Everyone wants a home run: The six factors that determine property value
Friday, September 7, 2018/
Value. It’s such a tricky concept to unpack and define.
We all know that gold, diamonds, oil and even saffron are high-value commodities, thanks to their scarcity, desirability, or the fact that we need them to go about our lives.
It’s the delicate balance between supply and demand that drives up the value of these goods — the illegal drug market is the perfect example of how a highly-coveted, yet hard-to-come-by item can become inflated several times over its original worth. If people want it badly enough, they’ll pay the price.
But what makes real estate valuable?
We live in a country with vast expanses of space, yet we cling to the major coastal cities for dear life and treat the inner-ring suburbs of Sydney and Melbourne like hallowed turf that we can only hope to be worthy of residing on.
Property taps into some of our strongest needs and desires — security, safety, prestige, status, a sense of success and something to leave behind for our children.
We all need somewhere to live, or somewhere to operate a business, but lately, real estate values have also been driven up by our desire to accumulate wealth.
As with any asset, when demand outstrips supply, prices go up — as we’ve seen over the past few years in the property boom.
Apart from home buyers over the last few years, an influx of foreign buyers and herd of local investors have helped propel Australia’s house prices skyward.
However, as we are seeing more recently, the changes introduced by APRA, the impending results of the Royal Commission into banking and falling consumer confidence has seen the buyer pool shrink rapidly. As a result, growth has slowed, and in some cities, we’ve even seen price declines.
Having said this, there are a number of key factors that will always play a part in the value of property, even in the most buoyant or subdued of markets.
So let’s take a look.
Where are we all going to live?
With Australia’s current annual population growth of 1.4% — about 340,000 people are added to our population each year.
While this may not sound like much, we’re adding the equivalent of one new Darwin every 20 weeks, or squeezing in a new Tasmania somewhere every 18 months.
Melbourne is Australia’s fastest-growing city — in fact, it is one of the world’s fastest-growing developed cities — with about 2.4% growth per annum. This means its population will increase by 10% in the next four years.
Where will all these people live? How will 10% more cars fit on the road?
Sydney is also growing much faster than the national averages and will increase in population by 10% in the next five years.
And if it keeps growing at its current pace, Sydney will add two million people (the equivalent of another Perth) to its population in the next 20 years.
This growth is causing a town planning nightmare.
Yes, we’re building high-rise towers in and near our CBDs and new housing estates on the outskirts of our cities, but there is a lack of the much-desired medium density dwellings in the middle-ring suburbs where more of us want to live. As a result, we are seeing increased value and strong price growth in this missing middle.
It turns out size does matter, after all
The value of a property is driven primarily by the worth of the land it’s on, meaning in any given location larger blocks will be worth more than smaller plots.
But that’s not the whole story. It really matters where the land is located, because not all land is created equal.
In general, land closer to the CBD, water within a short walking distance of public transport or train stations is more sought after and therefore more valuable.
Just look at your own neighbourhood — not all spots are considered equal.
Some locations will be more sought after, some streets will be more attractive and even one end of a street can be more desirable and therefore valuable than the other.
Somewhere safe to sleep at night is just part of the picture — people also want to be close to amenities, their workplace, good schools or the beach — and they’re willing to pay more for the privilege.
These homes also tend to be in established areas, where vacant land is non-existent, adding scarcity to the equation.
If there are only a handful of homes within walking distance to your favourite surf spot, and tonnes of buyers hoping to snap them up, competition will push prices up and you’ll have to decide exactly how much those lifestyle factors are worth to you.
It’s much the same close to the lifestyle cafe strips in our capital city’s inner suburbs. More of us are prepared to trade space (a large suburban block) for place (close to our where the action is). In other words, we’re happy to trade our backyards for balconies and courtyards if it means living close to our desired amenities.
And accommodation in these desired locations is scarce meaning they become more valuable as people with high disposable incomes are able to and prepared to pay a premium to live there.
The character, style and appeal of homes
Period, Federation and art-deco-style homes, all bursting with architectural features and charm, are both harder to come by and more sought-after than cookie-cutter new builds. As such, they tend to grow in value faster than the same-same properties surrounding them.
Home buyers are usually willing to pay more for a home which has character, a level of scarcity or a twist (something special about it).
Improving the infrastructure around a property can make it more accessible and liveable and therefore more valuable.
Think freeways giving easier accessibility to the CBD or workplaces and improved public transport or shopping centres.
One of the significant changes to occur in Australian cities over the past 50 years, which has pushed up inner- and middle-ring suburb property values, is gentrification: the shift in the socioeconomic demographic of a suburb.
Areas undergoing gentrification are suburbs where more affluent residents move in, renovating older houses or building new ones, pulling up the value of neighbouring properties.
Solid returns on investment
There’s no doubt that increased investor demand for properties in prime locations is part of what has been helping to drive prices in many locations across Australia.
There was a time only a few years ago when close to 50% of all new loans taken out in Sydney were investors who were stiff competition for the average first-home buyer, and again, the influx of investor cash resulted in scarcity, which we already know fuels growth.
The bottom line
Like with most things in life, supply and demand for property determines value.
And in the future, Australia’s population growth, our increasing wealth as a nation and our desire to live in a select number of locations in our big capital cities, will underpin the future value of property.