Why properties closer to the city are rising in value faster than anywhere else?

Posted In Property Investment
17 Jun 2016
do property prices rise faster closer to the city

Which suburb or area is a better investment? Should I buy further out where it is more affordable or closer in? It is often a popular discussion over the BBQ that “abc suburb is going to be the next hot spot” or “I have just purchased an acre out the back of xyz suburb, because land is the most important asset”.

Well the RBA has recently done a study (Long-run Trends in Housing Price Growth) to find the correlation between proximity to all major CBD’s and property growth rates. The results are quite interesting!

property growth rates by distance from the CBD

As detailed in the above graphs, not only are house prices rising at a faster pace in the inner city areas, they are doing so at a much faster rate! As a result, the difference between inner and outer capital city prices grows even wider, disproportionately benefitting homeowners and property investors who own real estate in the inner city suburbs.

Perhaps unsurprisingly, this situation has been exacerbated in Melbourne and Sydney however, it is still very relevant in Brisbane, Perth and Adelaide.

What affects property growth rates?

As always, there is no singular answer, more so a number of contributing factors.

1. Transport and Infrastructure

As quoted by Alan Kohler in The Australian “The reason inner-city prices have gone up much faster than the outer suburbs, and that capital city house prices generally have almost doubled in 10 years, with Sydney prices, in particular surging 35% in three years, is because a lack of infrastructure investment has made it unviable to live further out.”

“Australia is a big country; it should have a network of fast and efficient trains linking widespread suburbs, but instead we are crowding into the inner suburbs and paying exorbitant prices so we don’t have to commute more than hour to work each day.”

“At least Melbourne is a fairly extensive rail network to apply the technology to, when governments eventually get around to it: Sydney and Brisbane just need more trains.”

2. Convenience

Australians have foregone the ideology of having big back yards, favouring convenient and sociable neighbourhoods.

3. Cost of development

As land prices increase and development regulations continue to tighten it is becoming increasingly prohibitive to develop “brownfill” areas. Compared to more development ready “greenfield” sites which are more suitable for new dwellings.

effects-of-frictions-in-housing-production

4. Supply and Demand

The percentage growth in the number of dwellings increases the further from the city one travels (see table below) where supply more comfortably meets demand. This has proven to be true in every major city.

growth in the number of dwellings by location

5. Population

As the population of Australian cities continues to increase, the Reserve Bank found that this will disproportionately force up the price of both land and housing, close to the CBD. Not by a small margin, but by a factor of many!

The effect of larger population on urban structure

Which is the better property investment?

Well, this may still be a topic for conversation at the BBQ, however if you want to base the conversation on facts, the Reserve Bank of Australia report re-confirms what we already knew to be true. Property growth rates close to the city have risen substantially faster over time, and as the population continues to increase, the trend will only continue.

Stephen Vick

Written by  Stephen Vick

Stephen holds a Bachelor of Business majoring in Banking/Finance & Accounting, a Diploma of Financial Planning, a Diploma of Finance & Mortgage Broking Management, Specialist SMSF accreditation, a Real Estate Agency License, and is a member of the REIQ. He has spent 20 years in the finance industry and has held State Manager Roles with Australian Finance Group (AFG), Australian Unity, and Lawfund Australia. His last institutional role was with MLC as an advisor to financial planners.

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