Where do you find the best capital growth? Often, not where you might expect.
by Terry Ryder.
creator of hotspotting.com.au and RyderSelect
I get a lot of emails from real estate consumers and most of them address the subject of location. Many people already have a pretty firm idea of the type of location they favour – they just want confirmation or a little guidance.
Common themes include a desire to buy in a major city, rather than a regional centre; a conviction that you need to be close to the CBD to get good growth; and a firm attitude that they don’t want areas with a reputation for social problems.
Attitudes like these are not based on research – they are grounded in what I call real estate snobbery. Real estate consumers think they know the best places to buy and are often surprised, if not incredulous, when informed about the reality based on independent research.
A regular exercise at Hotspotting is to conduct suburb-by-suburb research for the major cities of Australia. We’re interested in which areas tend to show the best long-term growth in house prices. We’ve been doing this research for the past five years or so and the results usually contradict the cherished beliefs of real estate professionals and consumers.
So I’m devoting this edition of the Quarterly Market Report to discussing the results of our latest suburb-by-suburb survey. It reveals the locations with the best track records on price growth over 10 years.
Some of the results may surprise you.
For analysis of markets nationwide, click on the topics below …
|National Overview||Where do you find the best capital growth? Often, not where you might expect.|
|Adelaide||Adelaide outperforms Sydney and Brisbane on long-term growth.|
|Brisbane||Middle market tops list of Brisbane’s best performers.|
|Canberra||The national capital is bottom of the capital city pack..|
|Darwin||Darwin is king of capital city capital growth.|
|Melbourne||Eastern suburbs are the current capital growth leaders.|
|Perth||Only Darwin out-ranks Perth on long-term capital growth.|
|Sydney||Still an under-achiever, despite recent price rises.|
|Conclusion||Don’t take their word for it – ask for evidence.|
Where do you find the best capital growth? Often, not where you might expect.
Some real estate professionals claim the best place to buy for capital growth is always the prime inner-city suburbs. Indeed, some say you’re mad if you buy anywhere else.
There are two characteristics about people who make such claims: (1) they never produce any research evidence to support their statement; and (2) they have businesses based on peddling inner-city real estate.
The truth is a different story. In most of our cities, the best locations for long-term capital growth are the cheaper areas well beyond the inner city.
Hotspotting has compiled lists of the best and worst performers in the seven mainland capital cities. The results of this research are very different from what you might expect.
A constant mantra from un-researched commentators is that capital growth is all about Sydney. Some misguided chatterers say prime Sydney is the only place to buy because that’s where the capital growth performance is best.
The opposite is true. Sydney is one of the nation’s most significant under-achievers over the past decade. Despite the price growth of the past 12-18 months, Sydney ranks second last among the mainland capital cities on capital growth over 10 years. Only Canberra has a worse track record. Many of the suburbs on the Sydney Top 20 list would qualify for the Bottom 20 list in other cities.
Melbourne is the only city where the top tier of suburbs are currently prominent on the Top 20 lists – and even in Melbourne this is a departure from the norm. Each time Hotspotting has conducted suburb-by-suburb research for Melbourne over the past five years, the cheaper outer suburbs have dominated the list of best performers on long-term capital growth.
In this latest survey, the millionaire suburbs of Melbourne are prominent, thanks to strong price growth at the top end of the market in the past 12-18 months. This prominence is likely to be temporary.
Elsewhere, the so-called prime suburbs are generally out-performed by the middle-market and bottom-end suburbs. This is true for Perth, Brisbane, Adelaide, Canberra and Darwin. In Sydney, the top tier suburbs (the 12 most expensive, each with a median house price above $2 million) do not feature on the Top 20 list – it’s the next tier of suburbs which dominate.
Overall, the pattern from this survey and the surveys of the past five years is that locations below the top tier of “prime” suburbs provide the best capital growth rates. Usually – not always but most of the time – the best capital gains are found in the middle-market suburbs and the bottom-end suburbs.
This makes absolute sense because the cheaper areas attract the mass demand in any market. While people might aspire to live in Toorak or Vaucluse, that aspiration does not translate into market demand because most people can’t afford the glitzy suburbs. People buy where they can afford.
So the superior capital growth rates generally found in the cheaper areas is good news for investors and home-buyers. Those who claim superior investment potential in the “quality” suburbs are (a) giving bad advice which is contradicted by the research; and (b) wasting their time because most people cannot afford to buy in the “quality” areas.
In property investment, “quality” does not mean “most expensive”. It means the areas where you get the best capital growth performance – and that usually means heading away from the city centre to the cheaper suburbs in the middle and outer rings of most cities.
Adelaide outperforms Sydney and Brisbane on long-term growth
Adelaide seldom features in conversations about growth but it has out-performed several of the capital cities on long-term capital gains.
Adelaide’s overall performance is better than that in Sydney, Canberra and Brisbane – and is only slightly inferior to Melbourne’s record.
The cheaper end of the market dominates the city’s Top 20 list of best performers: 13 of the 20 suburbs have median house prices below $500,000 and only four have median prices above $660,000. Only three of the city’s top-end suburbs make the Top 20 list.
It’s clear where buyers need to head for capital growth. Mostly it is found north of the CBD – including 13 of the Top 20 suburbs.
And while the top two suburbs are in the Far North, the strongest precinct for capital growth in Adelaide is a cluster of solid mid-market suburbs north-east of the CBD. Seven of the Top 20 are in this precinct – mostly they are suburbs with median house prices in the $400,000s and most of them are in the municipality of Port Adelaide Enfield. They include Klemzig, Campbelltown, Felixstow and Greenaces.
It’s also clear where the weakest performers are found. There are no locations in the western suburbs on the Top 20 list, but eight of the Bottom 20 are west of the CBD. Bayside Glenelg, for example, has a growth rate averaging just 1.9% per year, while West Lakes has a growth average of only 2.1% per year.
Adelaide’s prestige suburbs are primarily in the middle of the pack in terms of capital growth performance. Fourteen of the 20 most expensive suburbs have growth rates between 4.8% and 6.3% – not good enough to make the Top 20 and not bad enough to rank among the Bottom 20.
Only three of the 20 most expensive suburbs are on the Top 20 and only two are on the Bottom 20.
Middle market tops list of Brisbane’s best performers
The leading suburbs in the Brisbane metropolitan area for long-term capital growth are a mixture of middle-market and bottom-end locations.
The leading suburbs are spread across the metropolitan area. Two of the top three are in the far south and four suburbs from the distant south or south-west of the Brisbane metropolitan area make the Top 10.
But most of the locations in the Top 20 are in the Brisbane City Council local government area (which, unlike in other capital cities, covers a significant proportion of the metropolitan area, rather than just the inner-city).
There are stark differences between these results and an earlier survey two years ago, when the Top 20 list was dominated by cheap suburbs in the Ipswich and Logan local government areas. All of the Top 20 two years ago had average annual growth rates well above 10%.
In this new survey, the best has growth below 8% per year and those distant cheap suburbs are less prominent.
A standout precinct lies in the eastern suburbs, where Bulimba (no.1) and Balmoral (no.5) make the top five for the Brisbane metropolitan area.
The worst-performing regions are the Redland LGA in the far east of the metropolitan area and Moreton Bay in the far north. No Moreton Bay areas make the Top 20 but seven feature on the Bottom 20 list. No Redland suburbs make the Top 20, but five make the Bottom 20.
Brisbane has never placed great real estate value on its bayside areas, probably because they have mudflats rather than beaches.
Brisbane’s 10 most expensive suburbs do not feature in the Top 20 for long-term capital growth.
The national capital is bottom of the capital city pack
Canberra shares with Sydney the title of poorest performer on capital growth among the capital cities.
It is also a stark example of the traditional divide between the best capital growth performers and the worst: the best are mostly the more affordable areas and the worst at the most expensive areas.
None of the Top 20 suburbs is an inner-city area of Canberra. Only one of the Top 10, Hackett, is a one of the 10 most expensive suburbs. In other words, Canberra’s Top 20 is dominated by outer suburbs in the cheaper price ranges.
Fifteen of the Top 20 are suburbs with median house prices below $590,000. All but one of the Top 10 have median prices between $450,000 and $570,000. (Canberra has few suburbs with a median house price below $400,000).
By contrast, the Bottom 20 list is dominated by the more expensive areas. Canberra’s five most expensive suburbs are all on the Bottom 20 list. These are places with growth rates in the 2% to 3% range – which means it would take at least 25 years for property values to double.
There are 20 suburbs in Canberra with median house prices above $600,000, including two above $1 million (Griffith and Red Hill). All but one of the 20 have growth rates below 4.7% per year.
The bottom line is that Canberra has performed very poorly on capital growth over the past 10 years. The best in the city have capital growth rates not much over 5% per year.
This is despite the ACT’s record of having a solid economy with usually the lowest unemployment rate in the nation and the highest average incomes.
Canberra has been a better capital-growth performer in the past but growth averages have been dragged down by poor market performance in the past three years – probably undermined by Federal Government instability and threats to job security by cost-cutting politicians.
Darwin is king of capital city capital growth
Darwin is a case study in what happens to property markets when there is a genuine shortage of dwellings. While property industry organisations for many years have claimed there is “a chronic housing shortage crisis” throughout Australia, the only capital city that has suffered from a genuine shortfall in dwellings is Darwin.
This is why Darwin has the highest residential rents in capital city Australia and it’s also why Darwin has the highest capital growth rates among the state and territory capitals.
Most suburbs in the Darwin metropolitan area have double-digit growth rates. And the top two are in the 14-15% range. No other major city comes close to matching that.
While the top two suburbs for long-term capital growth are high-priced near-city locations, the standout precinct is the satellite city of Palmerston – of the 11 Darwin suburbs with a capital growth rate of 11% or more, six are in Palmerston.
We don’t have a Bottom 20 list for Darwin – because this is a small city and there are so few suburbs that the Top 20 and the Bottom 20 overlap (which means the same suburbs could make both lists). So we have confined this to a Bottom Six.
The worst performing house market – and the only one with an ordinary growth rate – is the most expensive suburb. This is Larrakeyah, where the median house price is $950,000 and the growth rate is 6.3% per year (which would rank it in the Top 10 in Sydney but is very poor by Darwin standards).
Every other suburb in the Darwin metropolitan area has a growth rate of 8% or higher. It is worth noting, however, that the six worst performers in Darwin are all suburbs which feature on the list of Top 10 most expensive suburbs.
Eastern suburbs are the current capital growth leaders
Melbourne is currently the only capital city where the top end of the market dominates the list of best performers in terms of long-term capital growth.
This has not always been the case in Melbourne – over the past five years, most surveys of this kind have found the best growth markets to be in the cheaper outlying areas – but the price growth of the past 12-18 months has lifted the millionaire suburbs up the rankings.
The two most expensive suburbs in Melbourne – Toorak and Canterbury – don’t feature on the Melbourne Top 20 list, but many of most expensive locations do. Half of the Top 20 capital growth suburbs have median house prices above $1.2 million.
The leading Melbourne precinct for capital growth rates at present is the eastern suburbs. Half the suburbs on the Top 20 are immediately east of the CBD, including the top six locations, headed by East Melbourne and Deepdene.
The prestigious south-east precinct based around Toorak is not as prominent: only one of the Top 10 is in the south-east.
Melbourne’s growth rates are considerably higher than those found in Sydney. All of Melbourne’s Top 20 suburbs have growth rates above 7.5% per year, whereas Sydney has only one suburb in that growth range.
Generally, Melbourne’s prestige suburbs are much better performers than Sydney’s: most have long-term growth rates above 7% per year, although the city’s most expensive suburb, Toorak (median price $2.4 million), is only 6.7% – not nearly good enough to make Melbourne’s Top 20 but better than all except three of Sydney’s suburbs.
Most of Melbourne’s worst performers on capital growth rates are found north of the CBD.
Only Darwin out-ranks Perth on long-term capital growthh
Perth is up there with the best in capital city Australia on capital growth. Only Darwin is (marginally) better.
The top dozen areas for long-term growth in median house prices have growth rates above 10% per year. At that growth rate, values are doubling every seven years, on average.
The leading suburbs in the Perth metropolitan area for long-term capital growth are found overwhelmingly at the cheaper end of the market. Seventeen of the top 20 suburbs have median house prices below $500,000, including seven with median prices below $400,000. Only one of the top 20 is above $700,000.
Conversely, half the suburbs on the Bottom 20 list have median house prices above $500,000, including two with medians above $1 million.
It should be noted that Perth’s worst capital growth suburbs are good performers by the standards of some of the other capital cities. Pearsall, with a capital growth average of 6% per year, would make the Top 10 list in Sydney.
The stand-out precinct in the Perth metropolitan area is in the south-eastern suburbs around Kenwick. Five of the Top 20, including four of the top six, are in this precinct. They are all affordable suburbs (median house prices in the $360,000 to $470,000 range), most with train links to the CBD.
The north-east of the city, out towards Midland, is another pocket of affordably-priced suburbs where growth rates have been strong.
None of Perth’s Top 20 most expensive suburbs make the list of best capital growth performers. Most of the millionaire suburbs have growth rates in the 7-8%, which are good by national standards but not good enough to rank among the best in Perth.
Sydney still an under-achiever, despite recent growth
Sydney is the under-achiever among the major Australian cities. Despite the big price growth of the past 12-18 months, the long-term growth rates of Sydney suburbs remain among the worst in the nation. Melbourne, Perth and Brisbane all have vastly superior growth rates.
Most of the suburbs which make the Top 20 list for Sydney would rank among the Bottom 20 in Perth.
Only one suburb in the vast Sydney metropolitan area has a double-digit growth rate. That is Pemulwuy in the city’s western suburbs.
At first glance, it appears that the top-end suburbs dominate Sydney’s Top 20 list, as 17 of the Top 20 have median prices above $1 million. But, in fact, these are mostly suburbs a tier below the top end.
In Sydney, the 12 most expensive suburbs all have median house prices above $2 million. Sydney’s Top 20 for capital growth is dominated by suburbs in the $1 million to $1.5 million range.
The outstanding precinct is the inner west, which has shown strong growth in the current up-cycle, lifting the long-term growth averages into the 5% to 6.5% range. This is poor by national standards, but among the best in Sydney. Seven of the Top 20 suburbs for Sydney are part of the inner west precinct.
The bottom line is that, in Sydney, a million-dollar home is no big deal. Over 100 suburbs have median house prices above $1 million.
The prestige end of the market, suburbs with median house prices above $2 million, continues to deliver poor capital growth rates. The best of them is Palm Beach with a 5.1% average growth rate and most (nine of the 12 most expensive) are below 4% per year.
They include Vaucluse, which has a median price of $3.3 million and a capital growth average of 2.5% per year (at that rate it would take almost 30 years for values to double).
Double Bay, Sydney fourth most expensive suburb, has a long-term growth of 1.8% per year (values doubling every 40 years).
The worst precinct in Sydney for capital growth is in the south of the metropolitan area in the vicinity of Georges River. This includes three suburbs with median house prices around $1.1 or $1.2 million, including Sylvania Waters (which is the only Sydney suburb with a negative growth average) and Yowie Bay (which has a 10-year growth average of zero).
Don’t take their word for it – ask for evidence
Next time someone tells you that you have to buy close to the CBD to get good capital growth, challenge them. Ask them if they can produce any research to back up their attitude. You will usually find they have no information to support their views.
Often the people making the claim will be real estate “professionals” – selling agents, buyers agents, valuers or property advisors. If you check, you’ll usually find they all have real estate businesses based in the inner-city areas. In other words, they have a vested interest in expressing their views.
The worst offenders are Sydney real estate professionals. Sydney business people tend to think Australia begins at Sydney Heads and ends somewhere around Parramatta. If you’re not there, you’re nowhere.
The reality is that Sydney continues to be a chronic under-performer on capital growth – right across the metropolitan area. Sydney’s best matches the worst in most other cities.
But you will still hear Sydney-based “professionals” repeat the mantra that Australia’s biggest city is the best place to buy.
The reality is that the Sydney market is currently playing catch-up. But it still has a long way to go to catch the best of the other capital cities.