Expert Bust #11 - Apples & Oranges

Data suggests that the longer the time-frame, the more likely 2 suburbs will end up with the same long-term growth rate even if they are in different cities. The following chart shows that the majority of 1-year capital growth has been between 0% and 5%.



This chart was derived from an examination of over 40 years of growth history for suburbs across Australia. There were a lot of 1-year periods in the last 4 decades. There were thousands of cases of double-digit growth over a single year.

Here's the same chart but calculated for an 8-year period instead...



Notice how the spread has thinned. Here's the 16-year spread...



There's a tendency for all suburbs to grow at roughly the same rate over the long-term. The reason for this is called the Ripple Effect. When prices get too high, buyers look for the next best alternative.

Imagine apples were 1c each a hundred years ago and oranges were 2c each. Now imagine apples grew at 4% per annum while oranges grew at 8%. Today a single apple would cost 50c while a single orange would cost $44.

The higher price for oranges subdues demand for them. Apples are considered the cheaper alternative and that increases demand for them. Growth of apples accelerates while growth of oranges decelerates until balance is restored.

Trying to find a high growth outperformer is going against basic human behaviour. No property, street, suburb or city is destined to outperform the others over the truly long-term. They might over a decade, maybe even 2, but long-term: same-same.

 

i like identifying areas where median house price of surrounding suburbs is perhaps $100,000 more. Wait for catch or the ripple effect.

 

Expert bust # 12 Brisbane City Council vs Logan City Council
Expert bust # 13 North of the River vs South of the River;
Expert bust # 14 Here vs 'South of the Border' (ie. mexicans)

 

There is no north and south. There is where you were born, then nothing else. Don't try to complicate things.

 

I think I tend to agree that eventually the under performing suburb will catch up due to growing in populations and housing demand growth.
But as an investors, you want to pick one that could deliver the fastest growing suburb so that you could utilise the equity for the next one. You cant wait for 30 years when you no longer viable have the borrowing capacity anymore.

 

Exactly. I always laugh when people use Redfern as an example. People were talking about Redfern's potential gentrification since I was a kid in the 80's. You could have sat on that for a lonnnnng time before that paid off.

 

So is this suggesting that if you're simply taking a 40 year investment view, it doesn't really matter where you buy, it all averages out.

However specific locations might do better or worse on the short to medium period, so do your research and choose wisely?

 

Yes but if you take that approach/attitude, you very likely wont be building a large asset base anytime soon.

Even if your assumption is correct, in reality, to be able to keep building a portfolio you need to make some intelligent decisions as to what locations and what stock types will have the quickest growth due to x, y and z reasons. This will (obviously) allow you to access equity faster, buy more assets faster and grow your overall net worth faster. Imho its actually imperative that you are able to do this to some degree rather than just say any buy and suburb will average out the same growth over the long period. Your portfolio wont get very far with that mindset.

Being able to look at data/statistics is one thing. Often, the reality is much different

 

Would like to see that, a lot of spruikers bashing Logan, and a lot flogging "investment properties" in Logan as well.

 

Yes, the data suggest that the longer the time-frame, the less it matters where you buy. However, the time-frame required to bring that equality about, may exceed an investor's lifetime. So, it still might matter to choose wisely.

I've tried to find metrics for picking long-term out-performers. One of the problems is the availability of data 30 or 40 years ago. (That's an argument for focusing on the short-term, another topic maybe). Here's what I've found over the long-term though:

1) Don't buy anything new.
Depreciation counters appreciation for quite a long time.

2) Buy a house rather than a unit.
Historically, units have under-performed. However, units have higher yields, so if the investor is about to to retire, units might be a valid option.

3) Don't buy near large tracts of vacant land.
There are historical cases of the land being developed (supply) over many years. Supply thwarts capital growth.

There's a few more things for me still to research. But so far, that's all I know for long-term.

 

Datageek - I for one appreciate the posts you write in busting these 'myths' series. I am not well versed with property speak - I have just done my thing and aside from this forum haven't really watched youtube videos or read up on so called experts describe this or that aspect of property investing (like I had been restvesting without realising there was a word for it). I have always respected pure quantifiable data instead of useless anecdotes about "my cousin sold in this area and his house has gone up x amount in y years so it's good to buy in z area" etc. so it's always great to have opinion backed up by data (or to have the data go against the commonly held beliefs).

 

I agree with those 3 points, generally speaking.

There are many other things you can do to increase your chances of your asset performing quicker, enabling you to grow faster.

1. Better time markets by simply monitoring changes in SOM, DOM, Disc%, ACR, rental yeild, quarter quarter growth, market sentiment and talk to agents on the ground.

2. Improving your negotiating skills/strategies when buying

3. Buying stock to add value ( can make a huge difference)

4. Create/strategic finance eg how to set up loans with what bank etc (can make a huge difference


One of the most important strategies with resi investing is being able to leapfrog onto the next one to expand your base to grow for you, then once you have a sizeable base, time in the market does become very important.


But from the time your building your asset base to the time you have that base built, imho it's not enough to just buy almost anything/anywhere and let time do it's thing to even out.

 

The Sydney unit market is depressed for many years largely due to oversupply. The price gap between these two types of properties is quite wide. Do you think the unit market may outperform the house market in the next 5-10 years?

 

It is not something I have researched recently and is not on my TO-DO list either, sorry.

One of the problems with forecasting unit markets over a 5-10 year period is future supply. There could be nothing in the DA pipeline at the time of forecasting and then the next day a DA could be lodged and more every day thereafter. That's one good reason to avoid units and greenfield estates.