Where in Melbourne Should You Buy an Investment Property or Development Site

The most common question we get from prospective clients is Where should I buy?

I’m going to give some very valuable advice in this article. But, before I do, understand that to properly answer that question, I’d need to as a few questions of my own: What’s your objective? Your timeline? Your budget? Are you buying for long-term investment, for development, or for both? How experienced are you, and what type of risk are you comfortable with?

Let’s skip the 10+ further questions and get to the point…

Two critical considerations in determining where to buy are: current market conditions, and likely near- to medium-term market trajectory.

To keep things simple, by current market conditions, I mean how has the market been performing in recent months and years. Melbourne House Prices have been increasing for about 4 years now. You don’t have to be a stats geek like me to recognise that the market’s been hot. Ignore the strong auction clearance rates, investor demand, record low interest rates, widespread development activity, booming prices… Just attend an open for inspection for a quality house and push your way through the traffic. Or witness an auction with 5, 6, 7 or more bidders. Or, just look at the advertised price for a property last week, and compare it to the actual sale price that is 20%+ higher.

 

This graph shows how house prices have fluctuated over the last 15 years for the average Melbourne suburb. In each of the last 3 years (since 2014), the median $ house price has increased about 10%. Your $625,000 budget in the Spring of 2013 would have to rise to $880,000 in early 2017 to purchase the same quality of property. Vendors have benefitted dramatically from current market conditions with fast rising prices and strong buyer demand.

All growth cycles eventually come to an end.

That doesn’t mean property prices will fall (for the record, I don’t believe they will). What most analysts mean by the end of a growth cycle is a flattening of the rate of growth. Imagine that prices in August are up by 5% compared to August last year; in September, prices are up 6% compared to September last year; in October, prices are up 7%; and, in November, prices are up 8%. The growth rate is increasing – the market is heating up. Imagine the opposite, where August prices are up 8%, September 7%, October 6%, and November 5%. The growth rate is decreasing – the market is cooling. This is a simple way of describing a cycle, and of determining where we are in the cycle. It helps in predicting the near- to medium-term market trajectory.

 

Look at the above graph, which compares house price growth of the average Melbourne suburb with growth of the most expensive 25% of Melbourne suburbs. Notice how much higher the % increase is for expensive suburbs during periods where growth rates were rising (2005-2008 and 2013-2017). And, notice how the % increase for expensive suburbs was significantly lower during cooling periods (2002-2005, 2009, 2012).

The lowest priced 25% of Melbourne suburbs tend to behave very differently – they don’t grow as much during hotter periods, but they perform much better in cooling periods. The difference in performance between both suburb types during different market periods is pronounced in this below graph.

Where you should be looking to purchase should be coming clearer.

When market conditions are strong, and the growth rate is likely to increase, then you’d be best off investing in more expensive suburbs in order to capitalise fully on future price rises; when market conditions are weaker, and the growth rate is likely to cool, you’d be best off investing in more affordable suburbs in order to take advantage of the typical tail-end of the growth cycle.

We’ve segmented all 400+ Melbourne suburbs into 4 equal-sized groups, according to their current Median $ House Price: Under $0.69m; $0.69m – $1.00m; $1.00m – $1.33m; Over $1.33m…

 

In All Periods (regardless of market direction), the most expensive segment experiences about 0.5% more growth per annum than the average suburb. In High Growth Periods, where ‘YoY Growth Rate Rising’, the same suburbs experience 2.1% more growth per annum than average; but, conversely, in Cooling Periods, where ‘YoY Growth Rate Falling’, their growth is 1.2% lower than average. The next most expensive segment behaves similarly, though not nearly to the same degree.

The inverse is true for suburbs in the lower two segments: they under perform in High Growth Periods, but over perform in Cooling Periods.

So, where do you think you should buy?

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