Finding Long Term High Performing Suburbs…Is It Even Possible?
In order to get the best return on investment we are told to invest in the right suburb so over the long term they will outperform other suburbs over the long term.
But what I’m starting to see is that a lot of suburbs tend to perform extremely similar over the long term.
Read this article: https://selectresidentialproperty.com.au/busting/apples-oranges/
0:00 – Introduction
0:58 – How comparing apples to oranges applies to property investing
2:08 – Why doesn’t extreme growth disparity happen?
4:40 – Chance of better than average capital growth over the long term
8:35 – The positives and the negatives of above average growth being hard to achieve
9:25 – How can we get above average returns as an investor
13:00 – Differences between 1 year, 5 years, 10 years and 25 years growth
14:43 – What are the chances of picking a high performing market over 15 years vs 5 years
16:40 – Can you determine high performers over the long term (30 years)
19:10 – Radical vs marginal difference in price
In order to get the best return on investment and achieve our property investment goals, we’re told to invest in the right suburbs so that over the long term, they’re going to outperform other suburbs. And you’re going to end up you know, so much richer than if you purchased in the wrong suburb. But what I’m saying to say what image Jamie Shepard from select residential property is that a lot of suburbs in general, tend to perform very similar over the long term that yes, in the short term, there can be big disparities between suburbs. And there can be value in you know, picking your suburbs for the short term. But when you start stretching it out to 20 3040 years, a lot of these suburbs especially the choosing suburbs, with good fundamentals tend to perform extremely similar. So I guess this is kind of looking at short term versus long term investing. And Jeremy has got a great metaphor and analogy that can help us understand this, which is the concept of purchasing apples and oranges. So do you want to lead us into that, Jeremy? Sure.
Thanks. Thanks, Ryan. Thanks for having me on your show. No, all right, let’s say you walk into a fruit shop 100 years ago, and there’s a crate of apples, and there’s a crate of oranges. Now assume that the apples were one cent each and the oranges were two cents each. If the apples grew at a rate of 4% per annum, whilst the oranges grew at a rate of 8% per annum, then after 100 years, an apple would cost you 50 cents. And an orange would cost you $44.
Okay, imagine the beginning. Did I just start out at two cents? Did you say
yes, oranges for two cents.
So in the beginning, oranges were worth twice as much as apples. And then in the end the end after 100 years, if they continue to have this disparity, and they grow the 4% apples versus 8% oranges in 100 years time, the owners are now worth 88 times more than apples. But why? Why doesn’t this happen?
Okay, well imagine walking into a fruit shop right now and you’ve got a hankering for some fruit. You’re looking at apples 50 cents each, or oranges $44 each. You just you’d have to be mad keen on oranges to spend 44 bucks on one. Right? So
that week, most people wouldn’t spend $44 on oranges. I don’t know if you remember years ago, when there was the banana shortage $3 for a banana? I remember going months without a banana and then going in and just buying one banana.
Again, well, I guess yeah, it all comes down to supply and demand.
I guess during that time period, I bought way less bananas than I would buy now when they’re really cheap. And so I guess a lot of people would do the same thing, which is you’re saying, you know, at some point along this journey, oranges get so ridiculously expensive that no one’s gonna buy them.
That’s right. Yeah. And so they look for an alternative. And that, of course subdues, the demand for oranges reducing their growth rate, and increases the demand for the alternatives, which could be apples. And so what you find is that eventually, things balance out apples and oranges grow at the same time, right? It’s still an apple, it’s still an orange, nothing’s changed. They’re still as equally desirable. He’s perhaps someone
Well, I’ll just gonna stretch out this analogy a bit. Because, you know, we might go through a period where there’s, you know, some, let’s say there’s a social media trend about oranges, you know, so everyone’s going out and buying oranges. They’re super popular, although there’s an orange shortage because it runs on Tick Tock or Instagram, with their oranges. They grow up in value, you’re out outpacing apples, but then eventually they grow to the point where you know, people are like, okay, yeah, this is an rnc. Or, and then and then apples might have a trend. And then they might grow faster than oranges at some point as well. But eventually, over the long term, they’ll kind of end up similar at a rate to, you know, apples end up at 50 cents, oranges might end up at $1 to one ratio, yeah, over time. And then bringing this back to property, which is what this is all about, is that properties that start more expensive, maybe they were just always more expensive. And in the future, they’ll still be more expensive compared to cheaper ones, but that ratio was still sort of be the same.
That’s right. Yeah. And over the long term, that’s, that’s what we see happening. And there’s a couple of charts that I can show you about that. So this chart here is it’s a chart showing the probability you’ve got of getting a particular capital growth rate over a one year period. So the tallest bar that you see in the middle there, that is the sum of all the percentage of all properties property markets around Australia over the last 30 years, that in any one year period had capital growth between zero and 5%. So the vast majority have, you can see, those three or four tallest bars somewhere between minus five and 15%. Now there’s a chance if you just randomly choose any property market, that on the far left, you could have had minus 20 to minus 15% capital growth, but it’s unlikely that’s the lowest probability, go over to the far right. And you can see that there’s a slim chance, you could have had 25 to 30% capital growth. So that’s gold. Yeah, that would be awesome. But it’s only over one year. Now I did the same thing. But using a two year capital growth, period. And you can see that the the chart is a little bit narrower, the ones the toolbars, are dominating more so. And there’s even less chance of you having minus 20% per annum capital growth over two of those atoms. And here it is for four years. And you see now a trend starting to emerge becomes clear, after eight years, there’s very little chance of you having extremely high ladies above average capital growth over an eight year period. And when we go to 16 years, it’s it’s it’s a really what we’re saying is that over a period of time, time is the great leveler of capital growth, everything just starts to to have roughly the same capital growth rate. Now, you’ll always find outliers, you can see there’s a little sliver of hope that over an incredible 16 year period, there has been a property market that has had somewhere between 25 and 30% capital growth per annum over 16 years, which is phenomenal. But your chances of picking there. I mean, that is absolute outlier territory. Yeah, the what you can expect over 16 years. And I didn’t show a chart for 32 years, because it’s really quite boring. Did I share a chart? No, I didn’t for 32 years, it’s really just a single column. And there’s nothing I you should
have shown that chart because it would just emphasize even more that the 32 year mark, everyone just kind of comes together. And the growth rate is extremely similar.
Yeah, so. So this is just highlighting that. There’s this concept, that the longer the growth period, the more likely it is that you’re going to have the same capital growth as the next investor, regardless of which suburb you you invest in. So if you’ve got time on your side, you know you’re a young investor, that the key is to just get in early, but you’re not going to really outperform so you don’t have to get this analysis paralysis. It’s more a case of Eeny, meeny, miney, moe.
Yeah, well, like you and I have been talking about we know people in our lives, our clients that you know, have been ready to invest, but they’ve undenied about maybe it’s market timing, maybe it’s the suburbs, they’re just not sure they’re not ready to kind of pull the trigger. And I feel like then they just miss out on a whole bunch of growth over a certain year period. And especially if you look at, you know, the long term, even if they pick the wrong market in the beginning, over the long term, chances are that it’s all going to converge together anyway, and work out. So I see this as both a positive and a negative. Because if you’re just looking to, you know, build a property portfolio over the long term, get good growth, you know, maybe build financial freedom through your portfolio, it’s like, Okay, this kind of like eases the tension in me that I have to pick the best suburb, otherwise, I’m screwed. So easy as that. Because you know, the chances of me getting above adger, average growth is so slim, it’s like, as long as I can land in the middle, I’m going to be successful, and I’ll be fine. Yeah. But then on the flip side of that, the chance of choosing a suburb that actually is going to outperform over the extremely long term is, you know, slim to none as well. So it’s like, Okay, if I want to be an above average investor, and looks like it’s going to be really difficult. So do we want to jump over to the article on you shouldn’t focus on long term to talk about your idea of like timing markets, and then jumping between? Yeah, sure. Because I have that ability, because everything converges in the end. How can we get above average returns as an investor? Right. Okay.
Well, let me give you this little challenge here. This is more for the listeners because I think you know the answer right? If we knew the performance over the next 25 years for two markets market I in amber or orange or brown, and market be in purple. Clearly if we knew this was how their capital growth charts would look we would buy in market B. But actually, the best investment option here is choosing market a, and that’s because it has excellent capital growth over the next five years. And here’s what you do. Yeah, after those five years, you would sell out of market a, and with those sale proceeds, you would invest with more money in market B. And from then on the investor who, who bought in market B at year zero, can’t can’t catch you because you’ve got the same capital growth as they’ve got. But you’ve just invested more dollars in that same market. Yeah, the key here, of course, is, do we know that over the next five years, there’s going to be that striking difference between market a and market B so that we could capitalize on a fantastic performance of market a for five years exit, and then buy into a different market, which also has fantastic capital growth from that point on. So if we can accurately forecast the time to enter and exit markets, then we can outperform just holding over the long term. The trick, of course, is how do you know how much growth a particular market is going to have over the short term?
With that said, it can be difficult to pick and I guess that’s the silver bullet, or that’s what we’re trying to work out, not necessarily the silver bullet. But looking at all the statistics. Looking at this graph, Jeremy, how come the green line drops below the orange line and isn’t wrong aligned? Okay, good. Good
question. So there’s a loss incurred in selling out of market a, you’ve got to pay capital gains tax, you got to pay an agent, their sales commission, and then when you purchase back in, in market B with your sale proceeds, you’re going to pay more stamp duty. So there’s a loss that you incur, just moving your funds around.
Yeah. Okay. So that makes sense for that. But that’s the thing. I think choosing markets, the more that I studied this while i think it’s it’s very, very difficult to choose the exact bottom of the market, the exact top of the market and the perfect time to sell. It does over the long term. As you start to look at markets and you see markets that have gone up significantly, in the last five years, you can start saying, okay, given our previous video that we did on how does past growth, predict future growth, even area hasn’t grown a lot over the past, you know, 10 years, 15 years, it’s more likely to grow over the next 15 years. And so it’s combining all of these ideas, and all of these data points into a strategy like this, where you can potentially accelerate your growth and get a above average return. Hmm,
yeah. And to highlight some of these these issues, I’ll I just want to show you a couple of charts. So try and guess the period of time over which this this chart covers? It’s sort of a rhetorical question. I mean, you can see there, there’s the answers down over one year. Here’s another one. That is, again, only over a year. And you could see that they’re all radically different. Yeah, all those growth profiles are radically different over a year. Now, here’s another chart. And you can tell straight away just because of all the jagged edges, there are more data points, this is probably over a longer period, at least over five years. Here’s another one over five years. And here’s another one over five years. And as we increase the period that we’re looking at, this is now 10 years, you can see a trend start to emerge. That was very different from one year, one year, it was just all over the place when
you couldn’t Oh, no, I couldn’t pick life
examples and random over one year. And there’s, there’s 25 is another one, and another one. And so yeah,
they also write while they may not have the exact same growth curve, they all look like they started a very similar point and then ended a very similar point in terms of growth.
That’s right. So the further you back out further, you zoom away and look at a longer period, the more these growth charts all start to look like this one. This is your stereotypical exponential, you know, this is this is compound growth. And that’s what we see in property markets around the Western world for the last few centuries where data is being collected. And that’s what pretty much every property market is going to follow over the long term. And it’s very hard to pick those long term outperformance. So, I did some calculations that over 15 years, you’ve got a chance, one in 44 markets will double the national average over a 15 year period. Thought it was like a two to 3% chance of picking that right market. Yeah, that’s right. So it’s it’s fairly slim. If you’re using a random method of picking a suburb. If you’re also using a random method of picking a suburb over a five year period, you’ve actually got one in nine chances of doubling the national growth rate. Okay, so your chances increase dramatically, outperforming by significant margin over a shorter period of time over a longer period of time, you’ve got less chance of outperforming.
Yeah, this is just if you picked us up at random as well. So I would assume as an active investor, and someone that is looking into the data, understanding some research, while what we want to do is increase the chances you know, from one in nine to much higher, but I would assume that it’s still going to be easier for us or myself as an investor to pick the time and timer suburb that’s going to do well over the next five years than it is the biggest other that’s going to outperform or double the national average over the next 15 years. So I brought Yeah, so it’s gonna be easy for me to focus on. Okay, when I think it’s going to do better over the next five years, versus trying to pick Okay, where do I think is going to grow better over the next 15? And then I guess I could do that. If I do get it correct, still out at five years, and then try and repeat the process three times over 15 years?
Yeah. And there’s there’s more than just probability that’s working for you in that strategy. When we when I’ve tried to find, how do you discover our performance over the long term. And the problem with this is I’ve looked at 30 year old data, and there’s not a lot there even 20 years ago, there’s there’s no auction clearance rates, there’s no there’s no yields, there’s really nothing to look at, in the the internet age of the data age is really only been around for, you know, the last decade. So we don’t have the historical data we need in order to analyze and say, I can pick an outperformer, over 30 years, I don’t know. In fact, there’s only three things that don’t buy a new property, don’t buy near loads of vacant land, which can be developed and create oversupply, and buy a house rather than a unit. Those are the only three things over the long term that I’ve found any data to support. But over the short term, you’ve got auction clearance rates, you’ve got selling times, you’ve got discounting, you’ve got all these novel sort of metrics, like ripple effect, potential neighbor price balancing, market cycle, Tommy, there are loads and loads of metrics that we can look at. So our chances of outperforming over the short term, and not just based on the probability, but based on the availability of data. And there’s just so much more now that this isn’t getting so hard to do, to actually trade property.
So anyone that saying that they know how to pick properties that are going to outperform over the next 30 years. They actually don’t have any data to back that up.
Yeah, I can’t assess. I can’t assess someone on being a helicopter pilot. If if they’ve never flown a helicopter ever before, not even once. So what were you doing 30 years ago? What property markets were you pick it? Were you picking your nose? A lot of these so called experts who say who claim to pick these long term outperformance? Well, you know, show me what you were picking sizer wasn’t came out of your nose 30 years ago. And and I’ll see Are you are you really an expert? So there’s a lot of talk out there. And people will refer to the data but but that I’m referring to the data right now. And there’s nothing in it to say that you’ve got a good chance. But someone could argue the case? Well, I know it’s difficult, Jeremy, but I can do it. Well, okay. Just Just show me what you’ve done. Anyway, it’s, it
was the day and then we’re gonna wait 30 years to save the right.
That’s right. Yeah, that’s what I’m asking for something they picked 30 years ago. Yes. There’s another lovely bit of statistics that I want to show you. Well, this is this is a good little infographic here. There can be a radical difference due to property markets over the course of just five years, but over 20 years, it’s going to be less than than radical. And that’s what we’re talking about. Here. We’re talking about a significant difference, which justifies the expense of selling a property paying capital gains tax, buying another one spending on stamp duty, because the opportunity cost over that period of time is going to be so significant. So that that’s what we’re talking about. It’s a radical difference on a marginal difference.
Yeah. Well, the marginal going back to that one marginal over time, like if we the radical one, if we look at you know, when Perth had its boom, and it outperformed, you know, Sydney and Melbourne who did amazingly for a bunch of years, and then we know over the last five years, it’s actually gone backwards. Whereas Sydney and Melbourne had their run ups leading up to I think mid 2017. Whereas Brisbane kind of laid flat, and then I’m kind of thinking, Okay, it’s Brisbane turn, we’re going to need another five years to see if that’s actually the case. But along these paths, you’ve got all of these different cities that are performing radically different to each other. Sydney, Melbourne performed radically different to Perth leading up to you know, 2012 to 2017, massive different performance, but then do you spread it out over the long term? And you don’t get that massive difference?
Yeah, that’s right. Yeah. I mean, I read somewhere with someone was was was saying that. Over the last 20 years, Launceston, one of the oldest cities in in the country has outperformed Sydney, one of the biggest cities in all the biggest city in the country. But if you go back, only over the last 10 years, what’s Sydney that’s outperformed Launceston, if you go back 30 years, it’s again, it’s Sydney that’s outperformed Launceston, but over 20. So it depends where you put the start, man. Yeah. But yeah, so long term, the Trading Places, they all are approaching the same sort of sort of growth rate, but over the short period of time, then then you can see a significant difference.
Yeah, well, I think we’re gonna leave this one there. Because I think the concept is that over the long term, things are going to perform mostly the same, you know, you want to have strong fundamentals in your property. But over the long term, you know, it’s almost like stress less like, if you’re investing for the extremely long term, you buy something good enough, chances are, you’re going to be in that main batch that gets the same sort of capital. Yeah. Anyway. If you want to get above average returns, then looking at a shorter time period, like five years, and then getting that radical difference, and then selling and moving into different markets. Could be the way to get higher than average returns.
Yeah, yeah. Spot on.
Yeah. Yeah, it’s, um, I don’t know, for me going into property. It’s cool, because well, I guess now it just comes down to how do we pick those markets that are going to perform better. And that’s what the this whole series is about, is looking at the data points that’s actually going to help us pick these markets and also ignoring the data points that aren’t going to help these market because pick these markets, which I think is just as important. We just did a video on amenities and how it affects capital growth, being close to good schools, good sharps, train stations and public transport. We’re told that yes, this is going to increase the capital growth. You showed me data, Jeremy that says, No, it doesn’t. And so so many people are focusing and spending their energy on that, where really, they should be focusing on other things. So in a future video, we’re going to talk about, okay, what things should we actually be looking at in order to find a potential high growth suburb so go ahead and check out our previous videos that we’ve done on this, and I’m really looking forward to that future on with you, Jeremy, thanks so much for coming on and sharing this. Thanks for having me. So you guys can go and check out the articles that we’ve talked about today. I’ll leave them links in the description down below or go to Select residential property.com.au. And you can see all Jeremy’s educational content over there, as well as links to resources and tools that can help you do some of this research yourself. So go ahead, check that out. And until next time, stay positive