Expert Bust #26 Investment grade props

A few qualities I’ve heard over the years for an "investment grade" property (or suburb):

• Lifestyle location
• Safe & friendly
• Special
• Appeals to a wide range
• Affluent owners
• Short walk to amenities
• Cafes, parks
• Street appeal
• Views
• Natural light
• Privacy
• Attractive style
• Sound structure
• Above avg. historical growth

I believe a good investment has nothing to do with those features. My definition of "investment grade":

• Low risk
• High growth
• High income

But do the features of the 1st list lead to features of the 2nd? Not necessarily, it depends on timing.

Here's a picture of Cottesloe in the western suburbs of Perth.



Cottesloe qualifies as an "investment grade" suburb using the lifestyle, street appeal, etc. features list. It has some nice houses.



Mount Druitt is at the other end of the spectrum.



Outdoor toilets are back in vogue in Mount Druitt. But now they’re in the front yard with an open plan to encapsulate street views.



Mount Druitt housing is pretty simple...



If you were an investor in 2013 choosing between Cottesloe and Mount Druitt would have been a no-brainer if you based that decision on the list of "investment grade" features. But here's what happened...



The opportunity cost in just 5 years was 80%. For a $2m portfolio, that’s $1.6m.

Some might argue that over the long-term, Cottesloe will outperform Mount Druitt. But that changes nothing. An investor who bought a mil of Mount Druitt at the start of 2013 would have well over $1.5m after selling at the end of 2017. They could transplant that equity and buy more "Cottesloe" in 2017 than they could have in 2013. It doesn’t matter how well Cottesloe grows from then on, the investor would be better off having started in Mount Druitt - even after selling and paying CGT, agent's commission, etc.

Investment grade attributes, miss the point. One of those points is risk. Risk can be measured using volatility. More expensive areas have greater volatility than cheaper ones...


source: Core Logic.

Imagine there were 1000 mansions for sale in Cottesloe and only 10 millionaires looking to buy one. If that was the case, then supply would exceed demand by 100-fold. According to the age-old law of supply and demand, prices for mansions would tumble.


Now imagine a completely different market in which 1000 Bogans are fighting over 10 dog-boxes. Demand exceeds supply by 100-fold. In this kind of environment prices would start tearing upwards for dog-boxes.

It has nothing to do with lifestyle, street appeal, views, proximity to amenities, architecture, etc. It's all about supply & demand.

 

I am glad that @datto didn't over think his investment choices. Buy what you know.

 

Its all abouts cycles. You have chosen 2 different States, not really going to be a fair example

How about giving an example of 2 properties in Syd and 2 in Melb, one in affluent suburb and one in lower socio.


Such as Bondi and Mt Druitt…… same time frame…… compare growth???
or Hawthorn and Jacana

lets compare apples with apples.

 

Very interesting.

It defies logic.

I'm gonna go and smoke the tyres up and down the shopping strip.

 

Are you rushing out the door to smoke the tyres as well?

 

I should be buying in Armadale (Perth) or KGB or Rockingham, all these #Perth5k rubbish is proven wrong now...

 

Anyone can turn their nose up at fugly, doesn't make you special or different. The better outcome is realised when you go home, put your distaste aside and see that the ugly duckling is exactly what you're looking for.

 

Honestly…. I could not care less where I buy, I have been happy to buy in State housing areas if I know it is rising market or numbers stack up.

 

I've typically referred to the abs data to look at which areas have seen rising levels of professionals and household income however this census data is getting old (2016). Is there anything more current available?

 

Thought the same thing, not really comparing apples with apples, WA's economy is mainly subject to mining sector whereas NSW economy has many other sectors, so just one such suburb in WA in comparison to one in NSW, IMHO, is not a 'good' example indicator.
Also timing can be manipulated to display statistics one wants? Like those PDS on some managed fund investments.

 

+1

Whilst I agree with the gist of the post, the examples aren't the best to highlight the difference! Would have been better to pick suburbs from the same state/ city.

"I believe a good investment has nothing to do with those features. My definition of "investment grade":

• Low risk
• High growth
• High income"

How is Mt Druitt a"High income" suburb?

How would one know which is going to be a "High Growth", given your earlier myth-buster post on "past high growth" is no determinant of future CG.

Low-risk is also highly subjective & time dependent. All those who invested in 'extremely' low risk prop of inner city apartments and avoided 'high risk' of regional/ bayside etc were in on a big surprise as covid hit! Melbourne's mornington penninsula (wasn't high growth, high income or low risk) delivered the highest CG in Aus over the past 18 months whilst low-risk apartments are down 30%-40R% in value and no income..

 

Bondi median house prices rose 79% for the same period in which Mount Druitt house prices rose 100%, that is, January 2013 to December 2017.

Jacana houses grew by 82% in the same period. Hawthorn houses grew by 76%.

 

Sorry, that was confusing of me. By "High income" I meant high yield, i.e. my "income" from the investment. Rent, not wages of locals.

So, I'd like to retract my confusing statement about those 3 things I look for in an investment grade property. They're really objectives, not things that define an investment grade property UP FRONT, before one buys.

Instead, for me, what defines an investment grade property/suburb/area is one where demand exceeds supply. And that is independent of the fancy features it might have.

BTW, yes, low risk is highly subjective. For example, in the last 2 decades I can't recall anyone ever referring to inner city apartments as "low risk", least of all, "extremely" low risk. But there you go, now I have.

 

kmrr, you might be heading down the wrong path there. Check Expert Bust #6: high wage suburbs not so special.

 

thanks…

But can you provide graphs for both for the above areas up to…..2020/21.

Let’s see what happens…….I expect figures will be very different????

 

It's hard to disagree that an investment grade property has high income, high growth and low risk.

The first list are qualities or attributes; the second three items are outcomes really.

The question is what attributes lead to "low risk, high growth and high income". ie How would you identify these suburbs?

I agree with MTR that comparing WA to Sydney will be more affected by the macro cycles than the suburb particulars particularly over a 5 year period. The only way to adjust for this, would be to pick suburbs in the same state, or extend the period to say 20 years.

Interesting nonetheless, and thanks for the charts and analysis.

 

Its very interesting as I recall going hard in Broadmeadows, Melb in 2008… this is lower socio area, but it was apparently best performing suburb during this time

I think lesson is not to ignore any areas/suburbs that are showing signs of growth.

 

So why are we picking time frame or years of 2013 to 2017? Shouldn't we at least compare at least 30 to 40 years grows? I don't plan to buy just for four years but for long term never to sell...

 

Give me a list of 20 "investment grade" suburbs as they were classed back in 1990 and then give me 20 suburbs that were the opposite. Again, as they were classed back in 1990.

For example, Balmain or Redfern in Sydney might be considered investment grade now, but were they considered that 30 years ago?

I'll do the analysis and report back to everyone.

 

As much as I like to geek out on data and graph.
It isn't all that important to see the last 30 years. That is one generation of growth which I was probably too young to care.
Gives us a 20 years and 10 years - something something and we can all geek out over it.