"Prime" areas better for capital growth? Here's where perception meets reality
Perception and reality seldom coincide in real estate.
The perception created by media misinformation is that "prime" delivers the best capital growth. Reality disagrees. Constantly.
During my recent trip to Perth, I visited the City of Gosnells (downmarket, affordable, a long way from the CBD) and I visited some of the beach and river suburbs like Mosman Park and Cottesloe (upmarket, millionaire homes, close to the city).
The perception is that the prime stuff would trounce the cheap areas on capital growth. The reality is the contrary.
In the past year, five years and 10 years, those cheaper areas have had superior growth rates. Here are some comparisons.
Kenwick in the City of Gosnells (median price $390,000) recorded a 16% rise in its median price in the past 12 months. It has averaged 4% per year in the past five years and 10.4% per year over the past decade. The median rental yield is 5.7%.
Everyone I told about my trip to the Gosnells had this reaction: “Why would you want to go there?”
Here’s why. The suburb of Gosnells in the City of Gosnells is a highly popular market. Over 500 house sales in the past 12 months. The median has risen 10% to $355,000, but yields remain solid around 5.6%. The 10-year capital growth average for Gosnells is 10% per year.
Buying in affordable areas with good infrastructure is often a win-win-win situation: cheaper prices, better rental yields and superior capital growth rates.
The vacancy rate is well under 1%.
So while real estate snobs may not want to go there, plenty of home buyers and tenants do. The result is outstanding data, from the investor’s viewpoint.
Let’s look at some of the places beloved by the real estate snobs.
Mosman Park, wedged between beach and river, has a median house price of $1.17 million. It grew 1% in the past year. It's median has fallen an average 2.3% a year over five years and has risen 7.5% a year over 10 years. Typical yields are around 3%.
City Beach, median price $1.73 million, has performed better than Mosman Park, but only marginally. It grew 7.5% in the past 12 months. But in the past five years, it has dropped an average of 2% per year. Over the past decade it has averaged growth of 8% per year.
The vacancy rate is around 5% and typical yields are 3.5%.
Remember, we’re not discussing where you might want to live, but where you should buy investment properties. Do you want to impress a dinner party by saying you own a property in City Beach? Or would you rather make money by owning four properties in growth markets like Gosnells?
If your answer is the former, maybe you’re not suited to property investment.
Where is the opportunity in this?
Buying in affordable areas with good infrastructure is often a win-win-win situation: cheaper prices, better rental yields and superior capital growth rates. "Prime" real estate means better quality homes, not better investments.
All that’s required is to be driven by your brain rather than your ego.