Even amateur home buyers know that location matters. Not all of them know why it matters, though. Today we dig deeper on why choosing your next property’s location is such an essential factor when it comes to property investment.
Let’s first understand which factors come to play in an individual’s selection of location. Three primary considerations affect market demand; therefore; determining property prices.
Economic Activity – People flock to locations that offer a multitude of work opportunities and where they know they can earn a good income.
Human Interest – People favour settling in places that answer to their basic needs and their interests.
Human Behavior – People ruminate over their perceived image and consider what people would think if they lived in such a place.
Lifestyle drivers are important information when it comes to understanding the reasons why some markets outperform others. Individuals are searching for places that can cater to their different kinds of needs - proximity to work, beautiful landscape views, access to a range of restaurants and museums nearby; and investors are searching for the same things - since their tenants are - in addition to opportunities for capital growth.
Studying these factors and their correlation to relates to property investments is crucial because we gain an understanding of how properties in good locations play out in the field when the housing market faces challenging times.
When the going gets tough in the housing market, some suburbs dip while others remain flat. An example of this is a property investor we know who bought his first property in Coogee, in the ‘80s. Unlike most suburbs that really dipped during the crash of 1987 and the early 1990s recession, Coogee and eastern suburbs of Sydney had median prices that remained flat.
If your properties’ values are not adversely affected by economic downturns, it means your properties are in good locations. This has a knock-on benefit too: if these properties are not highly leveraged, owners will find less need to sell them, and if owners are not pressured to sell, market supply remains limited. Coming back to the investment theory of supply and demand, scarcity is what drives higher price growth over the long term.
The short version? If you buy in the right spot, you can not only survive economic downturns, but prosper in them.
So, the popular knowledge goes, that if you’re looking for long-term growth, it’s highly advisable to buy in a capital city. Why? Because it’s the well-established areas and areas that offer unique benefits that go commonly go up. An example would be buying properties in a city centre, or that feature harbour views – their value can only go up because you can’t find this feature anywhere else.
While capital cities do get the most attention, you also need to do the work and research on where the new centres of growth are that show excellent opportunities like Parramatta, Bundaberg and the Sunshine Coast – all investing in local infrastructure and developing self-sufficient economies.
We once encountered a property investor who told us that his methodology was: “80% of a property’s price comes from its location”. That being said, along with choosing a good location, you must also look at the remaining 20%, which is the asset itself – your property. A-grade properties can still sell at A-grade prices even when the housing market is in decline. Homes that are both short in supply and considered highly desirable offer the most value.
When you’re buying a property for you to live in or use as an investment property, location and capital growth are significant considerations for long-term growth. Purchasing a quality asset in a well-established area will allow you to stray from panic and concern when it comes to the downward run of the housing cycle.
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