Expert Bust #29 - Location Location Location

Location is not nearly as important as timing when it comes to achieving above average capital growth.

If location really was the 3 most important things to get right about property investing, then over a short time-frame you'd expect to see a superior located property/suburb/city edge ahead of inferior ones. Over a longer time-frame, that edge would start to become more pronounced. Over a long time-frame the clear winner would be obvious.

But that's not the case. Examination of historical growth patterns comparing thousands of suburbs over decades, shows that long-term there's a tendency for all properties/suburbs/cities to have the same growth rate.



But over the short-term you can see some staggering differences. Here are some examples at the city level...









Across all these 5-year intervals, the average growth difference was 43% between top and bottom cities.

In 4 out of the 5 cases there was at least one city where investors were high-fiving while at the same time in another city, investors were treading water or drowning their sorrows.

But over the long-term, they end up very similar. Here are the same cities over the last few decades...



Note the number of curve crossovers. This You Tube clip shows it in a cute way...

Capital Growth Race

A typical comparison of 2 markets over the long-term looks like this...


When you set the start and finish lines has more influence on determining a winner than location does.

BTW, to understand why there's this long-term tendency for all markets' growth rate to balance out, revisit Expert Bust #11 - Apples and Oranges.

 

Great post, but FWIW, when I think "location location location" I think "employed tenants, employed tenants, employed tenants".

Poorly located properties may have the same capital growth, but that doesn't tell the whole investment story, when you have things like loss of rent and generally undesirable people in your house.

 

Timing is everything


How important is the product???? For example today we are seeing houses outperform units in booming markets???

 

Good data!
But I have only a good 30 years to get there. Having more afterwards is kinda pointless.
Gotta enjoy my retirement at 60s.
Making an extra $1m yearly means jack for me when I am retired.

 

Over the last 30 years houses have outperformed units by 0.9% pa. So I guess you could say at a rough baseline, product selection is worth low single digits cap gro per annum. I'm sure there'd be cases with larger numbers than that. I can't see anything else having such a huge difference as timing.

 

Yeah, cap growth is not so relevant to retirees. High dividend paying stock might be a better option than property in that case. Or some income fund that deliberately forgoes growth for higher yield.