseye, the easier it is to dilute demand because their is so much more space.

land right in the CBD sells for up to $50M, for it to get to this level it has to be increasing faster than the outer areas.

 

[awg]

It makes sense to me that property in the inner suburbs will have higher growth in demand as the population continues to grow, because there is no more land left in these areas so the only way is up,

Areas in inner city will be rezoned for higher density which will increase the value of that land. Houses will be bulldozed to make way for apartments, meaning people that the people that want to live in houses / town houses will have a dwindling supply and have to compete for an ever decreasing supply of houses and will see higher prices in those areas,

land right in the CBD sells for up to $50M, for it to get to this level it has to be increasing faster than the outer areas.

As an example, in Sydney, my gran owned a house in Waitara, she died about 40yrs ago. All those nice old houses now have 30 story unit blocks on them.

In Mona Vale 25 yrs ago, many old beach houses, now all multi story unit blocks.

So if you had accquired properties at that time, and developed them, or held them for long term investment as development, the upside of potential value is in the skyward building direction, more concentrated towards the inner city.

Calculating the long term capital growth would need to factor this in.

you need pretty deep pockets to play that game, but thats one reason why the rich get richer