PORTFOLIO POINT: As cities spread ever-wider, property prices in inner and middle ring suburbs will continue to outperform.


Victoria recently swept aside 15 years of politically correct media releases when Planning Minister Justin Madden announced a backdown on policies to end urban sprawl, making Melbourne’s urban growth boundaries irrelevant. It’s the latest example of why any Australian property investor should never invest based on mooted long-range policies.

Changes in urban planning directly affect the long-term capital growth outcomes for residential property. Some investors will conclude that with nearly all state governments recommitting to urban sprawl, housing supply must increase, which will limit capital growth for all existing houses and apartments. But the investment consequences of urban planning decisions play out in a more complex way.

In fact, established housing in the inner and middle rings of the Australia major cities is being made scarcer and these decisions should act to underwrite this sector’s future capital growth. Some investors will no doubt be asking what happened to the 15 years of pronouncements about ending urban sprawl.

Planning and development is stuck between two schools of thought. On one side are what I call the econo-centrics, who believe the only way to develop Australia’s fast-growing cities is to release more land on the urban fringe and build the required infrastructure some time in the future. The other side, let’s call them enviro-centrics, argue we should be limiting population growth, expanding regional centres and building high-density housing only where it’s “appropriate”, which really means “anywhere but in my street!”

With state and local governments unwilling to allow a significant increase of housing supply in the areas best serviced by infrastructure, supply is being capped in the areas most in demand. This bodes well for investors in inner and middle ring suburbs.

But where does that leave investors who have taken the advice of some property investor companies (read developers and on-sellers) espousing outer suburbs as the new “hot spots”. Unfortunately for these investors, the capital growth prospects of outer ring suburbs are likely to be undermined if the recent upturn in housing starts proves to be sustained, dramatically increasing supply on the back of another planning backflip.

Demand for outer ring housing is primarily sourced from young first-home buyers seeking lifestyle and accommodation at an affordable price. Many of these young buyers simply ask themselves whether they should buy a brand new house they can help design, or an older home for the same price a 10 year-old suburb five minutes drive away.

With many choosing to build, outer suburban housing is left with fickle demand from any burst of new construction. We can see the effect of this in the Housing NSW price growth figures below. While suburbs in the outer rings mostly fell after a burst of new building approvals in 2002-03, inner ring areas coped far better. When the volume of new stock on the outer fringe rises, it takes a substantial portion of the demand in this area with it, leaving established houses with fewer buyers.

New South Wales building approvals – dwellings

How Sydney suburbs have moved
Area	Median Price 2003	Median Price 2008	Change
Inner Ring	$525,000	$530,000	0.9%
Outer Ring	$385,000	$355,000	– 7.8%
Mossman – inner north	$630,000	$740,000	17.4%
Marrickville - inner south	$491,000	$500,000	1.8%
Penrith - outer west	$325,000	$304,000	– 6.5%
Campbelltown - outer south west	$305,000	$280,000	– 8.1%

It’s this thin, fickle demand that really underlies poor performance in outer suburbs. While the outer suburbs continue to be popular with young families, they are far less popular with renters, professional singles, “empty nest” mature-aged couples or DINKs (double income no kids couples). With little upward demand pressure, improvements in land values tend to be slower than market overall and, together with poor transport and social infrastructure, provides the major reasons why first-home buyers tend to move closer in when they upgrade to their second or third homes. This means investors who consider these areas will find the lack of demographic diversity will be a serious impediment to investment performance.

Looking at the role of planning and development in investment performance across our major cities, it’s a case of Sydney with one outcome and all other capital cities with another. The NSW government has made a determined effort to impose high charges on developers in the name of curbing urban sprawl, but the relatively high rate of unit development in Australia’s biggest city is probably more an outcome of the geographic barriers of the Blue Mountains and the Nepean-Hawkesbury River.

In Brisbane, the Queensland government is favouring expansion to the west, away from the more popular south-east where road congestion is increasing. In Victoria, the government has decided to carve up and develop farmland and bush to the west and north-west of Melbourne to ease a major housing shortage.

Dr Bob Birrell, co-director of the Centre for Population and Urban Research at Monash University, explains that because of Australians’ attachment to detached housing, “Any change to the pattern of building 50–60% of new housing units on the urban frontier would be politically damaging. Governments’ first-order priorities are to ensure economic growth and to attract new migrants and businesses. Environment concerns are second-order issues.”

So for property investors there’s one simple message: don’t believe the hype. State governments are unlikely to execute any of the “visions” they’ve apparently had for our capital cities anytime soon.

This makes the task of identifying the location of an investment property a lot easier. Without a major change in urban planning policy or a generational change in home buyer and tenant preferences, the right property in an inner or middle ring suburb is far more likely to outperform a property in an outer ring suburb.


Property Q&A

This week

• Headlines vs bottom lines.
• A house on the coast.
• Short-stay apartment investment.
• Should I buy my mother’s house?

Property’s true story

Almost on a weekly basis, I read conflicting information about the housing market. An article in the Sydney Morning Herald recently said the housing world has stopped spinning, rents have stalled and prices have fallen in total contrast with articles in the Eureka Report. Where are they sourcing their data?

Your question reminds me of a front-page headline from the same newspaper, which said: “Aussie house prices set to fall”, based on one comment in the middle of a 90 page report by a Canadian consulting on the world economy. The bottom line here is that many newspaper and magazine editors believe “screaming headlines” sell their product, regardless of the quality of the content.

This particular report is about quarterly movement in asking rents. Quarterly movements are interesting, but they do not establish a trend because asking rents can and do jump around from quarter to quarter. Even so, the asking rents for Sydney houses rose 7.1% in 12 months. And despite the negative tilt in parts of this article, this is a solid improvement. I’m sure most Eureka Report subscribers would be pleased to hold shares in a company that had increased its revenue by 7.1% in the past year!

Although a solid rental market usually accompanies a solid buyers’ market, a significant jump in the number of first-home buyers can have a short-term impact on the rental market because first-time buyers move out of rental properties and into their own homes. But with Australia’s population growing at its fastest rate since World War Two and a continuing housing shortage, I think we will find rents continue to show at least moderate improvements over the medium term.


Coastal attraction

My partner and I have nearly paid off a small renovated semi in inner Sydney. About a month ago we put in an offer for a property two and a half hours north of Sydney, with water views. I believe we can buy this property for a good price and if we put a nice house on it, the property will achieve good capital growth as the holiday home market improves. It’s not a conventional investment property. Do you think this would be a tactical mistake?

It seems from your question that you would like to combine investment with building the perfect holiday home. The problem here is that you are trying to mix lifestyle and investment and this rarely works. So although your purchase at a good price may be a great tactical move in terms of price point, the question remains: is this a strategy for above-average investment returns?

Sometimes coastal properties move ahead in strong economic times, but we also see coastal properties suffering significant price falls when times turn tough. Comparing that performance to the litmus test for a strong investment – how well does the asset hold its value during a slow phase and how strongly does it move ahead when conditions improve? – you will find that holiday homes tend to underperform during most of the economic cycle.

If you want to build a beautiful holiday home, and this is the perfect spot for it, then go ahead and make the project happen. But I wouldn’t suggest this as the route for an outstanding investment. There are better opportunities elsewhere.


Short-stay apartment

We have been trying to find a two-bedroom short stay apartment in Melbourne similar to our Sunshine Coast property without success. Our investment apartment in Queensland is separately managed in a 60-apartment resort with average stays of seven days. This has the advantage of being managed and generating investment returns, potential capital growth and the opportunity to rent your own apartment should you wish.

I’m not surprised you have had trouble finding this kind of investment apartment in Melbourne, as the profile of short-stay accommodation is smaller in Victoria than in Queensland’s south-east. You will find serviced apartments in the ring of suburbs that surround the CBD, particularly to the south-east and north of the city.

Before you buy, just make sure you understand what this purchase is for. In your question, you itemise one of the benefits as “potential capital growth”, which is a bit of a worry as there shouldn’t be anything “potential” about it. Capital growth is the primary reason you invest in residential property.

My advice to you is to invest it in a well-positioned residential apartment or period-style house in Melbourne. Serviced apartments are marketed to investors as inexpensive investments with solid cash flow but they come at a very high price: little or no capital gain, very high management fees and levies and virtually no personal control. Despite the seemingly low entry prices and hyped-up tax benefits, I am yet to see a worthwhile serviced apartment proposition for investors. They are nice to stay in but most of them are poor investments.


Mother’s house

My mother's house will come up for sale soon, a large block, with two bedrooms and a granny flat. It will have a market value of somewhere around $550,000. My two siblings and I are entitled to one-third each. Should I take advantage of the discount on the buying price to purchase the remaining two-thirds? I would take an investment loan of $360,000.

I assume from your question that the discount you refer to that you already own a third of the equity. First and foremost, you should decide whether this property will be a good investment from an objective, stand-alone basis and use that as the basis for your decision. If it has all the characteristics of a strongly performing investment property and your siblings are willing to sell it to you then you can go ahead and buy it.

However something you should also bear in mind is that many inherited properties can be a source of ongoing tension within a family. Even when the offer and acceptances are made at the correct market price and with full agreement of everyone, if the property performs well over the next seven to 10 years, your siblings may find your success with what was a family owned asset confronting.

To avoid this you may consider selling the property and taking your one-third equity stake and investing it in another investment grade property. This way every one will recognise that your investment success is entirely a product of your own making.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.