Thoughts on the risks of fringe suburbia

I notice quite a few investors come in asking about cheapish properties in new city fringe areas - places like Oran Park in Sydney, or Wyndham Vale in Melbourne, or Springfield Lakes in Brisbane/Ipswich, or Molonglo in Canberra.

A lot of people seem aware of the dangers of CBD apartments, especially off-the-plans, right now. However fringe suburbia could also become a risk. In Ireland, this asset-type is exactly the sort that crashed hard. Fringe suburbia made up the bulk of the crash.

Why is that? Well -

1 - Fringe suburbs, firstly, were built quite late in the boom - so were targeted by a higher degree of speculative investment by inexperienced investors who paid high prices.

2 - Quality of fringe suburbs tended to be lower. Small blocks, rapid builds, shoddier materials, dime-a-dozen designs. A lot of developers/builders bought bulk land in these sorts of estates on spec, planning to build and then sell for profit, which made them essentially a lot like off-the-plan apartments (to work out, people needed to keep buying them, or developers couldn't make ends meet, and also due to the long time period between the land being purchased and the eventual sale to an owner). House and land packages are at risk in a bubbly market because if sales slow down these builders could be left holding the hot potato so to speak. And that can quickly lead to aggressive developer discounting which, if you buy into these suburbs, you will be competing with. If a builder has 50 new homes/packages, grows impatient with slow sales, and cuts the price by 10% to move them well, you've just lost 10% too. In any correction, fringe suburbia often falls faster and further.

3 - Fringe suburbs were targeted by buyers on lower incomes; they tend to represent a more "affordable" home or asset. Lower income earners are much more likely to lose their job in any downturn, so although a lot of these homes are cheap, they are also often a greater risk. (Compare this to central, established middle income suburbs dominated by long term owners, who will hold on for dear life, meaning prices in those areas are unlikely to tank.) If there is any significant downturn, and people struggle to make payments, these fringe suburbs can be disproportionately affected by defaults.

4 - Access to infrastructure and jobs. Often these fringe suburbs simply don't have a lot of this going. Yes, many have malls and public transport and so on, but they aren't near the major entertainment, work and popular school destinations, making them less attractive than suburbs closer in. They're "out in the sticks". If prices come down even a little in more popular areas, where will the buyers go?

5 - They were exposed to "the exodus". During the collapse in Ireland one significant trend was a flood of occupants away from fringe estates. As suburbs like Belmayne, Dunboyne Castle, Lynwood etc turned into ghost estates. People slowly abandoned them because a lot of people didn't like living in partly built suburbs. People didn't like the way these abandoned suburbs were turned into social housing. People didn't like the crime they attracted. There were horror stories of kids drowning in abandoned pools and half-built homes turning into drug dens. As supply loosened up closer in and as prices fell in other areas, people wanted to live in the more sought after, nicer, inner FINISHED suburbs, which were only affected mildly by the crash. Fringe estates seemed to make up (anecdotally here) about 80-90% of Ireland's price falls and a lot of them have just never recovered, plenty were even bulldozed. Assets in more central suburbs have recovered and are now seeing very strong growth. These assets also attracted strong rental demand during the recession, as the excess supply of the boom and bust was swallowed up by the abandonment of fringe suburbia.

In another thread, Wyndham Vale was being discussed, well - it's a great example. That suburb alone has 637 properties for sale Wyndham Vale Real Estate for Sale | allhomes, with just 50 sales in a month (and there are thousands more on offer in surrounding suburbs like Werribee and Point Cook). They're not exactly flying off the lot, which means there is very loose competition on the market in an area where rental yields already aren't very impressive.

A lot of these properties are bulk offerings from the same handful of developers, who've clearly gone all in. So what happens if prices in this region stall, even a little? Those developers will discount - because they're not going to just hang on long term to a bunch of blocks, why would they? They'll get what they can get. You as an individual investor will see your value affected by that trend because you will not be able to compete with it. You will be at the mercy of that discounting.

Even if there's no correction on the near horizon (which is of course highly possible - but remember denying a crash can happen is just willful blindness, and won't in fact prevent it. Someday, there will be a market correction, whether large or small, and a good investor understands how bubbles work and plans for them by considering their risk position).

If you're thinking about one of these fringe suburbs, do think carefully. Right now new homes in fringe suburbs are often numerous as recently built apartments. Have a good look a your competition and have a look at the risk. Ask if fundamentals really support continued growth. This sector of the market really does deserve more scrutiny right now.

Often, even though they may seem more expensive, good quality assets in popular, gentrifying or middle income, tightly-held suburbs present much better value. They're closer to the action, dominated by owner-occupiers who will hold on for dear life, will probably not be hit by defaults, have better rental potential as families tend to want to live in these areas, and so on.

 

Good post

Have seen this happen in outer/fringe areas when markets turn, too much land and everyone building cookie cutter product.
How low can you go when market softens. If stuck building end values may not stack up on completion

 

Nice post! Can confirm that it happens in oz like that too...as that's what has happened in Darwin.

Inner (Northern) suburbs went from 700k - 550k and seem to have leveled out.
Palmerston (fringe) went from 650k to 4-450k and is still dropping.

Looking back on that now...just shows how nuts the market was.

We're small fry. "Fringe" here is 25 mins out...

What about Perth? @MTR, @Perthguy Same story?

 

That is one aspect...but infrastructure also has a very large bearing....a larget shopping centre and a train station will stabilize demand...

 

Yes, same has happened in Perth

 

Same with Dublin on the distance, everything is close, but I suppose it's all psychological in the end. In a huge city half an hour seems "close" but in a smaller city it might as well be the moon.

 

Great post highlighter, I always enjoy reading your educational material.

So it all depends on the market tanking, which we all know does happen and can happen here. Just really depends if it happens now or in a few years time because those fringe areas will no longer be fringe suburbs with the current population increasing.

 

I really don't have any interest in buying on the fringes (I don't even like the idea of buying a new build in a GOOD area, much less the fringe), but I do appreciate a well written post. Excellent analysis.

 

Another aspect is that in average and bear markets, there is less money in the pool. Generally most if not all types come off to varying degrees in bear markets . I would think in such times, the potential buyers pool would buy the best they can afford, whixh likely won't be fringe suburbia as their first choice ( because other more desirable areas have become cheaper)..

 

That's a good point - where the pool of money for lending takes a dive, banks are more more risk averse, but so are buyers. If these fringe suburbs and off-the-plan type apartments (areas that have seen the heaviest development), if they drop in value or developer discounting really takes off people are likely to view those assets as risky.

It's absolutely happening now with apartments. Ask the forum "should I buy this one bedder CBD apartment?" and the answer is almost always a resounding "no" - people have come to view them as a dangerous or at least neutral bet, with little assurance of good tenancy, let alone capital growth. It could certainly extend to fringe developments, and if they stall the market could turn on them pretty quickly. Both buyers and investors may start to favour better, safer locations, even if they cost a bit more.

It's interesting that new development seems to be what loses most of its value when bubbles burst. In USA it was mostly condos, in Ireland it was mostly Dublin's outer suburbia, also a lot of development in small towns, especially by the seaside. Most of these unfinished estates just never got back on track.

 

It's total madness to be buying new houses on tiny blocks way from the city. What happens when they aren't new anymore? As soon as demand drops a bit they will get hammered

 

I love my 100+ year old home in middle Sydney.... it has charm and location... easy access to city and Parramatta... Living here I just can't imagine myself living really far out. I've got friends who owned in Stanhope Gardens but moved to Artarmon.... Don't get me wrong, Stanhope Gardens is nice but if you are going to go to the city regularly, Artarmon is much more convenient. Ditto friends who bought in Prestons... soon after they decided to rent closer in! Anyway, yes, agree, far out housing (with poor transport) will suffer in a downturn, along with anything else oversupplied, which may include inner city apartments unless they have a unique factor to them.

Areas with more established homes will have a greater likelihood of ownership without a mortgage, and a higher proportion homes with low debt. No forced selling by owner occupied vendors... areas stay premium... hard to buy into.

 

Really? My understanding is we're now more in debt than ever and those that purchased in recent years in established areas would have a huge mortgage.

 

@highlighter a point I'd like to add is those fringe areas are always low cost the get into and hold. If the worst does occur and jobs go, a family on unemployment benefits could probably still service that home. Does Ireland have generous unemployment benefits like we do here?

Also when the markets tanks, you will take a massive hit compared to middle or higher end suburbs compared to fringe. A 20% drop on a 400k fringe home is 80k loss. A smaller 10% drop in middle ring suburbs of 1.2m median is a 120k loss, which is still more of a loss than cookie cutter homes in fringes.

 

True but many of these tightly held inner suburbs are occupied by a lot of older Australians who bought pre-bubble or at least early in the bubble, so they either have much smaller mortgages or have paid them off. This is part of the security in these suburbs through downturns: they're dominated by people who have no motivation to sell.

Many of these homes could halve in "value" and the majority of their owners would suffer nothing more than a slight hit to the ego. Very large falls are unlikely because a lot of these suburbs' owners both can and will hold through even the worst case scenario. So there's not much in the way of a catalyst for panic selling, no developer discounting to contend with.

They might attract less speculative interest if the bubble burst, but due to the fact they were so tightly held, they didn't attract all that much anyway.

 

I do agree with that - if a correction is contained/small (which is certainly very possible), but then in Ireland at least, a lot of these fringe suburbs didn't lose 20% - they lost 90% or above. The crash wasn't uniform at all. Inner suburbs - many you'd consider ludicrously overpriced - often only came down 10-15%. Outer suburbs often 80-90%, or even more for those many that were abandoned, as the owners just couldn't offload them to anybody - plenty just walked. Ireland has the jobseekers/unemployment benefit, it's pretty similar, perhaps a bit better as it can scale above minimum wage though since the last couple of years, it does drop after 3 months (though that didn't affect the bubble). It's all about weighing personal risk, though - many people are comfortable with that sort of risk, because the timing of any correction is almost impossible to pick.

 

But these same people are the ones that have leveraged off those middle/upper area homes into more homes causing the debt levels to increase above any other country in the world.

 

Agree with @highlighter... there's a huge body of people who have little or no debt in these areas. And even if people have recently bought in these areas, they are usually upgrading from something else, like a unit or townhouse or homes that are less well positioned so they usually already have substantial equity and buy with little debt.
So.... its the fringe areas that people want to move out of that's at greater risk than the areas that people with some equity under their belt want to move in to....

Yep. 100%.

 

Why did Ireland fringe suburbs drop so much? No jobs, population completely departed? How much of the Ireland population departed?
80-90% or more is almost worthless. America also had a massive correction but fringe suburbs didn't drop 80-90% and many areas have increased since the fall.

 

If push came to shove, they'd rather sell the badly located IP or secondary properties than sell the well located PPOR. Trust me on this!
That's why the Central Coast suffered really badly during the GFC downturn. People had margin calls on shares or lost their jobs... holiday homes got sold. Solid middle Sydney PPORS? Not so much.