Buying a home can be an emotional business. Witness the collective tizz we saw from buyers in the ritzy suburbs of Melbourne and Sydney from 2013 to 2015 when people became caught up in the hype and euphoria of auction fever, paying record prices for homes.
Buying for investment property is a different process. Logic replaces emotion as the key driver.
Or it should. This is the mistake some investors make: they bring the same emotions and process to an investment as they do to buying their home. They buy things they shouldn’t and overlook the best options because they’re in downmarket areas or are dwellings they wouldn’t choose to live in themselves.
Some investors treat properties as trophies to be paraded before friends and colleagues. They’ll enjoy a brief ego massage but will never achieve wealth through property investment.
Many of the locations dotted along the east coast of Australia are alluring tourist destinations or cute lifestyle towns. Some have stunning settings, with houses perched on seaside hills looking down on sweeping beaches. There’s evidence of vibrant communities with happy residents.
Many people would be happy to live there. But you shouldn’t buy an investment property there. The long-term capital growth record of most of these places is below-par (less than 3% in some cases) and there are few economic pistons to generate out-performance.
This is an issue for Sea Change locations along the Australian coastline. There are so many of them and little to distinguish one from another in investment terms. It’s only the few with specific growth drivers like improved transport infrastructure that command investor attention.
Often locations like these attract unit developers who oversupply the market with new product, which undermines prospects for capital growth. The Gold Coast is a perennial example.
But often inland from some of those appealing coastal towns are mainstream regional cities, which present much better investment prospects. You might not choose to live in regional centres like Dubbo in New South Wales, Bendigo in Victoria or Toowoomba in Queensland, but they provide better prospects for an investment purchase than the cute coastal resorts. There are diverse drivers of economic activity there and that translates into housing demand, which in turn generates price growth.
You probably won’t be contemplating a family holiday in Wagga Wagga but it should be on a list of possibilities for property investment, as a strong and diverse regional economy with good growth prospects. The population is growing and the property is affordable. Big money is being spent on local infrastructure, creating economic activity and jobs.
You will often see magazine articles quoting “experts” who nominate their perceptions of property hotspots. They typically nominate areas like the dress circle of Melbourne’s south-east, and quote reasons like good schools, proximity to the CBD and good public transport. It sounds logical but it isn’t.
These locations have always been located near the CBD, so why is this feature suddenly going to make them hotspots? The schools referred to have been there for many generations, as have the tram services. There’s nothing new happening to elevate these place to the realms of long-term out-performers.
It’s emotion (and often vested interests) dressed up as logic. Many people may aspire to live in the millionaire suburbs of Melbourne’s south-east but that aspiration does not translate into demand, because the vast majority of buyers cannot afford those prices.
People buy and rent homes in locations where the prices are affordable, the basic infrastructure is good and there is ready access to jobs nodes (most of which are out in the suburbs, not in the CBD).
Right now in Melbourne, the most active markets are those in the outer-ring suburbs which fit the basic criteria of affordability, infrastructure and jobs nodes.
To make good locational choices as investors, you must avoid the emotions that drive behaviour in the home-buying markets and concentrate on common-sense basics.