The first mistake many investors make: Terry Ryder

Many investors fret about not being able to afford to buy in locations they regard as “prime”. Their definition of prime is often “expensive” and/or “inner-city”. And that’s their first mistake.

They think this is where the best growth lies. They think this because the supremacy of prime property is most of real estate’s most enduring myths, promoted by the self-interested and the poorly-informed.

But investors on a budget can relax. The research keeps showing that the best capital growth rates over time are found, consistently, in cheaper areas.

I wrote on Property Observer on 16 March: “My own research contradicts the claims of the supremacy of “prime” property. The Top End markets never produce the best long-term capital growth rates. In most of our capital cities, the lists of best suburbs for long-term growth are dominated by the affordable end of town.”

I commented that Logan City, a downmarket sector in the Brisbane metropolitan area, was our pick as the number one market for investors right now.

My research, confirming that affordable areas with identifiable growth drivers consistently provide the best capital growth rates, has been reinforced by information provided to me by researcher Jeremy Sheppard, who runs the DSRdata.com.au website.

Sheppard this week completed some research on the precincts of the Sydney metropolitan area, comparing the degree of capital growth in the inner, middle and outer ring areas over the past three years – the period in which the Sydney market has been playing catch-up after a lengthy period of under-performance.

Over the three years up to the March 2015 Quarter, inner ring suburbs (suburbs within 16 kilometres of the CBD) have grown 26.7%, with a median price now around $1,062,400.

The middle ring suburbs (16-32 kilometres from the CBD) have increased 29.1% to $695,200. The biggest increase, narrowly, has been in the outer ring suburbs (32-48 kilometres from the CBD), up 29.7% to $494,000.

Sheppard’s chart of growth, quarter by quarter, since early 2012 shows that the outer ring suburbs have the least volatility, with consistent growth quarter by quarter. The middle ring and inner ring areas have both had periods when the median price has dropped, albeit briefly, in the past three years.

These results confirm Hotspotting research which, over many years, has found that the best growth rates occur in the more affordable areas in all our major cities.

When examined over a longer time period than three years, the differences in the growth rates tend to be larger. Top end suburbs are always more volatile markets than the bottom end areas.

People buy where they can afford and the great mass of buyer demand goes to affordable areas, especially those that offer good transport links, good infrastructure generally and proximity to jobs nodes (many big employment precincts are a long way from the CBDs of our major cities).

So when people with $800,000 or $1 million to spend ask me which of a list of upmarket suburbs they should buy in, my answer is usually along these lines: None of the above. If you have the capacity to invest that much, don’t pump it all into one property – buy two or three properties in affordable locations with growth prospects.

The ideal would be three properties in affordable growth areas in three different states.

TERRY RYDER is the founder of hotspotting.com.au. You can email him or follow him on Twitter.