Expert Bust #16 - Cheap markets don't fall the most

I've heard plenty of half-baked experts say that cheaper suburbs are riskier. They say that the more affluent areas closer to the CBD hold their value better. However, historical data during price corrections says the opposite.


Using Distance From CBD

For the 1996 correction:

• Worst 100 falling markets had a median distance to CBD of 35 km
• Best 100 rising markets had a median distance to CBD of 87 km

2008 GFC price correction:

• Worst 100 falling mkts, 17 km to CBD
• Best 100 rising mkts, 47 km to CBD

2011 price correction:

• Worst 100 falling mkts, 24 km to CBD
• Best 100 rising mkts, 33 km to CBD

Using Negative Growth Measures

1996 correction:

• 100 closest mkts averaged minus 3.13% pa growth (experts right for this case)
• 100 furthest mkts averaged minus 4.38% pa growth

2008 GFC:

• Closest 100 mkts –5.86% pa
• Furthest 100 mkts –2.62% pa

2011 correction:

• Closest 100 mkts –5.39% pa
• Furthest 100 mkts –3.7% pa

Most expensive vs cheapest

1996 correction:

• Most expensive 100 city house mkts -2.75% (experts right for this case)
• Least expensive 100 city house mkts -2.30%
• Most expensive 100 city unit mkts -3.23%
• Least expensive 100 city unit mkts -2.44%

2008 correction:

• Most expensive 100 city house mkts -6.88%
• Least expensive 100 city house mkts positive 0.13%
• Most expensive 100 city unit mkts -6.84%
• Least expensive 100 city unit mkts -1.37%

2011 correction:

• Most expensive 100 city house mkts -6.06%
• Least expensive 100 city house mkts -2.09%
• Most expensive 100 city unit mkts -5.85%
• Least expensive 100 city unit mkts -1.87%

Here's a telling chart from Core Logic



The cheapest 10% of the market only went negative once. The most expensive 10% dipped 4 times and by bigger margins. And there's less volatility in the cheaper end (a measure of risk).

Opinions are so much easier to give than facts.

 

100% believer in this and have been bursting this myth in the older version of this forum (somersoft) and this forum with similar data. Michael Yardney and other cohorts used to pedal this myth all the time and still do and a significant proportion of SS'ers bought this hook line & sinker.

It became an urban myth around 'blue chip' areas would always grow better/ faster than outer areas and are more resilient to the downturns.

Bluechip areas (although I am now heavily invested in inner suburbs) overall as an investment proposition when looked at yield, equity return and sub div potential over a 10 yr time frame are almost always a second choice for investment Vs a strong outer metro proposition.

 

Great post! As always markets within markets and find the best for your situation and what you want to achieve.

 

Agree hear MY still pedalling this one. No data to support, just his opinion that this lower price further out had greater impact as though it is fact.

Despite Corelogic data reporting during the downturn that inner city were falling faster than further out.

To be fair, the recovery of course is the opposite - inner & higher priced properties are now recovering faster (as they had fallen further).

The hard to determine fact of course is which properties are transacting during the downturn?
Are these the same ‘normal’ mix of properties in a stable or increasing market?
Don’t know the answer to that one.

 

What I have learnt from all these years and a trend that has proven itself over and over

1) The best suburbs always grow faster in times of growth but they will also drop the fastest in times of downturn.

2) The outer ring suburbs will always grow slightly slower but they will also bear the downturn much much better than the high premium areas.

3) Rental demand in blue collar suburbs is always in demand no matter how bad it becomes. The more lifestyle suburbs, the trendy suburbs and the ones closer to CBD are the ones the get hit absolutely the hardest when times are bad. This was highlighted by Nathan Birch which I know has many lovers and haters but he is 100% on the ball here. This was recently evident in Covid. One of my best friends was paying close to $900 per week in rent in a Pyrmont apartment. She is paying now like $550. Massive massive drop.

My apartment in Parramatta although I did drop the rent from $475 to $425 its nothing compared to some of the other places.

AND my free standing houses in the west I actually INCREASED my rent towards the end of last year by $10 each on 2 of them.

 

The key is finding that middle ring which is neither Mosman nor very far. That seems to hold best value and performs well in a boom like now. In Syd and Melb that’s prob the $2.5m range now

 

This is absolutely spot on.

 

So buying a $2.5M investment is the best bet then?

Many questions to answer and consider

1) What is going to be your rental income on a 2.5M house and how easy is it going to be rent out such a place?
2) What will be your LVR and what will be your holding costs per month?
3) Is this $2.5M investment going to continue to rise MORE than your holding costs each month for more than 5-10 years? Taking into consideration that the last 3 months and the following 24 or so months will NOT be sustainable forever.
4) Are you going to be a 1 house investor for life or you plan to keep going and build a portfolio? $2.5M depending on LVR you wont be able to get much more than that unless your on some serious serious coin. You'll be a 1 house wonder.

There will be times of stagnation and negative equity throughout these years as well.

 

Well what I said was a generalisation ... just from what I’ve observed that’s all. That said, a good buy is a good buy irrespective of price.

But if you don’t know what you’re doing or have limited experience (I’d consider that as having bought less than 5 times in life at a minimum) it’s probably a safe bet that probably falls less in crash and rises (sometimes quickly) in a boom.

 

What an excellent post. I don’t have much to add at all, thanks for explaining it so well.

This pretty much details why I avoid these types of inner high value properties (along with a complete lack of desire to live in an inner area). Holding costs are insane, stamp duty rises literally exponentially, and risk is higher as you detailed. There is also the ‘eggs in one basket’ issue that is avoided if you spread the same cost over multiple outer metro or regional properties - chances of having all three outer properties vacant at the same time are minimal.