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You probably have heard an old saying; “Land Appreciates and Buildings Depreciate”, hence the money is always in land. Which brings me to one of the most important Key Drivers of Capital Growth to appreciate (and there is quite a number of them) is that Not All Land Is Created Equal.
That is, 150 square metres of land in Richmond will always outperform 1,000 square metres of land in Sunbury. Always remember that 80 per cent of the growth is based on the location, and only 20 per cent of growth is based on the type of dwelling.
In most cases the location of the block of land, rather than the size will determine the level of capital growth, as long as there are two factors simultaneously present:
- There is a scarcity of land, and the most important one;
- There is strong demand by people which have high disposable incomes, or the right demographics.
Hence, the very definition of the main Key Drivers of Capital Growth are:
High Capital Growth is determined by the level of scarcity of land in a given area, combined with demand by high income demographics.
Therefore, by definition, the reverse of this equation or statement is also true.
Low Capital Growth is the result of unlimited supply of land in a given area, combined with demand by low income demographics.
And when you really analyse these two statements and backtest them in the market, they hold true for virtually 95 per cent of all scenarios.
Lets in turn look at the very first statement:
High Capital Growth is determined by the level of scarcity of land in a given area, combined with demand by high income demographics.
Now there are two key factors that are mentioned in this statement, in order to have high capital growth in any given area or suburb, you need 1; Scarcity of land, or stock, and 2; demand by the right high income demographics who have large disposable incomes way above the national average.
This is a very important point to remember as it’s exactly this high disposable income that allows private buyers to push prices up in any given area, beyond the current market.
We see examples of this every week in Melbourne’s inner city affluent suburbs whereby even during the slow part of the property cycle, buyers ended up paying $200,000 or $500,000 above vendors reserve at an Auction.
And isn’t the vendors reserve the market?…yes it is.
Kind regards,
KONRAD BOBILAK
CEO & FOUNDER
Investors Prime Real Estate