Today we are looking at the virtues and values of where to buy – an inner city property versus one in the outer suburbs
We must start off by saying that the strategies, purchases, timings and options vary from one investor to the next – there is no one fixed solution or location as to where to buy for all property investors. But it is a worthwhile and interesting exercise for any serious property investor to understand the typical pros and cons of the considerations around where to buy when considering an inner city or an outer suburb location.
Generally areas closer to the city attract stronger capital growth if the property is within 5 to 10 kilometres of the city..
..because people tend to gravitate towards the city for economic and social reasons – as well as for the obvious conveniences. This means that the entry price for inner or near city property is on average, higher. As you have higher entry pricing, and can expect stronger capital growth, you also tend to get a lower rental yield – meaning your rent returns may not cover your mortgage – and this means putting you into a set of circumstances where you could use negative gearing.
Also, if the rents are higher closer to the city (even if the yield is lower) investors may believe they will attract a better quality tenant
Consider that higher density housing closer to the cities means the type of prospective tenant looking for where to buy will often be different in the inner city suburbs – those preferring units – singles, couples, city workers for example, as compared with families looking for spaces, yards and swimming pools that will often look further out where there is more land and room to move.
But there is some inherent risk at the higher end of the market too – as high end properties values – say, above $1.5 million, tend to fluctuate more in times of economic volatility..
..so as well as going up in value quickly in good times, prices can rapidly drop too, when the markets turn bad – just like we saw in the global financial crisis when here in Australia, high end prices collapsed in areas, wiping millions off the value of many properties caught in the fall-out. Also, when looking at inner city areas and where to buy, it is advisable to look for areas with limited supply. If there are a number of high rises being built, and more coming – it can create an over-supply, and put downward pressure on both rents and appreciation of those areas.
Areas in the outer suburbs tend to provide a higher rental yield, meaning the rent return is higher as a percentage value to the price of the property
This happens as property values tend to be lower the further out from the city you are. Being further away from the city traditionally means lower capital growth or value appreciation too – but this is a generalisation and not a rule.
When looking at where to buy, if new infrastructure and transport is built to these areas, this will often bolster the value of properties in the area – as we have seen in Parramatta in Sydney’s west, for example – as more people are prepared to live in these areas when they can access lower prices, good transport to town along with good infrastructure.
Also, as prices in these areas are cheaper than the inner city, they can grow more quickly when inner city areas become too expensive for many people – as we have seen in Sydney, with more young professional couples and young families buying and moving further west to take advantage of more affordable locations, and lower density lifestyles.
Again, when looking at where to buy in the outer suburb locations, supply and demand is a major factor to consider
Are there new estates and developments happening around the corner that will increase the supply of property, and how will that affect pricing in terms of both rental and property values? Good quality data about the short, medium and long term attractiveness of the area, plus economic and social drivers encouraging people to that suburb are very important to take into account.
So, if you seek the right expert advice to help you determine where to buy, have the fundamentals of your research and personalised strategy in place, you will find that there are no hard and fast rules to suggest that inner or outer suburbs are ‘better’ or ‘worse’ to invest in
There are many factors to take into account – such as the property cycle, considering which areas have ‘boomed’ or are due to, infrastructure approvals, desirability drivers such as limited supply, unique properties, economic and work opportunities, council investment plans and more – plus of course your own circumstances and strategies around affordability, serviceability and taxation strategies.
One thing for sure is that there are some very exciting opportunities in the Australian property market
Talk with us about your considerations, and we will be happy to give you some ideas about making your next move forward.