How to take advantage of the forthcoming property boom
Tuesday, January 02, 2007
Author: Michael Yardney
Date: December 1, 2006
Property booms never last, but neither do property busts. So how can investors make the most of the next property boom when it eventually comes around, as it surely will?
The answer is simple.
The investment strategy that has worked well for the most successful investors and will work just as well as the next property cycle rolls on is to invest in real estate for long term capital growth. And capital growth will always occur in our major capital cities in Australia with median property prices increasing by about 10% per annum over a 10 year period.
Why?
It's all to do with the value of the land, which is related to the supply and demand for that land.
I remember many years ago reading an article written by John Edwards of Residex, www.residex.com.au. It went something like this…
Imagine someone discovered a new island just off the coast of Northern Queensland and a number of smart entrepreneurs decided to set up business there because land was cheap as no one else really wanted to live or work there.
Over time people would want to move to the island because there were jobs available there. These new residents would need to build houses.
Remember, it was just a small island so after a few years the island would be full and there would be no room to build more houses. The island was now thriving and more people wanted to move and live there, but there would be no more land left to build houses.
What could they do?
With no vacant land left, they could only buy a piece of land that was already occupied. They would have to pay the people already living there for the privilege of moving to that island and if there were lots of people wanting to move to the island those willing to pay the highest price would get to live there.
The more people that wanted to live on that island, the higher the cost of housing would be. This causes capital growth.
Capital growth is highest in an area where there is a demand for property and the land is scarce. If you look at Melbourne, Brisbane and Sydney you can instantly see why house prices grow there faster than they do in regional Australia.
Sydney has almost run out of land because of its geographic boundaries. In Melbourne the perimeters of the city cannot expand because of town planning boundaries. While there is a huge demand for property in Queensland and in particular South East Queensland, there is still quite a bit of land available for new housing, but as most people want to live near Brisbane or near the water, much of the most sought after land has been taken.
One thing to remember about scarcity is most people want to live in the most desirable locations. In Melbourne it is the inner south east suburbs and near the water. In Sydney the most desirable areas are in the harbourside and water suburbs. In Brisbane they like to live near the CBD or near the water.
As our next property cycle comes around, as it already has in some parts of Melbourne and Brisbane, it will be the most desirable, the most sought-after areas that start growing first. These are usually the most affluent areas. People living in these areas can usually afford to upgrade or improve their houses. At the beginning of the property cycle these are the houses that will grow in value first.
What happens to those people who cannot afford to buy in the most desirable areas?
They buy in the next most desirable suburbs. This has been well documented in previous property cycles. Prices will start to increase in the more affluent and desirable areas and then start to ripple outwards to adjoining suburbs.
How can investors take advantage of this knowledge?
Firstly, understand the big picture. Understand where we are in the general property cycle. We are hovering around the bottom of the slump stage of the property cycle in Sydney and well located properties are definitely selling well in Melbourne and Brisbane where the cycle is in its early upturn phase
Next, become an expert in the suburbs that are going to grow in value first. Get to know those areas so you can pick the bargains in those suburbs near the city, near the water or in the more affluent, the more desirable suburbs.
If you buy a good property in those areas you are likely to achieve excellent capital growth in the next 5 years.
Then over the next few years the suburbs one ring further out will start to make good investment sense. It is only near the end of the cycle that the outer suburbs, those that have traditionally been first home owner areas get good capital growth.
The spread of capital growth from the inner to the outer suburbs is called the ‘ripple effect’.
How to Grow a Multi Million Dollar Property Portfolio - in your spare time
This article appeared in Property Investment Update www.propertyupdate.com.au. It was written by Michael Yardney, a property commentator, director of Metropole Properties, author of How to Grow a Multi-Million Dollar Property Portfolio - in your spare time.
posted by Daniel Serratore @ 12:56 pm,
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