Why some suburbs will always outperform others

Over the past year or so, much of Australia has experienced a significant property boom, causing some commentators to suggest we were getting ourselves into a bubble that is ready to burst.

But when you examine the figures more closely, not all areas performed so well.

Just look at Melbourne or Sydney as an example. While some suburbs experienced 2% growth a month, others were meandering along at a less than remarkable rate.

Of course these extremes in price growth are nothing new.

A recent report on Sydney’s property market published on Domain clearly showed some suburbs outperforming others by more than 50% over the past 20 years.

The article cites data from Australian Property Monitors (APM) that indicates Sydney’s overall median house price rose by 223% between June 1993 and June this year, from $188,050 to $626,444.

That’s not bad – averaging around 10% growth per annum over 20 years. However when you dig a bit deeper, the figures reveal that in Sydney’s inner west, house prices increased by 318% during that time, from $208,000 to $870,000.

At the other end of the scale Canterbury-Bankstown recorded the smallest gain when the median house price rose from $166,000 to $500,000, representing a 201% increase.

Now that’s a big difference if you’re a property investor counting on capital growth to increase the value of your asset and increase your rent!

APM’s head of research, Yvonne Chan, says inequality in property prices is likely to continue as housing affordability becomes more of a problem for potential homebuyers.

“Australia as a whole, and particularly Sydney, is becoming more and more unaffordable, so first homebuyers will need to look for areas further away from the city,” she says.

The disparity in what different segments of the population can afford when it comes to housing is, in effect, creating a corresponding divide in how quickly property prices rise in different areas.

Essentially, in traditional working class and “new home” suburbs, income levels generally move in line with the CPI (consumer price index) increase in wages, whereas in more affluent neighbourhoods, disposable incomes increase substantially above CPI levels, meaning homebuyers in these areas can afford higher property price tags. Putting it simply, they have more disposable income.

Managing director of Rismark International, Christopher Joye, says the discrepancy in house prices between Sydney’s east and west is a direct reflection of the broader disparity of incomes and wages growth.

“Anyone buying a house in Point Piper has realised much higher income growth, and wealth begets wealth. It’s affluent people that are buying in affluent areas and future affluent generations of people will live in those areas,” says Joye.

He adds that while Rismark data shows Australia’s median house prices have increased by around 250% overall since 1993, homebuyers shouldn’t assume that this trend will continue over the next 20 years.

“People should not expect house prices to grow more rapidly than their own incomes. It’s as simple as that,” he says. Joye points out that much lower interest rates between 1995 and today, averaging about 7.3% compared to around 12.6% between 1980 and 1995, produced a reduction in the cost of debt and therefore a “one off” boost to purchasing power for homebuyers.

Joye warns that the cost of debt will rise in the coming years though: “You had this huge reduction in the cost of debt… I think that conditions in the future will be more volatile than they have been in the past due to the economy’s increased reliance on China. Anyone buying a home today should be budgeting to pay interest rates of about 9% or higher.”

That’s sound advice. As is the suggestion that the more affluent suburbs will keep outperforming, as they always have. There’s nothing new about that. It happens in all Australian capital cities, just as it does in many other mature big metropolises around the world.

Michael Yardney is the director of Metropole Property Investment Strategists, a best-selling author and one of Australia’s leading experts in wealth creation through property. For more information about Michael visit www.metropole.com.au and www.PropertyUpdate.com.au.