How far does your property dollar travel?

The inner city detached housing market has long been an attractive purchase option, but one that has been out of reach for many buyers due to the relatively high entry price of properties compared to those located further from the city centre. Inner city living holds an appeal for a wide variety of reasons.

The CBD is the single largest working node within each capital city and living close by minimises commuting times to and from work. The abundance of retail options provides a high level of convenience and residents have a vast number of social and dining options to choose from. Public transport options are generally widely available and very efficient.

The down side of course is that buying a detached house within 10 kilometres of the CBD tends to be quite expensive.

Hobart is the only capital city that has median house prices below $300,000 within the inner city region. In fact, across the combined capital cities if you were looking to purchase within 10 kilometres of the capital city you would most likely be paying between $500,000 and $1 million. Both the $500,000 to $700,000 price range and the $700,000 to $1 million account for 28% of all suburb based median house prices within 10 kilometres of the CBD. In Sydney, 96% of suburbs within the inner city area have a median house price of at least $700,000. Melbourne (78.1%) and Perth (53.9%) also have a majority of suburbs within the inner city area with a median house price above $700,000.

Moving a little further away from the city centre, prices become more affordable (as you would expect). Across those suburbs located between 10 kilometres and 20 kilometres from their respective capital city centre, the largest proportion of these suburbs have a median house price of between $300,000 and $500,000. In Sydney, 91% of all suburbs in this region have a median house price of at least $500,000. Despite the fact that these areas are further from the city centre in Melbourne (72%), Perth (56%), Darwin (almost 69%) and Canberra (51%) the majority of suburbs in this region have a median house price of more than $500,000. In Brisbane, 49% of suburbs in this region have median prices above $500,000. In other cities the proportions are as follows: Adelaide (19%) and Hobart (4%).

The evidence suggests that if you are on a tight budget, the prospects across most cities of living close to the CBD within a detached house are quite limited. Once you move 20 kilometres from the city, property prices begin to become relatively more affordable. Across the combined capitals, 59% of suburbs located between 20 kilometres and 30 kilometres from the city have a median house price of less than $500,000.

In suburbs more than 30 kilometres from the city, 82% have a median price below $500,000 however, only 11% of suburbs in this region have a median house price below $300,000.

Many of the new housing development areas across capital city metro regions are situated more than 20 kilometres from the city. Although buyers are attracted to the prospect of having a brand new home, in the main the cost to purchase the land and build the home is in excess of $300,000. Herein lies the problem, the prospects of low income buyers, particularly in major capital cities, of being able to purchase a detached house is severely hampered by an extremely limited remaining supply of houses priced under $300,000.

Excessive charges on new development and the limited supply of infrastructure in many of these regions drive up not only the cost to purchase in these areas but also the cost of living once you consider the price of public transport and petrol.

At the other end of the equation, it is very clear that in cities such as Sydney, Melbourne and to a lesser degree Perth there is significant demand for those properties within inner city areas. As a result competition for this stock is intense and this has pushed up prices in well located inner city areas. If you wish to live in a house close to the city centre, you are going to have to pay a substantial premium within these cities.

We believe that the cost of detached housing in these inner city areas is likely to remain relatively high and demand quite strong due to the quality provision of infrastructure and amenities in these areas. As a result we expect that densification will continue in these areas as residents demand access to these facilities which in the main simply aren’t afforded to residents that live further away from the city centre. As a result we would expect that more and more unit developments will have to be delivered in inner city areas so that a greater number of residents have access to accommodation close to the city and they aren’t hampered by the high cost of purchasing detached housing.

Tim Lawless is the Director of Property Research at RP Data.