Do Properties Near The CBD Actually Get More Capital Growth? (Property Data Dive)
We are often told if we want the best capital growth we need to buy as close to the CBD as possible. But is this actually true and is there any data to back up this advice?
0:00 – Introduction
1:13 – Issues with prior reports
6:35 – What trend you’d want to see if this was true
8:10 – Calculating the data
9:25 – The results
11:45 – A problem that makes this difficult to assess
13:30 – Change in growth/m2
16:35 – Yield vs distance to CBD
19:20 – Don’t just look at one data point
20:25 – Volatility vs proximity to CBD
22:30 – Why are properties near the CBD more expensive?
We’re often told that if we want the best capital growth, then we need to buy as close to the CBD as possible and that the further out you get from the CBD, the less capital growth you’re going to get in that suburb and in that property. But is this actually true? Today? I have with me, Jeremy Shepard from selected residential property to talk about this. Do we actually need to buy in the CBD or as close to the CBD as possible? And is it true that the further out we get, the worse our capital growth is going to be? When we look at the data? Does it actually tell us a different story? So hey, Jeremy, thanks for coming on today.
Thanks for having me. on your show. Ron.
No worries. So yeah, this is one that I’m really curious about. I know that you take different angles, other people, you look at the data, I guess more,
I don’t know, less emotionally, you don’t draw conclusions as quickly as other people do? And you tend to say no, what does the data actually tell us? And sometimes you throw your hands up and say, Look, it doesn’t really tell us much. So I’m excited to hear what conclusions you come to and what data you’ve looked at. So don’t talk us through a bit about what research you’ve done, what conclusions it’s likely to? Yeah, well,
I guess it was all triggered by having a look at some prior reports, I’ve seen quite a few. And it all seemed very convincing. And I tried to replicate the same sort of results and just to a little more well rounded job of it. So for example, people refer to inner ring, middle ring, outer ring, why have we got three rings? A lot of the reports I’ve seen have just focused on a single city. And I just thought, we need something a little bit more broad. What I wanted to know was, what is the improvement in capital growth per kilometer closer to the CBD? Is it possible to come up with a metric like that. And really, what I found was, there’s not really much in it. And it’s debatable whether there’s anything in it. In fact, if I just scroll down, I think there was a Okay, so I go through some other reports and just point out some of the shortcomings, or some of these reports were quite a few years ago. So we can’t really, you know, point a finger at what was done then it was was pretty good for its time. But there is a chart or where I cut to the chase. So I’ll just if you’ll bear with me, and I
will link to this article down below if people want to go through this go through it in way more detail than we’re going to cover in this video. And you can see all the graphs and things here.
This is a great one from two big names in real estate. Well, two big names in data in general RBA and real estate Institute of Australia. And, and this chart is a little bit hard to absorb. But what they’ve done is they’ve they’ve tried to create a ratio between these two timeframes, 2014 and 2008 2008. two and six. And the idea of this chart is that prices are getting the difference between inner and outer rings is getting larger and larger over time. So all I did was I tried to replicate this exact same chart, but for two for different time frame. And I’ve got completely the opposite result. So where’s my one?
I don’t even understand what this chart is trying to tell us.
Well, yeah, okay, so
his inner ring, and where’s the outer ring?
Yeah, where exactly where do you draw the line? That’s, that’s another issue. What is
it? Like? What does red mean? What does blue mean? What is medium prices? How much? Ring house versus an outer ring house?
Yeah, that’s right. Okay. And that’s it’s 2006 versus 2014. So, you can see that in every case, the blue is higher than the red.
That is the ratio is getting higher inner ring, the growth of inner ring houses outperforming the growth of outer ring. So you want to kind of 2014 the ratio should be higher than 2006. If the CBD is going to grow faster.
Yeah, that’s right. And so if this was what you looked at in isolation, you’d be thinking, Well, yeah, I better buy closer to this CBD. But quite often in these sort of capital growth analyses, it’s quite important way to set the finish line for whatever race you’ve got set up and he they’ve set the finish line just as a 14, maybe this this came out in 2014. But I tried to replicate it. And just for two different dates, nine, another eight year period, but this time from 98 to 2006. I’ve got pretty much the reverse. And and this is the whole thing about you know, surges in booms for cities, they tend to start in the affluent areas which are closer to the CBD where there’s more expensive property. And then that growth tends to ripple out towards the fringe suburbs over a period of years. And
talk about in future videos is that the top end of the market, how it does fluctuate more, it can grow more during boom period and get into decline more during You know, that’s right periods.
Yeah, so depends where you set your start and finish line. So what we need is something that’s a lot longer than just eight years. And also, I
can already see the downside of this draft, as well as it’s only talking about detached dwellings or houses. And obviously, you’re looking at the CBD of Sydney. How many detached houses are you going to find in the CBD?
Yeah, that’s right. Yeah.
I mean, it’s out there. So it’s kind of it’s not really comparing apples to apples? Yeah, well, what
I wanted to do was it was create a lot more rings instead of just three. And then where do you draw the line is an inner ring within five kilometers, it could be, you can’t use five kilometers for every city in Australia. So I thought that the best way to get a general trend about proximity to CBD is looked at multiple cities over multiple time frames long term, and using a large number of rings. So what
I did find out,
yeah, he’s just more reports more previous ones, I’m just picking holes in, in the, you know, the, the way, the methodology. Okay, so let’s say that we had 10 rings instead of three. And now this is just fictitious, you know, a theoretical chart,
there’s not actually done on this chart
you’ve just made just to show the point of why we’d want 10 rings instead of three. Because now we can plot a trendline and see, well, what is the general rule going on here? If you’ve only got three, like three in in our middle? Well, we can’t really plot a trendline so that’s why I thought let’s come up with 10 rings. And instead of, well, here’s an example of like, you know, what are the growth rates for each for each ring? So this is just hypothetical stuff, then I get into the the actual so here’s another good good question. What do you do when you don’t have a completely circular city? You know, like Melbourne, you know, a few kilometers to the south and you’re you’re in the water. There’s plenty plenty out to the east but the greater metropolitan areas a bit short on the on the west, so goes a long way down the South. I mean, did you know that the greater metro area went that far south I didn’t it’s it’s extraordinary. So what I did
was so the morning I created Tim Peninsula, which I know is a popular area is so far from the CBD, but it is a highly desirable area.
Yeah, yeah, that’s that’s a good point, too. So I came up with GSR, so I put, based on the distance from the CBD, I put each suburb into one of 10 buckets. So the 10% of furthest away suburbs are in the 10th desolate, so when you see over there either, so the inner ring would be in the first decile. So instead of actual kilometers, it’s just evenly sized buckets. And that way, we don’t care about the shape of a city, because we’ve got the same number of dwellings in each
or so. Okay, so it’s not, it’s not necessarily Okay, here’s one to five kilometers, five to 10 kilometers, it’s the 10% of suburbs closest to the CBD, then, you know, the 10 to 20% 20% 30%. And then when you get to the end, it’s okay, here’s the 10% of suburbs furthest from the CBD.
Yeah, that’s right. Which, like in Canberra, Canberra might only be you know, 10 kilometers between Sydney it’s like 80 kilometers, right to the the outskirts.
Yeah. against what big cities as well as smaller cities and can work for shrine. But I did
limit this to only the cities with populations of a million so it’s, it really is just Sydney, Melbourne, Brisbane, Perth and Adelaide. Yeah. But it could be extended to other cities. Okay, so this is this is the rub real data? Yes, this is this is a real data this is actual. So you can see that there does appear to be some sort of a relationship for the first three decimals, and then it goes flat. So you’d expect if this is a true relationship, you’d want it to continue to decline the further and further you are away from the CBD. And this is growth over 40 years. So this is definitely long term sort of buys
this just looking at detached dwellings as well.
Yes, just houses, no unit. So of course, anything like you said before, really close to CBD, Sydney, Melbourne, it’s just all units. Yeah, there’s, there’s a couple more that I did. What was this one. So this is just over the last 20 years just, I need to randomly changed the period of time because of what I was saying before, depends on where you set the start and finish line. So I just need to change the start and finish line. So this is a 20 year look, and you
say, you want to change the start and finish line, you want to change, you know, look at 40 years, 20 years, as you said, these different time periods and you you would like to see this trend continue across those different time periods. Exactly.
Yeah, you want to see consistency. And as soon as you start to see inconsistent behavior, then you can’t rely on this as a trend.
But over 20 years, I can see the third deciles seem to do the best.
Yeah, yeah, but I mean, it’s not my channel is
no even going all the way out to the 10th. So the difference, you know, it’s maybe half a percent.
That’s right over the long term, it works out to be around about point 7% per annum, that you might be better off buying in the absolute top 10% closest to the CBD versus the furthest away. So if that’s Sydney, and you’ve got like 80 kilometers in there, assuming everything was evenly spaced, the difference of being eight kilometers close to CBD is just nothing, it’s like point 01 percent per annum, you just wouldn’t notice it. And and this is with a particular caveat. So the way in which I’m calculating capital growth is changing medium values. And here’s one of the big problems which make this makes this very difficult to assess. In infringe suburbs, you might have 4000 square metre block of land, which is subdivided into into a number of different blocks. So let’s say 20 years ago, every dwelling every property, every address in an outer suburb was on 4000 square meters and was worth $100,000 can use forward if every one of those properties gets subdivided, it’s quite possible that the price will remain the same. Even though there’s been some capital growth, let’s say it’s doubled in value, you’ve halved the amount of land you’ve gotten. So your median isn’t going to change. So the capital growth you’re measuring in the outer areas is biased lower than in the any areas which don’t have as much subdivision, you might see a 500 square metre block, you know, split up for a duplex, for example, but you’re not going to see a 4000 square metre block divvied up into 10 parcels like you could in an outer area. So some divisions are far more prevalent in outer rings than in inner rings, which means that the calculation of capital growth is unfairly biased lower for them. So that point seven per annum capital growth difference between the innermost ring and the outermost ring might actually be only point 2% difference, it’s it’s impossible to say. And I did some analysis, instead of looking at median values change in dollars per square meter. And there’s a chart down here somewhere. It’s a big scatterplot. Here we go. So unfortunately, the data for this is only available in Sydney and only four from from 2001. So that’s that scatterplot. Each one of those purple points there represents a suburb. And of course across the horizontal axis, you can see its distance from the CBD. And over that period of time that 2001 to 2018. There’s the capital growth up the vertical lift access. So you can see it’s it’s generally quite flat, meaning that proximity to CBD doesn’t have an obvious trend. But you can see that you could argue a case, from right in the in the CBD to 20 kilometers. There could be a bit of a relationship there. But then why does it break almost reverse for the next 20 kilometers? Yeah, wow. Again,
you know what we’ve got?
No, no. So
I’m looking at the rise in the middle around, you know, 40 to 60 the outliers right at the top there with
by your by the outliers, and there are none of those extraordinary outliers close to CBD, or far from the CBA. So what’s going on there? I mean,
the thing I want to ask you was maybe buying further out, while on average, this others might perform better is there more variance the The further out you get in, you know, some servers might be going down because there’s too much development or, you know, is there more risks in the outer suburbs? But that’s why this scatterplot so good, because you can say, okay, even in these outer suburbs, further out 60 kilometers to 100 kilometers, there’s really none there in the negative at all over this period. Yeah. And they’re all performing very similar to everything else.
Yeah, that’s right. There’s simply isn’t enough in this chart. And again, this is just for Sydney, it’d be great if it could have been replicated in other cities. And for a longer timeframe. But this is the only place I could get data at a like per square meter value. So I’m, I’m ignoring what’s been put on top of the block of land, I’m ignoring subdivisions, you know, I get away from that anomaly. So this capital growth is, is a little more accurate. But unfortunately, it’s it’s not a convincing argument. The good news is that if you do want to buy close to CBD, you’re not hurting yourself. You know, there’s no harm in doing that. It’s just, is it actually a strategy that’s worthwhile pursuing? And there are a couple of other problems with that, like, I mean, first of all, if we’re talking about Sydney, and you get within 20 kilometers, you’re over a million dollars. So you’ve got a lot of eggs in one basket right there, you’re paying a lot more stamp duty per stamp duties is bracketed. And rental yields
also be negatively affected.
Well, yeah, I was just about to say, let me show you another chart. Where I show Okay, so this is the relationship between the desfile the ring, and yield, and you can see the closest you are to the CBD ring one has the lowest yields. And that is a very clear trend. That’s one yeah, that that you don’t argue with that. I mean, that that makes perfect sense. So if you’re a long way from the CBD, you’re getting a massively different yield, then then close the CBD. So you’ve got problems with cash flow, you’ve got all your eggs in one basket. I mean, if someone said to me today, where would I invest a million dollars in real estate, it would not be a million dollar property in in in Melbourne or Sydney, not because those markets are attractive. It’s just that I could, I could have 500,000 in Brisbane and another 500,000 in Adelaide. So I’m on diversifying. And if in the future, I want to sell off part of that portfolio, I can choose one of those properties. But if you’ve got a million dollar property, you can’t sell half of it. No, and I can sell a $500,000 property 30th of June, I pay CGT on that. first of July is a new financial year. So I’m paying CGT in a different financial year. So I’m paying less tax because I could also
as well look at market timings there. Say you bought one in Brisbane, one in Melbourne, or one in Adelaide or something like that. If you got to a point where you had to sell one and one of those cities had a really good run, it was nearing the top of the market, you could be like okay, I’m going to sell that one and keep the one that hasn’t had the run yet invest my money somewhere else. And I guess something as well. Looking at these yields, as you talked about eggs in one basket, something that I’ve learned heavily over the last couple of years is that sometimes we we always look at the property data and say what’s going to work out best this data but sometimes we don’t look at our own lives and say sometimes there’s risks in our own lives that stop our investing. So you know, I like roses downturn went through a separation of people obviously lost their jobs last year during Coronavirus. Those things can happen to force you to sell as well. And having high yields on a property can sometimes ease the burden of owning investment property. And even if you’re in a positive cash flow situation can pay off the mortgage for you. So there’s a lot more factors to look at than just how close Am I to the CBD. How much capital growth and we’re going to get?
Yeah, yeah. So even if if these figures that I came up with this point 7% between the inner and outer most rings, even if that is accurate, and I doubt it because of the effect of subdivision. There’s just too many of these other practical considerations, which you just mentioned, which means it’s probably not a strategy that investors should should focus on.
Yeah, and, and I’m always very, I always try and tell people don’t just look at one data point, like this distance from CBD or the previous video we did on population growth. Don’t just look at one data point and say, okay, that’s going to be my guiding light for where I’m going to choose my property, you’re gonna have your overarching strategy and then taking a lot of different data points to actually make decision as to what’s the best suburb for you distance from CBD might be something that you want to take into account. But as we can see from the data, it’s not a be all and end all and there’s no obvious trend there. So it’s something that you might want to look at, but I personally wouldn’t use To say, Okay, well, I’m gonna buy this other this other because it’s closer, I wouldn’t be looking at a lot of different other factors instead,
yeah, there’s simply too many other metrics that have a bigger sway on your profitability than than proximity to CBD.
Yeah. And we’ll get to those metrics in a future video. Is there anything else that we need to cover about distance from CBD and the effects it has? Oh, yeah, there’s
something that you mentioned before about the volatility. So this is this is a great chart from from corelogic. So they split up suburbs into the first decile, and 10th GSR by price range. And so you can see that the biggest swings of you know, high growth and low growth are typically in the more expensive suburbs, I’ll just, I’ll just highlight where that is there. So those sort of rectangles show the, for a period of growth or negative growth, low growth, they show the swings, the ups and downs. And it’s really, it’s really just a case of the more expensive, more affluent areas, they have the biggest growth at the start of a growth cycle. And when there’s a recession, when there’s a, you know, retraction or correction, they also fall by the biggest amount. And so that’s another factor for you to consider, like you said, if you’re in a position where you have to sell, you don’t want it to be at the wrong time for your property. And that’s that’s an issue. If you’re buying closer to CBD, because of the biggest swings, there’s more consistency in the in the cheaper areas. Yes, as the closer you
are to the CB, the closer you are to the CBD, the more likely it is your property’s going to be more expensive or towards this, you know, 10th decile of expense, versus the further out you are, the more cheaper your property’s going to be. So you’re less likely to have swings there. So while this doesn’t exactly show distance to CBD, you can make some correlations there because exactly, the CBD are more expensive than properties further out from the CBD.
Yeah, and I think that this is where the original theory came from, because people say, Well, why is it that the suburbs closer to CBD are so much more expensive, they must have had better capital growth. But they’ve just always been more expensive. They didn’t necessarily have better capital growth as the data shows. And so yeah, a lot of people will look at price current price as an indicator of past growth, but that I realize it’s, it’s probably just grown same rate as an outer suburb, it’s just that outer suburbs have always been cheaper. So there is definitely a correlation with price and proximity to CBD, but not capital growth and proximity and CBD,
which is super interesting. And again, something we’ll cover in future videos, which is how does previous price growth or history of price growth predict future price growth, as well as looking at this buying more expensive properties versus cheaper properties? How can that adjust capital growth? So that’s something we’ll cover in future episodes in this series, I really enjoyed today’s episode to kind of debunk this myth that the closer you are to the CBD, the better growth you’re going to get. As we saw, there may be some small trends there in that, you know, closer one 2/4 decile, but outside of that it just didn’t really seem to be the trend that we were expecting. So something to put into your back pocket put into your arsenal of property data, things to consider when you’re looking to invest. Thanks again so much, Jeremy, for coming on and sharing this.
nowise. Where can people find out more about you? I’ll link up to this article down below. But anything else they should check it? So
yeah, these are all these articles are on the Select residential property.com.au website. It’s all freely available. loads more topics. And yeah, we’ll go over them in in more review shows.
Yeah. So thanks so much for tuning in everyone go and check out one of those other episodes I’ve done with Jeremy This is just fascinating. Donna is going to help you become a much better property investor, reduce your risks and hopefully increase your chance of return as well. So check one of those out and until next time, stay positive