Source: Melbourne Investor Feb/March 2007

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Taking Advantage Of The Property Cycle

Source: Melbourne Investor Feb/March 2007

Written by Michael Yardney

Metropole Properties

Michael Yardney is the director of Metropole Properties, a successful property developer and a leading property commentator. He is author of How to Grow a Multi Million Dollar property Portfolio - in your spare time.

 

Taking Advantage Of The Property Cycle

Property booms never last, but neither do property busts. The Melbourne property market bottomed over a year ago and property values have shown steady growth in many suburbs. So how can investors make the most of the next property boom? The answer is simple.

The investment strategy that has worked well for the most successful investors and that will work just as well as this new 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 cent per annum if averaged out 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.

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 wanted to live or work there.

Over time people would want to move to this island as jobs became available. These new residents would need to build houses for themselves, and being a small island, after a few years the island would be full and there would be no room to build more houses.

What could they do?

With no vacant land left, all they could do is 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. If there were a lot of people wanting to move to the island,
those willing to pay the highest price would get to live there. The more people who want to live on the island, the higher the cost of housing would be. This is what causes capital growth.

Capital growth is highest in an area where there is a demand for property and land is scarce. One thing to remember about scarcity is most people want to live in the most desirable locations, in Melbourne these are the inner south east suburbs and suburbs near the water.

As our next property cycle moves on it will be these more desirable, more sought-after areas that will grow in value first. We are already seeing this in the more affluent suburbs, where property values have grown strongly over the last year. In general, people living in these suburbs can 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 initially increase in the more affluent and desirable areas and then start to ripple outwards to adjoining suburbs.

How can investors take advantage of this information?

Firstly, understand the big picture. Understand where we are in the early upturn phase of the next property cycle.

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. If you buy a good property in those areas you are likely to achieve excellent capital growth over the next five years.

Then over the next few years the suburbs one ring further out will start to make good sense.

It is only near the end of the property cycle that the outer suburbs, those that have traditionally been first home owner areas, will achieve strong capital growth. This spread of capital growth from the inner to the outer suburbs is called the ripple effect.

This is a time for investors to be selective, to think long term and buy well located properties.