The two-tiered property market

We’re bludgeoned with hype about the “property market”, but careful analysis shows there’s no such thing. Instead, there are many markets.

Real estate reports tend to rely on median-price data that sometimes separates houses and units, but doesn’t differentiate between other important property characteristics.

The result is flawed simplistic analysis. Deeper investigation reveals a two-tiered market, in which the values of established homes are wildly divergent from those of new housing (including off-the-plan units and land packages).

More rigorous analytic methods would show returns on established and older residential property (including flats and units) are outperforming those from new housing.

This is exemplified by two Melbourne suburbs: the new Point Cook and the established Wheelers Hill. Both are comparable distances from Melbourne CBD (28km and 26km respectively). Yet over the same period between 2012-2015, Point Cook’s median price growth was 13 percent; whereas Wheelers Hill’s was a hefty 46 percent. (The Melbourne median growth over the same period was 29 percent.)

This vast disparity can be explained by many factors. New housing packages and off-the-plan developments often emerge within oversupplied markets and artificially inflated prices. Developers make a significant margin that represents an instant devaluing upon sale. On the other hand, established suburbs are often characterised by scarcity, tenancy demand and established infrastructure.

These are some of the reasons why our approach continues to focus on buying older properties at or below market cost in established areas.

 

Until next week,

Jock Bing