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Does Size Matter?

Date: 24/06/2014

Flicking through the weekend papers I noticed an article about the size and price of inner city properties. The article’s conclusion was that traditionally smaller inner city blocks sell for more on a price per square metre basis compared with properties farther out of town.

For instance, in the inner Melbourne suburb of Albert Park (famous for the Grand Prix circuit around the lake) the median house is worth $1,310,000 which equates to $6,274 per square metre, yet in Toorak (where the rich and famous live) the median house price was $2,622,000 yet the price per square metre was only $3,187.

Aside from being interesting, the question I would like to pose is “Does size matter in real estate, and how can we take advantage?”

Misleading Statistics

The answer is only apparent by trying to answer why inner-city property prices are more valuable per square metre because I believe the premise of the smaller is better is misleading.

Generally speaking, unless you are a developer – or you plan to sell to a developer – land size is not the key determinant of a property’s value. If it was, the bigger the land parcel, the more a property ought to be worth and so large tracts of land in desert regions would be priceless real estate.

Desirability & Scarcity

No, the true value of land is determined by its desirability; the higher the income of the target market who wants the land, the higher the value of the real estate can go and its scarcity; meaning something in short supply.

If something is desirable and scarce then the growth potential of the investment increases dramatically.

So, what is it about inner city properties that is both desirable and scarce?

You’re invited to contribute your ideas by leaving a comment below, but to keep our discussion going, my thoughts are…:

Desirable

  1. Easier commute to inner city work locations
  2. Proximity to desired amenities such as beaches, parks, schools, etc.
  3. Appealing period nature of the housing
  4. Housing feature (north facing, parking, etc.)
  5. Perceived post code prestige
  6. Easier external maintenance
  7. Ability to sub-divide / develop (for investors)
  8. Birds of a feather flocking together – similar status / social group

Just on that last point, there is a trend emerging of cashed-up baby boomers trading down the family home and redeploying their real estate capital into easier-living communities in inner-city locations. Quality is definitely more appealing than quantity for these folks who frankly don’t want to mow large tracts of lawn anymore, but still appreciate a small garden to tend.

There also remains a general suspicion of apartment living, which although becoming more popular is not quite mainstream enough to be fully embraced by generations who typically grew up on a quarter acre block in the burbs. This stigma is slowly changing though.

Scarce

  1. Inherent nature of small blocks when the original subdivision was completed
  2. Little available land as most areas are built out
  3. High entry price makes it difficult to acquire adjoining blocks
  4. Land parcels of sufficient size, orientation, access etc. to sub-divide / develop
  5. Often restrictive planning overlays limiting redevelopment options
  6. Housing feature (e.g. off street parking)

Profitable Conclusions:

Inner city houses

Inner city living, once the domain of the working class, has certainly evolved into chic real estate, and given that the swelling numbers of baby boomers entering retirement is an indisputable statistical fact, it seems the trend of inner city living is set to continue for some time to come.

To cater for demand, about a decade ago inner city apartments started springing out of the ground like mushrooms, and while the living option of the future, potential oversupply of this housing product is undermining scarcity.

In my opinion, the better growth proposition comes from owning a standalone inner city property that is purchased to maximise both desirability and scarcity, and is appealing to an emerging demographic that is cashed up and buying with increasing vigour.

That said, even if you aren’t an inner-city investor, before buying any piece of real estate you must always contemplate the desirability, scarcity to the next expected buyer of the property.

It’s a reasonable assumption that any property that is desirable and scarce to a high income purchaser will experience strong capital appreciation over the medium to long term.

So friends, in this case, it appears its how a property is used, rather than it’s size, that really counts.

Profile photo of Steve McKnight

By Steve McKnight

Steve McKnight, the founder of PropertyInvesting.com, is a respected property investing authority as well as Australia's #1 best-selling business author.

Comments

  1. Profile photo of Siobhan Barry

    Interesting article and premise, thanks Steve.
    In terms of you first point under desirability, I consider there are at least 2 parts to this, the walkability of the area – are you able to walk to the local cafes, supermarket, restaurants – and also benefits of close public transport and a shorter commute.

  2. Profile photo of Coogee126

    Steve, I agree with what you say on inner city properties. Except that I do think even for scared property, there is still a upper limit cap also applied . I m running a experimental sheet myself to try to prove this. so far the evidence is quite strong esp. in some of the high end properties. eg, I saw people bought in sydney eastern suburbs beach front house for 3m 10 yrs ago and end up selling it now for similar price , maybe 150k profit on gross basis for 10 yrs holding such a premium property.. this is a horrible/likely negtive return for the money invested. I felt that there is a upper limit of how much a property can go up to.. and that limit is strongly linked with the macro economics envionment and the growth of the national income level. it’s easier for a property to go from say 500k to 1.5m, ( we see this a lot in some subs in syd in the past decades or two with our national income growth much higher than ever before ), but to move from 1.2 to 2.2m in my view will require a much more momentum and almost twice as hard. ( same absolute dollar amount but less ROI ).
    I can actually see some of this price trend in sydney, that I doubt how much higher it can go while the starting point is already high for most of the average income earner to bear.

  3. Profile photo of ESKN

    Steve,

    I’e read the article however it does not answer some of my questions whether bigger is better.

    i also agree with Coogee126, that even if you buy scared property its risky that you would only be able to fund that one house (too expensive), also i do have that feeling that it gets capped at a curtain price.

    Obviously the closer we get to the inner part of the city the higher the price increases, but if we look for example a suburb that is further out (possibly 20-30mins from the city) which is selling smaller blocks (off the plan) selling for about $450k, 350-450m2 v.s. an old house with larger land $550-650k with 600-800m2.

    Same area (same suburb) however we will be looking at the difference of profit from depreciation (tax return), maintenance costs for older house, bigger land hence more work for tenants (maintenance) makes it less attractable and would prefer the smaller newer house with less maintenance.
    In this case which is better?
    Will the new house appreciate more in value or the old house with larger land? (Future rebuild/renovate or if possible, sub divide?)

    Investment yield of new house verses appreciation of capital growth of old house (but bigger land) over the long term?

  4. Profile photo of Pacific homes

    it comes back to location, location, location.
    Major considerations such as council / development overlays, now and future town planning.
    transport corridor, privacy
    ease of renovation requirments, and parking
    when it comes to ROI always depends what the property is purchased for? that determines ROI.
    Paul Dingle

  5. Profile photo of Steve McKnight

    The revelation in the article is simply this:

    The land size is just a number. What determines its value is what the person you plan to sell to hopes to do with it. The more desirable (to the next buyer) and scarce the land, the better. To get the ‘super growth’ component you would want to ensure the next purchaser was within a high income target market.

    – Steve

  6. Profile photo of FFF

    Hi Steve,

    Since you know I go to the inner city auctions every Saturday Steve, a lot of the agents are talking about prices going up due to the disastrous planning laws that will lock up the land in parts of Melbourne. With interest rates being low and staying that way for awhile the agents believe that these two factors should keep inner city properties, especially newly built developments in hot demand. What are your thoughts Steve?

    Thanks,

    Josh

  7. Profile photo of BridgetandNikki

    Good article to read Steve, and all the comments. Steve, your ‘super growth’ comment is something to think on like an equation. So Super Growth = desirable+scarcity+increased population with higher income bracket.
    – Mariina

  8. Profile photo of toby

    Hi Steve
    Location Location This area has the parks, The beach with public transport, the city and work close by, and no lawn to maintain, and as you say cashed up baby boomers enjoying there kids inheritance, the area has major roads well established therefore the back streets are quite and street parking available for out of town visitor. It has everything going for it and now everybody knows so its to late.
    Regards Trevor

  9. Profile photo of Gladys Gomez

    Good article and good learning here.

    The point is to have purchasers with high income?… But what about in that areas with good amenities, close to transport, freeways, good access to the city and the areas are low socio economic.
    How the high income target market explains here?

    Thank you
    Gladys

  10. Profile photo of annp

    Hi Steve,
    Once again, you’ve made a great point. Desirability and scarcity are different for each of us. What is desirable and scarce for a two income family with school-age children is completely different to what is relevant for a retired couple or a single Generation Xer. The secret is in matching your property to the needs of your potential purchaser. If you are looking to make a large profit then you’ll need to buy wisely so you can supply what your high income end purchaser considers desirable and scarce. There’s a great opportunity out there for people catering to the needs of the baby boomers who are in or approaching retirement mode. Something I’ve learned from my parents is that security is important as we age, and being unable to maintain the old loved garden is a distress, so small easily-maintained gardens are very important, along with being physically close to good neighbours.
    Cheers from Tassie,
    Ann

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