The idea of constant strong demand for inner-city property is a myth: Terry Ryder

Sometimes the advice given to property investors by apparently credible sources is breathtakingly bad.

Here’s the best example for 2013 so far. An article on domain.com.au purported to provide “five top tips” to people looking to buy an investment property.

The headline was the first clue that this was a feast of furphies: “Supply and demand says inner beats outer.”

Already we’re in myth territory, even before the article’s intro.

But read on and here’s “top tip” number one: “Properties close to the CBD are in shorter supply than those in the middle and outer ring locations, so they’ll always be in demand.” There are so many ways to punch holes in that dreadful sentence it’s hard to know where to start.

But the greatest irony is that this particular tip comes from a property professional based in near-city Melbourne. Inner-city Melbourne is Australia’s most oversupplied market, even putting the Gold Coast in the shade.

Vacancy rates are in double digits and projects containing tens of thousands more apartments are being marketed. Developers are up in China trying to find buyers. How this tallies with the claim of short supply and constant demand is not explained in the article.

The idea that there is constant strong demand for properties close to a CBD, and therefore superior growth, is one of real estate’s greatest lies. Near-city residential markets are notoriously volatile, subject to economic fortunes, the exchange rate and the stock exchange roller coaster. The price graph for a “prime” suburb is never smooth. There are as many deep troughs as there are peaks. Toorak provides a fine example.

The demand is not constant and it is seldom large, because while many people may aspire to reside in Toorak or Point Piper, most punters cannot afford to so that aspiration does not translate into market demand.

Affordable outer suburbs have much smoother graphs and less topsy-turvy markets. That is because that’s where the great mass of housing demand goes. People buy where they can afford.

This is why the top 10 list for long-term capital growth in the Brisbane metropolitan area is dominated by suburbs in Ipswich City, on the south-western extremity where homes are affordable. It’s also why the list for Sydney is topped by affordable outer suburbs and the worst performers are mostly “prime” suburbs with median prices above $1 million.

We get the same result every time we research Australia’s major cities. The top 10 list highlights the affordable areas and the bottom 10 list features mostly millionaire suburbs.

So when “top tip” number one says that someone with $700,000 is better off buying one good-quality property in an inner suburb than two $350,000 properties elsewhere, they’re floating in a parallel universe. As I have demonstrated with research data in many articles and seminar presentations, the investor who ten years ago bought three properties in cheaper suburbs and/or regional centres would be infinitely better off than another who bought one property in an expensive inner-city enclave populated by people with more money than investment sense.

In one example, I focused on a buyer who paid $6.8 million in Wolseley Road, Point Piper, in 2002 and sold for $8.16 million in 2010 – a paper profit of $1.38 million representing growth of just 2.3% per year (fairly typical for that location). If they’d invested that money in 2002 in the top-performing suburbs of Brisbane (buying multiple properties), they would have made a profit of over $12 million, because of the vastly superior capital growth rates.

The domain piece goes on to advise buying property with unique features and looking for homes in “streetscapes that offer a sense of architectural consistency” – and really it’s just theoretical waffle from Melbourne professionals who benefit if investors buy the sort of homes they advocate. It’s all motherhood statements, unsupported by research.

This article demonstrates brilliantly the difference between an attitude and an argument. Any fool can have an attitude, but an argument is an attitude supported by facts and figures.

In my 30 years researching real estate I have seen many people expressing the attitude that “quality” properties in “prime” suburbs make the best investment, but I have not seen anyone back it up with research data.

The reason? The data contradicts them.

Terry Ryder is the founder of hotspotting.com.au