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THE TWO BIGGEST LIES IN AUSTRALIAN REAL ESTATE INVESTING!
1. Population growth automatically creates capital growth; …wrong, time and time again I have seen high population growth areas on the fringes on all the major capital cities, as well as Ipswich in Queensland, displaying record high population growth and average-below inflation capital growth.
Bottom line is that it’s always quality rather than quantity, that will have an impact on the capital growth of an area, and in this instance, I am referring to the level of household income in terms of quality.
Always remember that people or potential buyers must have the ability to pay above-market prices in order to create the necessary upward pressure on capital growth (price appreciation) in a suburb or area. High demand by people on low incomes does not create high capital growth, irrespective of the volume of transactions.
Now, I realise that there will be many interest groups out there that will try to refute this point, mainly because they are selling house-and-land packages in new fridge suburbs! Or are developers or builders in those areas, or other interest parties whose incomes depend on these areas selling to both owner-occupiers and investors alike. The reality is despite record-high population in Melbourne’s; West, North, and far South-East, all our house and land estates have severely underperformed over the last 20 years when comparing them to Melbourne’s top 10 or 20 best growth suburbs.
2. Government infrastructure spending creates capital growth; this is by far my favourite one! This is often used as a marketing ploy by developers and project marketers alike of a new house and land estates that happen to fall in designated government spending areas. The story goes that there are ‘Billions’ of government infrastructure spending that will be occurring in the area currently or momently and hence, this will create massive pressure on capital growth and appreciation of house in the area.
Really Why? And more important How? As mentioned before, just because you have a massive amount of broke people (low-income earners) buying up new estates in record time, this alone DOES NOT create Capital Growth appreciation!
Just because the government is spending billions of dollars of taxpayers money building roads, highways, schools, etc. in an new area doesn’t mean that this spending has any significant medium or long term direct impact on the local residence incomes or more importantly it doesn’t directly increase their borrowing capacity per household in that area.
If John is a plumber on $100,000 p.a. and Jenny a high school teacher on $85,000 how does building a hospital for $500 million hospitals or a billion-dollar highway extension directly impact their earning capacity? It doesn’t!
But it’s a great story for project marketers and developer alike! As they say ‘Billions are going into the area’…’ you can’t go wrong’….aaahhh, yes, you can…
Now, there are different levels of government infrastructure spending, as can be seen from the table on this YouTube video, but none of them has any significant impact on the long term growth of an area. Big claim, I know, but think about.
If you look at the diagram depicting the top 20 highest capital growth suburbs in Australia over the last 10 years ask yourself the question…”How much government infrastructure spending occurred in those areas in the last 10 years? 20 years?”
The answer is virtually none!
Why, because it was spent 30, 50 or even 100 years ago!
How much has government infrastructure spending occurred in Melbourne’s top-performing capital growth suburbs, such as; Mount Albert, or Toorak, or Brighton, or Richmond, or Elwood, or Williams Town? Etc.…in the last 20 to 30 years?
None!
Why?
Because the infrastructure, transport, schools, restaurants and parks were built 50 to 100 years ago, and that’s why these areas are in such high demand.
MELBOURNE’S SO-CALLED ‘GROWTH CORRIDORS’…
As can be seen in the Map displayed in this video Melbourne, just like Sydney is somewhat geographically landlocked and can only really sprawl outwards in the north and west part of the city. A large part of Melbourne South Eastern par is landlocked by the Dandenong Ranges and hills, from Whittlesea in the North right done to Casey in the far South East.
This means that Melbourne traditionally has had the potential of virtually infinite urban sprawl in the North and West direction of the city, which is why the vast majority of House and Land estates are located in these pockets or corridors. These areas were once farms, and as the outskirts of Melbourne’s ever-expanding urban boundaries reached them, they would be bought out by big developers, such as Metricon, Simmonds, Australand, Peet, etc, rezoned from rural zoning to residential zoning, and turned into the brand new house and land estates.
Now, this all sounds like a dream, or at least that’s what’s depicted in the glossy advertising magazines, television advertisements and posters created by clever marketing companies engaged by these developers and builders, who are prepared to spend literally millions of dollars on marketing campaigns in an attempt to lure young unsuspecting couples and migrants into these areas. But the reality of these dysfunctional estates sets in really quickly, as soon as they move in and start living their dream, and as you soon will learn, the idea of the young couples holding hands with their children whilst running through rolling hills on a summer day, whilst enjoying a picnic located on one of the many open spaces in their new estates, in a lot of cases soon turns into a nightmare…