WA Perth townhouse/villa in bluechip inner suburb vs house further out

Hey guys,

We realized we have some capacity to buy another property in Perth. Our first one was a villa in an inner suburb and eventhough CG was quite high on our list, we don't mind buying it as it's our PPOR. However for second one we would like to 100% focus on growth.

Which type of asset would have better growth - townhouse/villa in a bluechip inner suburb (Mt Lawley, South Perth, Mt Hawthorn) vs house further out (Morley, Dianella, Yokine etc.)? Budget would be 700-900k and we would focus on finding 3/2/2 as I understand these properties have better growth. I find it very hard to compare growth of townhouses/villas with houses but in my understanding:

- Focus should be on location first and then type of asset second, as location does 80% of work,
- Land in great location may appreciates faster than land further out if in high demand,
- It seems that houses have already grown a lot in Perth whereas townhouses haven't,
- Typically houses grow first and once they become less affordable, townhouses/villas start to grow. I think this makes comparisons even harder, as the only real way is to compare very long periods of time.

I have done some comparisons by looking at sold prices online for individual properties, and in some cases townhouses/villas would win, in others it would be the opposite. My comparison probably had flaws as probably only periods of 30 + years should be considered and starting and ending points in time need to be identical.

Linking in @John_BridgeToBricks @Whitecat @MTR @Westminster @JL1 as you guys may have way better understanding.

Thanks guys

 

I am the least experienced, knowledgeable and strategic of those you have tagged. But given your budget a house is good.
I feel the (now) 550k and under house segment has grown too fast. Much more than higher priced burbs. Investors scrapping with each other. And we are talking about not nice suburbs. But huge jumps in a very short time. But at your budget although there have been good gains, they have not been as extreme as the lower end. Is my observation.

As for the townhouse closer in vs house outer - well again, at your budget buy a house. But if we were talking 500 there might be value in a townhouse instead. Many townhouses and non green title places have not moved so much yet (just like apartments). So there may be value there as the investors were not duking it out as above as they wanted green title, house and land. But for 800k there has not been as much competition for houses (although still has been hot).

Buy a 4/2/2 in Beldon or Craigie (or might get lucky and get a suburb closer to the city but go north and beach side). (but I am biased)

 

For that price point and long term investment, I would be looking for as much land as possible.

 

This type of question has been asked before and it is a very tough question to answer as no one has crystal ball. You are also not comparing apples with apples as the density type and location is different. When you change more than one variable it becomes far harder to determine what impact that would have and to answer your question as to which option will lead to greater CG.

That said, I would always have a preference towards a house given the historical data which suggests it outperforms higher density properties which is likely largely due to the fact houses are harder to over supply. Keeping that in mind, it then ultimately comes down to the location and which area with respect to each property type is showing greater signs of demand.

You have hit the nail on the head when it comes to the ripple effect as lower density houses typically sees prices rise before a larger price discrepancy pushes people towards affordability such as TH or apartments. So this is something else to consider when choosing which route to pursue.

Would it be worth looking into both markets/property types and then seeing what opportunities present themselves? You may find an off market in either location that is below market value and great deal on paper. If you hedge your bets towards only one option you may mis out on an opportunity you would have prefer to have taken.

 

I dont think there's ever a one-answer fits all to this type of question. there's two considerations:

• your own investment goals,
• what opportunities the market is presenting.

Sentiment opens up opportunities for certain types of property, and if those properties align with your investment goals, that's a great opportunity to buy.

For example in Melbourne, units can be bought with yields double that of detached houses. sentiment has absolutely hammered units, so for a buyer who's strategy aligns with units, there's a great (but closing) opportunity right now. The mantra that houses always provide the best gains is not always true. Again looking to Melbourne, houses in many suburbs are going backwards due to affordability while townhouses move a good 10% up. there is a limit to what hype can achieve for a market. So your analysis is correct, the is absolutely no clear cut answer to house or unit.

I have a few rules of thumb i start with that help me decide on such a situation:

• blue chip with good yield is always my preference. in general, you'll get higher quality tenants which make life easier for maintenance and consistency of rental income. There are of course limits, i will not buy bad yield just because of location. I find ugly duckling suburbs to look like swans in a boom, but they turn quickly when the market cools. not bad if your plan is to flip but personally i dont want to deal with that for a long term hold.
  
  
• upkeep - i am one of few who seems to see perks in strata managed properties. gardens, building structure, a lot of the basic maintenance is taken care of. Strata insurance can be tapped for things like roof leaks, gutter cleaning is sorted, even hot water is taken care of in one of my properties. In general i find it can make life easy and reduce the number of unforeseen expenses. For that reason, i favour townhouses and quality units when looking for an easy money spinner that i don't need to think about.
  
  
• Quick equity - the one time i will advocate strongly for land is when you need to build capital fast. This will typically come at the expense of returns so be prepared for negative cashflow, but building equity quickly can open up opportunities to grow a portfolio with low risk cashflow assets. If you go for cashflow off the bat, you may find it builds equity slowly and you cant build the portfolio as fast. so in this situation pick land carefully, have a good logical reason as to why it has the headroom to grow faster than the market, and have savings aside to get you through. As soon as you can, start tapping that equity for cashflow assets.
  
  
• We are in a period of rising interest rates, which is unprecedented in over 30 years. its my view that causes cheaper properties (particularly those with good rental yield) to play catchup. if ever there's a time for units to perform, that time is now. In the areas i look, older units and townhouses have already jumped over 25% in recent times.

Applying those to your choices, i think the key consideration is what is your goal? long term hold vs flip? cashflow vs. chasing equity growth? are you ok with the risk of negative cashflow and additional unforeseen costs?

• long term hold, cashflow, low risk, i would personally be going the townhouse.
  
• flip, equity growth, or any sort of risk tolerance, i would be hunting for the golden goose piece of land that is undervalued.

FWIW, this one came up recently and was snapped up in 4 days, flipping bargain at the advertised price of $580k. wish i was in a position to have nabbed it.
https://www.realestate.com.au/property-townhouse-wa-highgate-143952164

 

Thanks so much for your always great comments

The primary goal would be to build equity and sell for profit in 15 years or so.

I just had a little excercise. On my own property that I recently bought in south perth (3/2/2 villa in a triplex), I calculated growth between the 3 sale dates of the property. Then I calculated the growth between the same dates for median Perth house prices (in the attached table, kindly posted by @fols ), and the villa grew slightly more than the overal housing market between the same dates. Would this be a valid comparison in your view?

 

Thanks so much Very knowledgeable and detailed comment.

So I guess in summary, look for both townhouses and houses, and choose based on the deal?

Have you seen units (specifically townhoses and villas) that experienced better growth than overal houses?

Lastly, would love to get your thoughts as well on the question I posted to JL1 below. The values in the table should be for houses only (not all dwelling types).

 

Not a problem.

Yes, that is probably the most sound approach given you can't predict which option will ultimately be a better investment. There most definitely would be cases in which higher density property has outperformed houses, however, on average, houses have outperformed the likes of apartments/units (using these terms interchangeably).

As for the attached 30 year growth document, I would firstly note that by plotting the start and end date during 1991-2021 implies that Sydney and Melbourne have a far superior growth rate to the likes of the smaller capital cities such as Brisbane, Adelaide and Perth. This for some time now has been a significant misconception of the housing market across Australia. When you look at property price growth over a 50 year period (reason being this long is because prior to 1970 its hard to come by accurate sales data) each of the metro markets have performed relatively similar. In fact, I have written an article on this if you are interested: Comparing Australian Cities - Find Properties that Grow | Property Comet Buyers Agent

Onto your question, yes, this would be an accurate representation of how a higher density property can outperform the capital city average of the course of a specific period of time. As I have mentioned houses outperform apartments on average over the long term but you must also take into consideration that you are not buying the average of a market. When you purchase, you buy one specific property in a specific location and so if you are able to purchase a higher density property at the right time for the right price you most definitely can achieve above average growth and outperform any other dwelling type.

 

Hi mate, Hope you have been well. There are some suburbs in Perth where houses have grown a lot more than THs from 2019. As an extreme example, houses in Mosman Park have gone up 60% whereas THs have only gone up maybe 15%. I feel like these are the suburbs where it's better to buy TH than a house at the moment, as the huge price gap will eventually have to close. For example, if we assume that Mosman Park houses will double in this cycle, then they only have 40% more to grow. THs in Mosman should also double (or close to double) in this cycle, so they have another 85% to grow. Would you agree with this analysis (that it's currently better to buy TH than house in suburbs where the gap between THs ang houses is significant)?

 

Look at Bedford house over any other suburbs on large lot.
Buy from Ross brothers. Best way to get in and network
This suburb is going nuts

 

Thanks I appreciate all your comments and knowleage in RE. Particularly because you helped me get started my property journey in Perth and introduced me to an amazing BA.

Thanks for your thoughts on Bedford!

I just posted smth on another thread to Scott No Mates, which has been like a light bulb moment for me. I'll copy it here.

I have been reading a lot on Somersoft and came accross some posts from Rixter and yourself (Rixter for example retired super early by buying THs only; there are other investors like him as well). It made me think why 95% of investors believe houses are always better. The realisation that TH/villas (older, with good land component and reasonable strata fees) grow at roughly similar rate to houses (without development potential) in a given suburb, is a huge light bulb moment for me. If I could start from scratch, I would probably invest in THs/villas only as they provide better yield, better location and hence better tenants and investors can grow their portfolios faster this way.

I believe THs/villas can particularly be great investments in times like now in Perth, where houses have skyrocketed (40% on average from 2019 bottom) but THs/villas have moved maybe 15% or so. This sector will grow faster to close the gap with houses. As an extreme example, houses in Mosman Park have gone up 60% whereas THs have only gone up maybe 15%. I feel like these are the suburbs where it's better to buy TH than a house at the moment, as the huge price gap will eventually have to close. For example, if we assume that Mosman Park houses will double in this cycle, then they only have 40% more to grow. THs in Mosman should also double (or close to double) in this cycle, so they have another 85% to grow. Would you agree with this analysis (that it's currently better to buy TH than house in suburbs where the gap between THs ang houses is significant)? Linking in @JL1 as a resident data guru (I believe he has been saying smth similar from mid last year).

 

Units, town houses have lagged behind but starting to move…. Key…. Affordability.


Nothing wrong with this product. Dont get too caught up with blue chip, broaden your horizon, you are buying to invest, not live in. Lower base will fly…. Investors from east buying up

 

Btw anyone know what happened to Rixter? Be nice if he came back here

 

Yes, agreed! Really enjoy reading his posts on Somersoft Let me guess, he's sipping his coctails at Bahhamas somewhere?

 

Avg house price in Bedford 850k! Wow! Its already gone up by 35% in this cycle.

 

Yes
My daughter purchased about 2 years ago house $635,000. Its probably worth $800k+

 

I had a look recently at vic park townhouses and was surprised how cheap they were.

I also am surprised at the price difference in Mt Lawley when something is characterised as a townhouse vs stand alone house that is two storey on a small lot

 

@Realist35

I've always wondered if it's because we simply don't have good data for townhouses? We have one, and it's really hard to compare 10y returns historically or how the market has moved using available data.

For example, SQM research postcode searches show 4 bed, 3 bed, and units. The media also always talks about houses vs units and the current gap. Where do townhouses fit in? I have no idea. Why do we not track that data? I have no idea.

 

Hi MTR, do you reckon Bedford has reached to peak or still has quite a bit of growth to go. I'm currently looking at this suburb however can't even find much below 850k.

Thanks in advance!

 

More growth for perth in general, 2 years to go…. i have a crystal ball