![\"key](\"https:\/\/propertyupdate.com.au\/wp-content\/themes\/oldpaper\/img\/keys.svg\")
\n<\/picture>\n<\/span><\/p>\nKey takeaways<\/p>\n
How crucial is it to exclusively invest in blue-chip suburbs? That’s what I discuss in this article.<\/p>\n
The reality is that some geographical locations will outperform blue-chip suburbs over the next few years.<\/p>\n
However, pinpointing these outperforming locations with a high level of certainty is challenging \u2013 neigh on impossible.<\/p>\n
Even if your prediction is accurate, sustained outperformance is unlikely unless the chosen location possesses robust investment-grade fundamentals.<\/p>\n
This is why an asset of high quality, backed by strong fundamentals, is more likely to consistently outperform in the long run.<\/p>\n<\/div>\n<\/div>\n
I was motivated to write this blog for two main reasons.<\/p>\n
Firstly, I observed several buyers\u2019 agents on social media proudly advertising short-term capital gains.<\/p>\n
One instance caught my attention, where a buyers\u2019 agent claimed to have purchased a property for a client 18 months ago for $435,000, asserting its current value at $510,000, implying 19% capital growth.<\/p>\n
However, the actual growth is 17.2% over 18 months or, more accurately, 11.2% p.a. annualised growth.<\/p>\n
However, this calculation excludes purchasing costs, making the true annualised growth rate less than 7% p.a.!<\/p>\n
Misleading advertising?<\/p>\n
Unfortunately, there are few regulations to protect property investors against such misinformation, unlike with share market investments (heavily regulated), highlighting the importance of conducting thorough due diligence.<\/p>\n
Secondly, I received an email from a reader, Stephen, asking me to explore the recent boom in regional towns over the past three years, largely attributed to Covid-related factors.<\/p>\n
This theme aligns with another topic I\u2019ve been contemplating \u2013 how seemingly secondary suburbs at times outperform blue-chip suburbs.<\/p>\n
This raises the pertinent question: How crucial is it to exclusively invest in blue-chip suburbs?<\/p>\n
![\"Location5\"](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2023\/02\/location5.jpg\")
<\/p>\n
Short-term performance data isn\u2019t very meaningful<\/span><\/h2>\nInvestors and their advisors cannot control short-term market performance.<\/p>\n
In the short term, market performance is volatile and unpredictable, with no reliable methodology for predicting it.<\/p>\n
However, over extended periods, market cycles tend to even out, making performance more predictable.<\/p>\n
Short-term performance is susceptible to unsustainable factors like popularity, while long-term performance is mainly influenced by investment fundamentals. <\/p>\n
Investors have control over fundamentals, meaning they can choose to only invest in assets with strong fundamentals, knowing that these attributes determine long-term returns.<\/p>\n
While one might experience above-average growth in the initial years of owning an asset, it\u2019s crucial to recognise it as\u00a0luck<\/em>, which is not a dependable investment strategy.<\/p>\nConversely, one can also face a scenario of investing in a fundamentally sound asset and having to endure below-average investment returns for an extended period.<\/p>\n
Markets may underperform for longer than anyone might expect, but not indefinitely.<\/p>\n
This is why I approach businesses that advertise short-term returns with scepticism, as it often reflects their marketing prowess rather than genuine investment acumen.<\/p>\n
On the other hand, highlighting long-term returns is very valuable and compelling.<\/p>\n
There will always be locations that out-perform blue-chip suburbs<\/span><\/h2>\nThe reality is that some geographical locations will outperform blue-chip suburbs over the next few years.<\/p>\n
However, pinpointing these outperforming locations with a high level of certainty is challenging \u2013 neigh on impossible.<\/p>\n
Short-term outperformance can be driven by various factors, including promotion by property spruikers, shifts in lifestyle preferences like tree\/sea changes, new infrastructure developments, or periods of low interest rates.<\/p>\n
The late founder of Vanguard, Jack Bogle, was famous for saying\u00a0\u201cReversion to the mean is the iron rule of the financial markets\u201d<\/em>.<\/p>\n\nThis refers to the undeniable concept that periods of above-average growth are inevitably followed by periods of below-average growth, resulting in average performance aligning with long-term average returns.<\/p>\n
In the grand scheme, a location\u2019s fundamentals play a crucial role in long-term performance.<\/p>\n
This means that locations experiencing strong buyer demand but limited property supply, such as blue-chip suburbs, are likely to enjoy higher long-term capital growth rates.<\/p>\n
![\"Aussie](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2024\/02\/aussie-suburb-800x533.jpg\")
<\/p>\n
Tried-and-tested versus growth suburb<\/em>\u00a0<\/strong><\/p>\nThe below chart illustrates the performance of two properties over time.<\/p>\n
The blue line represents a property that experiences rapid capital growth \u2013 the value doubles in the initial 7 years but then stabilises in line with inflation for 17 years and grows again.<\/p>\n
This is compared with the green line, representing an investment-grade property with a consistent average growth rate of 7% per annum in the long run.<\/p>\n
While the first property initially accumulates more equity in the first 10 years, the investment-grade property surpasses it with 44% more equity after 20 years.<\/p>\n
Remarkably, after 40 years, the investment-grade property is worth more than double the value of the first property.<\/p>\n
![\"Growth](\"https:\/\/cdn.propertyupdate.com.au\/wp-content\/uploads\/2024\/02\/Growth-spurt-versus-long-term-growth-800x545.png\")
<\/p>\n
Selecting the next potential high-growth location carries inherent risks.<\/p>\n
There\u2019s a possibility of being incorrect, with prices not increasing as anticipated.<\/p>\n
Even if your prediction is accurate, sustained outperformance is unlikely unless the chosen location possesses robust investment-grade fundamentals.<\/p>\n
This is why an asset of high quality, backed by strong fundamentals, is more likely to consistently outperform in the long run.<\/p>\n
But some secondary suburbs have performed just as well as traditional blue-chip suburbs\u2026<\/span><\/h2>\nOver the years, I\u2019ve observed that some suburbs, which are not typically classified as investment-grade, have demonstrated strong capital growth over several decades.<\/p>\n
Take, for instance, the suburb where I purchased my first property, Moorabbin.<\/p>\n
Over the past 25 years, it has exhibited an impressive average annual growth rate of over 8%.<\/p>\n
For example, the property I bought for $150k in 1998 would now be worth more than $1.3 million.<\/p>\n
Similarly, neighbouring suburbs like Bentleigh and McKinnon have also performed exceptionally well, if not better.<\/p>\n
Despite being around 20 km from the city and considered secondary suburbs, these areas have thrived.<\/p>\n
The question then arises: why have these secondary suburbs performed so well?<\/p>\n
Are these locations as good as traditional investment-grade locations<\/a>?<\/p>\nWill these suburbs grow at this pace indefinitely?<\/p>\n
Conversely, one can also face a scenario of investing in a fundamentally sound asset and having to endure below-average investment returns for an extended period.<\/p>\n
Markets may underperform for longer than anyone might expect, but not indefinitely.<\/p>\n
This is why I approach businesses that advertise short-term returns with scepticism, as it often reflects their marketing prowess rather than genuine investment acumen.<\/p>\n
On the other hand, highlighting long-term returns is very valuable and compelling.<\/p>\n
There will always be locations that out-perform blue-chip suburbs<\/span><\/h2>\nThe reality is that some geographical locations will outperform blue-chip suburbs over the next few years.<\/p>\n
However, pinpointing these outperforming locations with a high level of certainty is challenging \u2013 neigh on impossible.<\/p>\n
Short-term outperformance can be driven by various factors, including promotion by property spruikers, shifts in lifestyle preferences like tree\/sea changes, new infrastructure developments, or periods of low interest rates.<\/p>\n
The late founder of Vanguard, Jack Bogle, was famous for saying\u00a0\u201cReversion to the mean is the iron rule of the financial markets\u201d<\/em>.<\/p>\n\nThis refers to the undeniable concept that periods of above-average growth are inevitably followed by periods of below-average growth, resulting in average performance aligning with long-term average returns.<\/p>\n
In the grand scheme, a location\u2019s fundamentals play a crucial role in long-term performance.<\/p>\n
This means that locations experiencing strong buyer demand but limited property supply, such as blue-chip suburbs, are likely to enjoy higher long-term capital growth rates.<\/p>\n
<\/p>\n
Tried-and-tested versus growth suburb<\/em>\u00a0<\/strong><\/p>\nThe below chart illustrates the performance of two properties over time.<\/p>\n
The blue line represents a property that experiences rapid capital growth \u2013 the value doubles in the initial 7 years but then stabilises in line with inflation for 17 years and grows again.<\/p>\n
This is compared with the green line, representing an investment-grade property with a consistent average growth rate of 7% per annum in the long run.<\/p>\n
While the first property initially accumulates more equity in the first 10 years, the investment-grade property surpasses it with 44% more equity after 20 years.<\/p>\n
Remarkably, after 40 years, the investment-grade property is worth more than double the value of the first property.<\/p>\n
<\/p>\n
Selecting the next potential high-growth location carries inherent risks.<\/p>\n
There\u2019s a possibility of being incorrect, with prices not increasing as anticipated.<\/p>\n
Even if your prediction is accurate, sustained outperformance is unlikely unless the chosen location possesses robust investment-grade fundamentals.<\/p>\n
This is why an asset of high quality, backed by strong fundamentals, is more likely to consistently outperform in the long run.<\/p>\n
But some secondary suburbs have performed just as well as traditional blue-chip suburbs\u2026<\/span><\/h2>\nOver the years, I\u2019ve observed that some suburbs, which are not typically classified as investment-grade, have demonstrated strong capital growth over several decades.<\/p>\n
Take, for instance, the suburb where I purchased my first property, Moorabbin.<\/p>\n
Over the past 25 years, it has exhibited an impressive average annual growth rate of over 8%.<\/p>\n
For example, the property I bought for $150k in 1998 would now be worth more than $1.3 million.<\/p>\n
Similarly, neighbouring suburbs like Bentleigh and McKinnon have also performed exceptionally well, if not better.<\/p>\n
Despite being around 20 km from the city and considered secondary suburbs, these areas have thrived.<\/p>\n
The question then arises: why have these secondary suburbs performed so well?<\/p>\n
Are these locations as good as traditional investment-grade locations<\/a>?<\/p>\nWill these suburbs grow at this pace indefinitely?<\/p>\n
This refers to the undeniable concept that periods of above-average growth are inevitably followed by periods of below-average growth, resulting in average performance aligning with long-term average returns.<\/p>\n
In the grand scheme, a location\u2019s fundamentals play a crucial role in long-term performance.<\/p>\n
This means that locations experiencing strong buyer demand but limited property supply, such as blue-chip suburbs, are likely to enjoy higher long-term capital growth rates.<\/p>\n
<\/p>\n
Tried-and-tested versus growth suburb<\/em>\u00a0<\/strong><\/p>\n The below chart illustrates the performance of two properties over time.<\/p>\n The blue line represents a property that experiences rapid capital growth \u2013 the value doubles in the initial 7 years but then stabilises in line with inflation for 17 years and grows again.<\/p>\n This is compared with the green line, representing an investment-grade property with a consistent average growth rate of 7% per annum in the long run.<\/p>\n While the first property initially accumulates more equity in the first 10 years, the investment-grade property surpasses it with 44% more equity after 20 years.<\/p>\n Remarkably, after 40 years, the investment-grade property is worth more than double the value of the first property.<\/p>\n Selecting the next potential high-growth location carries inherent risks.<\/p>\n There\u2019s a possibility of being incorrect, with prices not increasing as anticipated.<\/p>\n Even if your prediction is accurate, sustained outperformance is unlikely unless the chosen location possesses robust investment-grade fundamentals.<\/p>\n This is why an asset of high quality, backed by strong fundamentals, is more likely to consistently outperform in the long run.<\/p>\n Over the years, I\u2019ve observed that some suburbs, which are not typically classified as investment-grade, have demonstrated strong capital growth over several decades.<\/p>\n Take, for instance, the suburb where I purchased my first property, Moorabbin.<\/p>\n Over the past 25 years, it has exhibited an impressive average annual growth rate of over 8%.<\/p>\n For example, the property I bought for $150k in 1998 would now be worth more than $1.3 million.<\/p>\n Similarly, neighbouring suburbs like Bentleigh and McKinnon have also performed exceptionally well, if not better.<\/p>\n Despite being around 20 km from the city and considered secondary suburbs, these areas have thrived.<\/p>\n The question then arises: why have these secondary suburbs performed so well?<\/p>\n Are these locations as good as traditional investment-grade locations<\/a>?<\/p>\n Will these suburbs grow at this pace indefinitely?<\/p>\n <\/p>\nBut some secondary suburbs have performed just as well as traditional blue-chip suburbs\u2026<\/span><\/h2>\n