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Sydney is one of Australia’s largest property sub-markets and the most expensive.
The city’s massive size and sky-rocketed house prices have significantly skewed property investors’ behaviour. We see many investors here making unwise choices that they might not be making if they were from another city. Today we’re going to talk about the most common three of them, and more importantly, discuss what a better option would be.
Location over Asset Type
While Greater Sydney’s median house price is now $1.2m, let alone the most popular locations, such as the eastern suburbs, the lower north shore, or the inner west, where house prices can easily be multi-million dollars.
Not many investors can afford that, especially first-time investors.
In the meantime, many Sydney investors believe in good locations – top school zones, train station catchments, shopping centre surroundings, beach suburbs, city fringes, etc. – where houses are usually much more expensive. They believe the value growth in such locations is better than in other areas.
Therefore, it seems natural that they invest in a cheaper asset type, apartments, rather than houses, in the “premium” locations. The below chart shows the median prices house and apartment in some popular Sydney suburbs.
It may seem that these investors have entered the blue-chip market with a lower price, but the choice is not wise – because it sacrifices their value growth.
In the past 10 years, Sydney’s house median price has grown by 116%, while the apartments’ only increased by 43%.
How about the 3 suburbs we just mentioned? The chart below tells us that apartments may grow better than average in popular suburbs, but the growth is still much lower than their house counterparts.
What would be a better choice?
A house! Houses generally grows better than apartments because apartments are pruned to oversupply risks – While the number of houses is limited by land availability, the number of apartments won’t be because they can expand vertically.
In one of our previous blogs, we tested the house value growth of “premium locations” and “ordinary locations”. It turns out that while their prices are different, growth rates are pretty close. That’s because the amenity’s impact, whether a school or a beach, has been set in the property’s value/price, and growth is influenced by demand/supply, which won’t change as long as the amenity doesn’t change.
You might say that I can’t afford a house anywhere in Sydney – “premium” location or not. That, my friend, is the second choice we’re going to discuss.
Backyard over Borderless
Many Sydney investors are only willing to buy in Sydney, or even more, only willing to buy around their area.
If you’re one of these investors, don’t think your preference is wrong. There is no right or wrong here. It’s just that only buying in your backyard is likely to slow down your journey to investment success.
Why do we say that? Let’s do a region count.
Say you live in Sydney’s Inner West and were looking to buy an investment property 5 years ago (the end of 2017) valued at $500k-$800k.
– If you were only looking in Inner West, no house was in that price range, unfortunately.
– If you expanded your search area to the SydneyMetro area, you’d get 8 regions.
– If you would like to include the BlueMountains and Central Coast regions, you’d have 13 options.
– If you didn’t mind going regional, your options would be doubled – 26 regions.
– If you were willing to go interstate, you’d have98 regions to choose from.
In 5 years, how have these regions grown in value? Did the Sydney regions achieve better growth than the others? Below is a list of SA3 regions across the country and their 5-year performance.
We’re not saying that other regions always grow better than Sydney, either. Every market has its highs and lows. We can never tell a market’s future growth by just looking at its past performance, but we need to examine many more economic and market indicators that contribute to growth.
However, the table above simply shows that plenty of options out of your backyard meet your budget and investment goals. By narrowing your buying regions, you’re significantly reducing your chance of achieving your investment success.
Borrowing Capacity over Borrowing Strategy
Sydney’s housing is generally so expensive that almost all property buyers need to maximise their mortgage amount to afford a property. It’s normal to see an investor asking their broker what their borrowing capacity is & what price they could afford and then going after a house of that price.
However, being common doesn’t mean being the best way.
Figuring out a borrowing strategy is wiser than figuring out your borrowing capacity.
It means you don’t always need to maximise your borrowing amount for one house.
For example, your borrowing capacity is now $800k, and with an 80% mortgage, you can buy a $1m house – Or you can borrow 2x $400k and buy 2x $500k houses.
The table below shows some suburbs that you can consider in the two scenarios.
Buying one $1m house, your weekly rental income would be less than $700; while buying two $500k houses, your weekly rental income would be even higher than $900.
The reason is that higher-priced regions tend to have lower rental yields (annual rental income – price ratio), data shows (below chart).
The three unwise choices are not just a result of Sydney’s sky-high house prices and its fast growth in the past decade, but also because many investors see property investment the same as buying their own home, putting too much emphasis on what they would personally like but ignoring what market data is showing.
To get rid of this emotional owner-occupier mindset in property investment, you need a group of professionals assisting you in making decisions, including a buyers’ agent who interprets market data rationally for you. InvestorKit is a data-driven buyer’s agency that helps investors identify the markets best suitable for their portfolio-building needs and make wise decisions based on rational analysis.Interested in our research and analysis approach? Book your 45-min FREE no-obligation consultation and talk to us today!