Cheap vs Expensive Suburbs: Which Get More Capital Growth?

We are often told to get the best capital growth we should buy the more premium and expensive suburbs and avoid the cheaper suburbs.
People things suburbs are cheap for a reason and are going to stay cheap.

But is this actually true? Do cheaper suburbs actually underperform compared to more expensive suburbs.

Cheap Markets Are Not Under-Performers (Article Link)

Select Residential Property

DSR Data

0:00 – Introduction
1:23 – Why are cheaper suburbs cheaper
2:59 – Cheap vs Expensive Growth Australia Wide
5:26 – Cheap vs Expensive in Regions
7:00 – Cheap vs Expensive in Smaller Regions
8:30 – Cheaper suburbs always perform better no matter which way you look at it
9:05 – Cheapest vs Cheaper vs Dearer vs Dearest
12:00 – Cheap vs Expensive in Major Capital Cities
13:17 – Looking at Deciles
15:00 – Looking at a 40 year period
16:30 – Cheap vs Expensive Yield
17:13 – Why buying cheaper properties could be better than more expensive properties

Recommended Videos:

Do Properties Near The CBD Actually Get More Capital Growth? (Property Data Dive)

Transcription

Ryan 0:00
We’re often told in order to get the best return on investment when buying property that we should buy the more expensive suburbs, the more premium suburbs with the idea being that people in the suburbs maybe have more money. And so I know property’s going to grow faster. But what about cheap suburbs? People often think, okay, they’re cheaper reason, and they’re probably going to stay cheap. But is that actually true to cheap suburbs, underperformed compared to more expensive suburbs? Or is the opposite actually true? So today, I have with me, Jeremy Shepherd from select residential property to actually look through the data and to say, should we be investing in the more expensive suburbs? Or should we be investing in the cheapest other? So hey, Jeremy, thanks for coming on today.

Jeremy 0:43
Thanks for having me.

Ryan 0:45
Yeah, this one is really close to home at the moment, because I have saved my deposit, I’m looking to invest in the next few months, three to six months, and looking at different options in South Brisbane for me, but there’s the cheapest suburbs, you know, kind of around $350,000 that I can get into with a lower deposit, or there’s more expensive suburbs looking at 450 to 550, where obviously, I need a bigger deposit. And so I’m kind of arming an iron between the two. So it’ll be interesting to go through this and to see, okay, what could be better?

Jeremy 1:19
Yeah, well, first of all, they don’t underperform. So they’re cheap for a reason is true. They are cheaper because they don’t have all the nice things that the expensive suburbs have. But that doesn’t mean that they underperform just being expensive, doesn’t mean that you’ve had better capital growth. And I think that there’s this mistake, mistaken belief that if a suburb is expensive, how did it get there, maybe it had better capital growth, but it’s always been more expensive. And there’s this correlation between proximity to CBD and higher prices for suburbs close to the CBD in the map, major capitals more expensive than the suburbs get. But they’ve always been like that they’ve always been more expensive. And as property investors were not interested in whether our properties is is cheaper, expensive, but whether it has a capital growth, that’s the that’s what we’re after.

Ryan 2:11
And exactly right. Because let’s say I’m going to invest a million dollars over the next couple of years into property or buy a million dollars worth of property, I could buy three for around, you know, $330,000 each, or buy two for 500,000, or one for a million. But what I hear at the end of the day is how much they go up in value. I don’t care about the individual property price and its ROI. You know, I think one of the best videos we’ve done together is whether or not proximity to the CBD does correlate to higher capital growth. And the difference there was very small and not as much as the experts say, so I’ll link up to that one down below. But let’s jump into the data here. Sure, cheap markets versus expensive markets and talk us through some of the analysis that you’ve done. So we can get an idea of which does perform better.

Jeremy 2:59
Yeah, so this, this table, as you can see here was an analysis of cheaper markets versus more expensive. So what I did is, at a start date, I split the entire nation up into two groups, you either had a suburb below the median, or above the median, that’s the cheaper or dearer columns there is. And then I measured on Australia as a whole. Yeah, yeah. And then looking at every suburb, over whether it’s three years growth, you can see there in the far left, gone, three years, four years, 510, or 20. And in every one of those cases, it was actually the cheaper market that that outperformed. But you’ll notice that after 20 years, there’s very little difference. So the capital growth rates is 7.3% versus 7.1%, which means

Ryan 3:44
we expect a three year period cheaper suburbs grow at 9.1%, whereas your suburbs are 6.7. So there’s a big difference there of around, you know, two and a half 3%. And then once you get to 20 years, the difference is just 0.2%.

Jeremy 3:58
Yeah, and and, you know, there’s errors involved in this sort of measurement. So that could effectively be the same. And you see this as people are trying to get into the property market. They’re looking for cheaper alternatives. If they’ve been priced out of one market, they’re looking for a cheaper alternative. So it makes sense that the demand is going to flow away from too expensive and towards cheaper alternatives. But over about 20 years, well, it’s just going to even out and it gets more, more and more even the longer the timeframe is

Ryan 4:30
well that’s in a future video, we’re going to talk about short term investing versus long term investing and how, you know, it tends to be that most markets perform exactly the same over the long term when it comes to property.

Jeremy 4:42
Yeah, yeah. It’s a startling insight, really, because everyone’s sort of jostling to trying to eke out the maximum but if you’re holding long term probably doesn’t matter so much. Rather that you just get in early. Yeah. Anyway. I yes. Yes, exactly. I had a Look at this through some different different angles having a look at it from different angles.

Ryan 5:05
Well, that’s because I think looking at Australia as a whole, you’re gonna have Sydney and Melbourne. Just in general, the majority of those suburbs I can imagine would be above the median for Australia. That’s right. You know, there’s other smaller regional towns and things like that.

Jeremy 5:22
Yeah, so in this chart, I’ve actually split it up into areas. So the cheapest suburbs within this the same area as more expensive suburbs in the same area. And that area is called an essay for it’s, it’s from the Australian Bureau of Statistics, it stands for Statistical Area level four. So they just split the country up into all these these different areas. So it’s it’s commonly referred to as a, perhaps a region. So you might have, I don’t know how many Sydney has it might have, say, a dozen of these sa fours. I think the there are only about 90 sa fours around the entire country. And it’s based on population. So they’re trying to make each one of these sa four regions large enough to encompass the same number of people. Okay, anyway,

Ryan 6:15
a kind of like Southern Sydney, inner West, CBD, Western Northern Beaches,

Jeremy 6:22
those sort of areas. Yeah, Northern Beaches is one of the the ESA fours. It will include a large number of subsets This is bigger than a local government area. Yeah. And as you can see from the numbers there, even when you are just looking at such cheap suburbs, in the same essay for as expensive suburbs, over 345 1020 years, it’s still the cheapest suburbs that seem to to outperform. And again, this is probably due to people looking for cheaper alternatives in their local area. Yeah. So yeah, and I’ve, I’ve done the same thing, drilling down to sa three, which is roughly equivalent to a local government area smaller than an SI four. And you get a similar sort of stories. It’s like

Ryan 7:07
a local council area sort of thing.

Jeremy 7:09
Yes, yes. But then you get like, a council, a mega council like Brisbane. Brisbane has just one Council. So the Australian Bureau of Statistics is trying to keep things a little bit more uniform, but not by geography size, by population, new people,

Ryan 7:29
with an essay three likely encapsulate, what does it

Jeremy 7:33
say, say a dozen. And he doesn’t, it’s hard to tell because if it’s sort of regional markets, rural markets, you may have very sparse population may be a massive geography including an enormous number of suburbs or localities. And, and that just has enough population to comprise one, essay three, but then in Sydney or Melbourne, you might have an essay three that’s, that’s only over say 1015 square kilometers, because the density of population is so high. So it’s, it’s more based on on population. So it might not have you might not have as many suburbs in one, so three is another. But the same thing comes out in the data as you can see there. So we’re really struggling now to find a case where cheaper is actually underperforming?

Ryan 8:27
Yeah. Firstly, when Australia as a whole, the cheapest suburbs in Australia as a whole, did they perform better than the more expensive suburbs in Australia? The answer was yes, they do. Then we went down to you know, there’s essay for kind of regional areas, cheaper suburbs, still outperforms now gone down to even smaller essay, three areas, and the cheaper are still outperforming. So it’s like no matter how you spend it, how large or small, you’re shrinking your sample size, the same sort of thing tends to be true.

Jeremy 8:55
That’s right. And this is just a slightly different approach, instead of splitting them into two groups or split them into four, so that those are quarter miles, the cheapest quarter mile, a cheaper quarter, then you’ve got the median, a deer a quarter mile, and then the dearest quarter, so quarter mile is 25%. of the of the sample size. Yeah, so So what a bunch of so

Ryan 9:17
what I’m finding really interesting here is that usually, you’d think like some sort of anomaly in the data, like maybe cheaper would outperform cheapest, like at at one certain, you know, three years, four years, five years, 10 or 20. Or maybe the DRL would outperform, you know, I would expect I wouldn’t expect it to just go from cheapest performing the best then cheaper than DERA then Dyrus. I’d expect like one middles to kind of switch.

Jeremy 9:40
That’s right. Yeah. And, and then maybe something in this in in how the capital growth has been calculated. Let’s say you’ve got a suburb for whatever reason, it just has a median for that particular month, which is the start of the growth period. That is abnormally low. So the median, of course, is just the middle price out of the list of properties that sell in a particular month. Now, what happens is, you really get a significant portion of a sub selling in a month, you probably get something like, roughly 1%. Now, 1% is not representative of the value of all properties in that suburb, it could actually just be for that particular month, the cheapest side of the tracks. And for the, the end of the growth period, it could have been the opposite of that you’re getting expensive properties that are selling within the suburb, so you can get the sort of anomalies. And when I’m trying to find these cheaper suburbs, maybe it was a bunch of those suburbs, which at that particular point in time, all happened to have this this anomaly. So you will get some of the suburbs that aren’t really that cheap, dropping into the cheaper groups. And then at the end, it’s back to normal. And so it looks like they’ve had better capital growth. So there could be some particular case of bias. calculation. So

Ryan 11:08
the thing is, you’re doing the national property market here, right? This is all of Australia, correct?

Jeremy 11:13
Yeah. Well, yes, this one, yeah.

Ryan 11:15
But then the opposite could also be true, right? a suburb could be over inflated in the statistics, because more expensive property sold in that month that you collected the data, and then all the capital growth would be worse. Okay, yeah. So it took me a second to quit.

Jeremy 11:33
Yeah, but But still, the fact that so much of these suburbs are analyzed in lots of different ways. And we’re still seeing a pretty clear trend, there would have to be a significant number of these anomalies in order to reverse that, or even just balance things out. So it’s, it’s still compelling, a compelling argument. And, and what I’ve done to try and smooth things out, or perhaps pursue some of these anomalies is I’ve weeded out the regional sub. So we’re just now looking at those the big four cities of Sydney, Melbourne, Brisbane and Perth. And again, it’s it’s a similar sort of trend. And then what I tried to do was exclude any suburbs where that median anomaly that I was talking about is, is more likely to occur. So I call those suburbs thinly traded suburbs. So you might only have a couple of sales. And that’s more likely to result in this median anomaly. So instead, I started looking for larger suburbs, where there were at least 1000 dwellings and a decent number of sales. So you can see there that, that I’m setting the minimum to 120 sales over the year. So that’s 10 a month, it’s a lot more reliable. And you can see that we still got pretty much the same story being told,

Ryan 12:57
where cheapest always outperforms cheaper, which always outperforms DRL, which always outperforms Dyrus. And there’s no counter example in here over any of the time periods where a more expensive one outperforms the cheap one.

Jeremy 13:11
Yeah, so maybe maybe those two, two large, those groups of only four. So here are split it up into 10 groups, each one’s called a decimal. And you might find a case, is there a case here? Can you see where there was a capital growth period?

Ryan 13:31
Okay, there’s at 20 years between D five and D six. Right?

Jeremy 13:37
Yes.

Ryan 13:39
That’s on the same in 28 years as well.

Jeremy 13:43
Yes. Yeah. So the longer the period, it looks like it’s balancing out more, which makes sense. But you see the difference there? point? 1%.

Ryan 13:52
Right. There’s no there’s a huge difference here.

Jeremy 13:57
Yeah. So I guess the, the whole point is that cheap markets are not the poor cousins, the expensive ones. What we’re interested as investors is we want capital growth. And just being expensive doesn’t mean that you have necessarily more expensive. Sorry, better capital growth.

Ryan 14:17
Yeah. And also, in this article, we talked about yields versus pricing small as well,

Jeremy 14:24
actually, there’s, there’s a good chart showing the breakdown over the different years. So each one of those covered lines is a different period of growth. Yeah. And, and you can see that I do sort of follow this downward trend sloping down to it from left to right. And you’ve got the deciles of the cheapest suburbs on the left. This all number 10 is the more expensive on the right. And so yeah, that’s that shows that

Ryan 14:48
it’s a pretty clear trend pair right. So kind of following the same process, the same slant as well.

Jeremy 14:55
Okay, so you’re talking about there. Okay, so then I started looking at longer periods. So this data dates back to 1974. So only available from I could only get it for the value of January from Victoria and you can see that there’s not a lot in it. It’s pretty much even. So it doesn’t really matter whether you pick a cheap suburb or an expensive one, they’re going to have roughly the same sort of capital growth that was over.

Ryan 15:22
So this is a period here. And I guess at least it debunks the myth that expensive suburbs outperform cheapest suburbs? There’s no real data that I can see that actually supports that.

Jeremy 15:37
Yeah, yeah, it’s getting hard to try and support that theory. And it makes you wonder, well, where did this come from in the first place?

Ryan 15:44
Well, I think the only time that I could think of where it may outperform, like more expensive servers may outperform is during an extreme boom, in an area where we say higher fluctuations in the most expensive types of properties. But then you also tend to see the highest declines in the most expensive properties when a market goes through a correction. So that’s right, I could see more expensive properties outperforming cheaper ones during that, you know, hype phase very hot market. Potentially, that could be a case, but I think j over the longer term.

Jeremy 16:18
Yeah, it doesn’t seem to return over the long term doesn’t doesn’t matter so much. I’m not sure what else I had in here. whether there’s any more data? Oh, yes. So this was the one you were talking about?

Ryan 16:31
Yeah, well, this is this is what I was asking you about when we’re talking about positive cash flow, or yield versus capital growth, and saying, you know, because so many people say that, well, if you’re going for capital growth, you’re gonna miss out on the even going for the yield and the cap, the cash flow, sorry, you’re going to miss out on the capital growth. And then I saw this graph, which is showing that well, the cheapest suburbs, which we’ve already established, tend to perform better than the more expensive ones, or at least the same of the long term, the cheapest suburbs have higher yield. So it seems it seems to me looking at this data, you’ve got high yields,

Jeremy 17:08
and higher growth in in cheaper suburbs. Yeah. And there are a couple of other things too, that perhaps aren’t performance related. Like, let’s say you’ve got a portfolio, you were saying before, you’ve got a million dollars to invest to buy a $1 million property to 500,000, or three. And if you do have a portfolio of of cheaper properties, and you’re in a position where for whatever reason you need to sell, you can sell one of those $333,000 properties. But if it’s a million dollars you got wrapped up, you can’t sell part of that property, the whole thing has to go. So you’ve got greater flexibility, if you if you aim cheaper, you get the higher yield, generally, you’re also actually paying lower stamp duty, because stamp duty is bracketed. And there’s another thing you can do, you can reduce your capital gains tax, let’s say, you did have to sell all $1 million of your portfolio, you could perhaps sell, let’s say you’ve got two $500,000 properties, you sell one on June 30 of this year, and then you sell the other on July 1 The day after. And because they’re in two different financial years, you’re paying less capital gains tax, because there’s less of that capital gain in each of those financial years. So it makes sense for a number of reasons to actually aim cheap, then then aim high.

Ryan 18:38
And also, as well, I can imagine looking thinking about my own portfolio is that, you know, I’ve been through hard times in my life and business downturns and things like that, if I own multiple, cheaper properties, and I do get some growth over the years, and then come on hard times, if I have to sell one because of my financial situation to maybe pay off some debt or get better cash flow, I could sell one and use the capital gains that I’ve gotten over the years in order to pay down debt on the other ones. Whereas if I just owned that one $1 million property, I can’t sell part of it and keep part of it. I’ve got to sell all of it. And if that bad time in my life lines up with a bad time in the market.

Jeremy 19:19
Yeah, it’d be really bad problem. That’s right. Yeah. And the other the other thing, of course, is diversification. You could have one property in Brisbane, another one in Adelaide. So you’ve got some sort of diversification against risk there. So yeah, you can arguments Yeah,

Ryan 19:37
time your markets differently and stuff as well. Yeah, yeah. So I think that kind of covers cheaper properties versus more expensive properties. You know, I I probably came into this thinking that more expensive properties would perform better. And because you know, people have more money, better socio demographics. People investing more into renovations on their homes. I would assume that okay, probably likely to see more capital growth in that area. But it’s been really interesting that the opposite has been true. And it’s definitely making me think and lean towards buying a Cheaper Property rather than a more expensive property.

Jeremy 20:14
Yeah, yeah. But I would just caution, investors to be careful, don’t, don’t aim too cheap. You could be buying in the middle of the desert, big, square kilometer of nothingness. So, yeah, exercise of caution. With all of these sorts of insights, you’ve got to just combine a large number of them, you can’t just focus on one thing and say, Oh, that’s it, that’s going to be my strategy on buying the cheapest property I can buy?

Ryan 20:39
No, absolutely not. And I’m really glad that you brought that up. Because, you know, someone might watch this and say, Okay, well, I’ll just find the cheapest suburb in Australia, and buy a property there. And I’m sure there’s a lot of examples where cheap suburbs don’t outperform the market as a whole don’t outperform more expensive suburbs. This is just one data point to look at, amongst the many that we’ve talked about with Jeremy and talked about on this channel. And so yeah, I’ll use this. But also, you need to have the underlying fundamentals as well as everything else that we could look at and talk about in these videos and some of research that we do. So yeah, just take this one point, take it with a grain of salt, add it into your larger data set, and then use that to help you make a better decision. Well, in the next episode, we’re going to be talking about proximity to schools and amenities and shopping centers and things like that, because people always tell you, you know, you need those sorts of things in a suburb if you want to get good growth. So it’d be really interesting to see what the data says about that one, and whether backs it up. Before we go Jeremy, obviously, people can check out this article on select residential property, I’ll link up to it down below, but where else can they find out about you or connect with the data sources that you have access to and the information you provide?

Jeremy 21:58
Um, well, the data that I use for for picking out suburbs would be on DSR data.com.au. But if you go to the Select presidential property website, you can see a suite of our products. DSL data is just one of them is Yeah, you can yeah knock yourself out. There’s a lot of free stuff there educational stuff, which is probably where where investors need to start.

Ryan 22:20
Yep, awesome. So go ahead go to Select residential property.com.au. Thank you so much, Jeremy for sharing this information. We will see you guys in the next episode, and until next time, stay positive