Expert Bust #36 - Cheap suburb, low growth?

Do cheap suburbs under-perform?

I split Australia into 2 groups based on whether a suburb is below or above the national median. Then I compared the performance of the cheaper half vs. the more expensive half over 3 years, 4 years, 5, 10 and 20 years.

For each growth period, the cheaper group outperformed the more expensive. And they outperformed to a larger degree over the shorter periods. Things started to balance out over longer time-frames.

I aggregated to the region (Statistical Area level 4) to make sure suburb growth figures weren't funny. Same result.

Perhaps 2 groups is a bit blunt, so I split into 4. But it gave me the same result.

Splitting into 10 groups looks like this...



D1 on the left is Decile 1, a group of the cheapest 10% of suburbs. D10 on the right has the top 10 most expensive suburbs.

Each line represents the growth period that was used to compare deciles. For example, the amber coloured line at the bottom was for a 28-year period. Decile 5, near the middle, had an annual growth rate of about 6.5% over 28 years.

Caution: there are anomalies with calculating values for a property market. Extreme anomalies might put a suburb in the lowest decile when the true value for that suburb might not be that low. In other words, ignore D1 and D10.

The most important thing to observe is the general trend of most lines, sloping downward towards the right. This suggests that cheaper suburbs outperform more expensive ones.

The following chart shows a comparison over a much longer time-frame, 40 years. Time is the great balancer of growth rates...


This was based on data for Victoria only from the Valuer General dating back to 1974. Same story, but less pronounced.

I suspect a lot of people believe that expensive property markets became more expensive due to higher growth rates over the decades. But in most cases, they've always been more expensive - at least for the last 40 years anyway.

 

Wow! Should have targeted lower end suburbs.

 

Thanks for the insight datageek, interesting as always.

I often see RP data ranking pulls of the top 20 performing Melbourne suburb in the last 20 years, and it's always the 'expensive' suburbs that come out on top (10% p.a.+ growth). Any ideas on why those rankings seem to contradict the findings here?

Also, more 'expensive' suburbs are more prone to sub-divisions (all the large houses have been sub divided over the years), I wonder how this is tracked in the capital growth in your charts. That's probably where a lot of your 'capital growth' has gone to

 

I think the biggest flaw in this methodology would be that as expensive suburbs get more expensive, dwelling sizes start dropping as a result of subdivisions and hence you are not comparing apple to apple.

If data was available, real way of doing this would be comparing land values per sqm over time.

Using land value per sqm, I don’t believe cheaper suburbs outperform more expensive ones. It’s completely other way round and by a massive degree. Land values on a per sqm basis in Sydney’s Eastern suburbs would have easily outperformed greater west by a huge landslide.

Found some data from Microburb:

Pyrmont is around $10,000 per sqm with a median price of $1.88m and Blacktown is $800 per sqm and a median of $860k. Because average dwelling size has shrunk so rapidly in Pyrmont, if someone bought in Pyrmont 30 years ago, they would have already profited from subdivisions and each subdivision would still be ahead of a cheaper suburb.

 

Although inner areas have more than likely undergone more subdivisions that outer areas over the last 200 years, over the last few decades, inner areas have undergone less subdivision than outer areas.

You can only subdivide so many times. Inner suburbs have more properties closer to that limit than outer areas. Eventually, they reach peak subdiv.

Analysis I conducted of changes in block sizes over the last few years shows that the inner most decile has a fairly static block size. Over the last 4 years the median block size has dropped by only about 1% per annum country wide in inner decile suburbs of our 5 largest cities.

Contrast this with the outer most decile which has had a block size reduction rate 5 times faster. Block sizes in the outer most ring were possibly 4 times larger 30 years ago. But the inner-most ring block sizes were only about 30% larger than what they are today.

So, if you compare price growth over the last few decades using change in median sale prices, outer areas' capital growth is biased lower due to a higher prevalence of subdivisions.

Data on land values doesn't date back far enough, but here's something for Sydney only...


Looking at the scattering of cases above, you could argue that there actually is a relationship between proximity to the CBD and higher growth rates "IF" you only looked at the first 20 km and only at Sydney and only from 2001 to 2018.

But then using the same scatter plot, you'd have to argue there is a reverse correlation from 20 to 40 km. Overall, the line of best fit suggests there's no correlation between rate of growth in land values and proximity to the CBD.

This was the topic of expert bust #5.

See this link for more details on the full article.

 

The winner of any capital growth race between 2 markets is determined by when you set the start and finish dates. If you compare 2 markets over a number of start and end points, rather than just one (e.g. 20 years), you find there's no clear winner. The lead changes depending on which stage of the cycle any one mkt is in...