{"id":21999,"date":"2018-08-13T01:00:00","date_gmt":"2018-08-12T15:00:00","guid":{"rendered":"https:\/\/realestatetalk.com.au\/?p=21999"},"modified":"2018-08-13T01:00:00","modified_gmt":"2018-08-12T15:00:00","slug":"blue-chip-is-bs-investing-is-about-smarts-not-status","status":"publish","type":"post","link":"https:\/\/channels.realty.com.au\/realtytalk\/blue-chip-is-bs-investing-is-about-smarts-not-status\/","title":{"rendered":"Blue-chip is BS: investing is about smarts, not status"},"content":{"rendered":"

By Simon Pressley, Head of Research, Propertyology<\/em><\/p>\n

Here you go folks, investing is simple. Don\u2019t bother with researching the various markets throughout Australia, forget about all of that economic stuff, affordability has nothing to do with it either, just follow the below golden rule:<\/p>\n

\u201cOnly ever invest in the blue-chip stuff\u2026 that means inner-Sydney and inner-Melbourne\u2026 disregard everything else. Right?<\/p>\n

Please. No!<\/p>\n

The thing is, there is no such thing as a \u201cblue chip\u201d location to invest in. It’s utter BS!<\/p>\n

Australia is a massive country with hundreds of towns and cities. Each location has its unique economic profile, diverse lifestyle attractions, and wide-ranging housing affordability price points. For those of us who\u2019ve taken the time to thoroughly study historical evidence, we know that all markets have previously experienced boom times, every single market has experienced periods of price decline, and they\u2019ll all have good and bad periods in the future.<\/p>\n

Truth be known, though, dollar-for-dollar, those who invested in Narrabri 20 years ago will have made more money than those who invested in Bondi. Similarly, South Gippsland outperformed South Yarra. We\u2019ll dissect the evidence of these and other examples shortly.<\/p>\n

Blue-chip bias<\/strong><\/p>\n

If you ask me, while most of them mean well, those who claim that certain locations are \u201cblue chip investments\u201d are heavily influenced by an emotional bias towards a specific location, usually based on where they personally live (or aspire to live), where they love going on holidays, or plain old ego.<\/p>\n

Some businesses that preach the blue-chip myth do so because of their own vested interest to promote a specific location. Often, their own business model depends entirely upon the public always being attracted to buy property in \u201cLocation X\u201d.<\/p>\n

According to them, no matter what the near-term outlook is for their favoured location, all roads always lead back to that location. Even when the property market of the subject city is underwhelming you\u2019ll find them pretending that their blue-chip patch has immunity \u2013 just keep an ear out for the old \u201cthere are markets within markets<\/em>\u201d chestnut.<\/p>\n

The blue-chip brainwash typically implies one should only ever invest within pockets of affluence in one of Australia\u2019s five biggest capital cities. Apparently, everywhere else in Australia is full of plebs \u2013 how could one possibly expect those property prices to outperform Silvertail City?<\/p>\n

Some seem convinced that one should only ever invest in inner Sydney or Melbourne where a typical property costs north of $1 million. They\u2019ll tell you that $30,000 to $50,000 of annual holding costs is a justifiable expense for blue-chip and if you don\u2019t have that sort of coin you shouldn\u2019t invest at all. Now, if that\u2019s not snobbery, it certainly is reckless.<\/p>\n

Most humans have a desire for nice things; no one should begrudge those who can afford to live in Silvertail City. Plenty of people also love lobster, but most can\u2019t afford to eat it. Meat-and-potatoes on the other hand\u2026<\/p>\n

A person\u2019s home is a person\u2019s castle, whether that\u2019s in Snobville or in Sh!tsville. But if a person\u2019s primary objective for buying a property is the potential financial return, they\u2019ll be wise to understand that the biggest pool of future buyers (demand) are where our middle class live (95 per cent of Australia\u2019s society).<\/p>\n

 <\/p>\n

What goes up<\/strong><\/p>\n

Narrowmindedness has played a big role in this blue-chip bias. I don\u2019t encourage anyone to invest in something that they don\u2019t understand, however, it\u2019s impossible for one to give themselves a chance of making the best decision if they don\u2019t (first) properly consider 100 per cent of their options. Doing that requires an open mind and a preparedness to learn.<\/p>\n

Media horror stories that draw attention to a small portion of lower profile property markets declining by (say) 20 to 40 per cent over a period of time hardly encourages people to broaden their horizons. Understand this \u2013 every market has downturns! While prices in big profile markets are less likely to drop large percentage values, smaller percentage drops on a much bigger value can equate to a similar dollar-value.<\/p>\n

For example, we are only 11 months into Sydney’s downturn and, even in desirable locations like Northern Beaches, values have already declined by up to eight per cent, according to CoreLogic. Who knows, but let\u2019s say prices fall another five per cent before reaching the bottom. That’s a $150,000 capital loss, plus there is the average annual holding cost of $20,000. I ask you: Is that not risky?<\/em><\/p>\n

Blue-chip baloney<\/strong><\/p>\n

There is no such thing as blue chip! Within Australia\u2019s eight states and territories, there are 550 city councils (139 within capital cities and 411 in regional Australia), and thousands of suburbs. Make no mistake, every location has had good years, bad years, and normal years in between.<\/p>\n

Property investment is littered with wives\u2019 tales and myths that aren\u2019t at all substantiated by historical evidence.<\/p>\n

If one purchased an investment property in Silvertail City 20 years ago they certainly would have made lots of money. They would have experienced two major boom periods, a few years of price declines, and a couple of stretches of normal growth. The same could be said about a very large portion of locations all over Australia where middle class Australians live, including non-capital city locations.<\/p>\n

Over the past 20 years, the so-called Sydney blue-chip suburb of Lane Cove [median house price $2,232,000 \u2013 March 2018] produced an average annual increase in median house prices of 8.4 per cent. The identical rate of growth was produced in the Sydney outer suburb of St Helens Park [median $590,000], the regional New South Wales municipality of Yass Valley [median $607,000], Geelong in regional Victoria [median $520,000], and the Hobart suburb of New Town [median $592,000]. Lots of other capital city and regional locations had higher growth rates.<\/p>\n

No one has a crystal ball, however, a skilled property investment business has a duty of care to see if historical evidence supports or contradicts myths and wives tales. Twenty years of official data from CoreLogic makes an absolute mockery of the blue-chip BS!<\/p>\n

Let\u2019s imagine one was looking to buy a typical apartment in Balmain today [median price $1,300,000]. They\u2019d first need to have saved $320,000 (cash) to cover their 20 per cent deposit and stamp duty; an investor would then need to fork out $17,000 each and every year to cover the shortfall between rental income and expenses.<\/p>\n

Acknowledging the considerable opportunity cost of sitting on the sidelines while saving a big deposit, a high proportion of investors raise their deposit and acquisition costs using equity in existing property. In Balmain\u2019s case, the higher leveraging increases the holding cost to $34,000 each year.<\/p>\n

A typical apartment in Sydney\u2019s Balmain has increased in value (from $340,000) by $1,000,000 over the last 20 years [source: CoreLogic]. So, the price of buying blue-chip does pay off. Or does it? That 6.9 per cent average annual growth rate is similar to many NSW regional locations like Dubbo (6.3 per cent) and Orange (6.5 per cent). Higher rates of growth were produced in lots of other NSW locations, including Kempsey (7.2 per cent), Mudgee (7.6 per cent), and Newcastle (8.5 per cent).<\/p>\n

Locations of affluence are located within all big cities. In addition to the obvious high entry price, there\u2019s the expectation that features-and-benefits of each property are maintained at the Silvertail City\u2019s high standards. These (often large renovation) capital expenditure costs conducted between date of purchase and the eventual sale can\u2019t be captured by CoreLogic, meaning the reported changes in median values are probably overstating the real growth on capital.<\/p>\n

Regardless, as our table below shows, the rates of growth in many locations where Australia\u2019s middle class live are comparable or superior to Silvertail City. When the rental yields and (important) annual costs to hold a property are added to the equation to produce a \u201ctotal return\u201d to the investor, the evidence is compelling \u2013 blue-chip is baloney but the highest buyer demand is for meat-and-potatoes<\/a>.<\/p>\n

Smarts, not status<\/strong><\/p>\n

In life, in general, there will always be a proportion of people who will believe what they want to believe. There\u2019s absolutely nothing wrong with investing in a so-called \u201cblue chip\u201d suburb. But, please, understand that a higher price tag, affluence, and desire actually work against the \u201cdemand\u201d side of the growth equation because there\u2019s a much smaller pool of buyers who can afford it.<\/p>\n

The important thing is to understand the factors that genuinely influence property markets most. Investing is too big of a decision to rely on mythology. No one can predict the future, but smart investors understand what is meant by the term \u201cfundamentals\u201d<\/a>, they know how to analyse them, and they appreciate the importance of buying at the start (not end) of a chosen location\u2019s growth cycle.<\/p>\n

At the end of the day, big companies like CBA, Qantas, BHP, Telstra and Woolworths have good times and they have bad times. Smart share investors know the difference between the two.<\/p>\n

Savvy share investors also understand the importance of not investing all of their eggs in one basket. If one can afford to invest in a so-called blue-chip suburb, a smart approach would be to break up the investment capital (or deposit funds) in to smaller portions and to diversify in to multiple properties that are located in completely different parts of Australia<\/a>.<\/p>\n

The aim of the game is to overcome emotion and ignore personal bias to genuinely consider 100 per cent of the options to give your hard-earned money a chance of working as hard as possible.<\/p>\n

Having analysed the historical performance of (literally) every location in Australia since before the turn of the century, the evidence says that (both) higher capital growth and cash flow occur when a town or city has a combination of an affordable median house price and a sustained period of confidence, usually driven by economic development.<\/p>\n

It\u2019s ALWAYS a good time to invest in property. The key question is \u201cwhere\u201d and not \u201cwhen\u201d! As the below graph and the earlier one illustrates, different markets will produce vastly different results at different times.<\/p>\n

 <\/p>\n

My advice is don\u2019t sit on the sidelines reading media reports. By the time you\u2019ve read about several consecutive months of good performance you might have missed 30 per cent of the total growth produced by that cycle in that market. And, as the historical evidence has taught us, those media reports are unlikely to alert us to those many lower profile locations that have produced higher total returns than Silvertail City.<\/p>\n

To show that I put my money where my mouth is, as recently as February this year I personally invested in another exciting non-capital city location<\/a>. I purchased a low maintenance, three-bedroom house close to the CBD for only $375,000. It costs nothing to hold each year and prices are now starting to move at double-digit pace.<\/p>\n

Job growth in this location is already occurring, community confidence is high, and several major job-creation projects are due to commence shortly. I believe that it\u2019s at the very early stages of this location\u2019s growth cycle. Our buyer’s agents have so far helped 20 everyday Aussies to invest in this incredibly exciting market.<\/p>\n

Tips For Property Investors<\/strong><\/p>\n