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Identifying Under-Valued Suburbs (3-minute read)

Proximity to CBD

Generally speaking, the closer to the CBD, the more expensive properties are. You can easily verify this using a nifty feature of DSR Data’s Market Matcher.

Here’s a list of suburbs within 10 km of Adelaide’s CBD, sorted from cheapest to most expensive:

Note that the typical values for suburbs in this article were accurate at the time of writing, but may have moved on significantly since. The purpose of the article is to show a price trend and a research method, not to identify suburbs worthy of investors’ attention right now.

There were some suburbs within 10km of Adelaide where the median price for houses was under $450,000. But stretch that out to a 20km radius…

And now the cheapest suburbs are even cheaper…

You can repeat this for pretty much any radius for any major city in the country and see the same phenomenon. The wider the radius, the lower the prices.

Value Does NOT Equal Growth

Many investors fall into the trap of assuming that higher values deliver higher growth. But that’s simply not true. Many expensive suburbs have always been more expensive. They didn’t get that expensive by out-growing others suburbs, they started off more expensive. The price difference has been maintained over the long-term without necessarily superior capital growth.

If proximity to the CBD was a clear driver of above average capital growth, it would show up in an analysis of long-term growth profiles. But history over the last 40 years suggests it’s not even worth considering. For more on that, see this article…

Why there’s no need to buy near the CBD?

It’s topic number 5 from my Expert Busting series of blogs.

Under-Valued Suburbs

But that doesn’t mean we can’t use proximity to the CBD to find out-performers over coming years. We can identify the potential for above average capital growth by finding “relatively” cheap suburbs, “relatively” close to the CBD.

Using the Market Matcher again, I repeated the process, but this time with Brisbane’s CBD and a 10km radius.

The cheapest suburbs within 10km of Brisbane’s CBD were:

Again, note that prices may have moved on since this research was conducted.

For Perth I set the radius a bit lower…

Cheap For a Reason

A word of warning: it’s possible these suburbs are cheap for a reason. In Sydney for example, more expensive suburbs are found further from the CBD if they are closer to city beaches. Some suburbs may have views while others don’t. Some may be just on the other side of a river or other natural barrier that makes travel time much longer. Proximity to CBD is not the only identifier of an expensive suburb.

So, this method doesn’t guarantee above-average capital growth. There are many more variables to be considered. So, I’m not suggesting that these suburbs will outperform averages. But combining this approach with a high measure of supply and demand as well, you’re more likely to uncover growth gems.

JEREMY SHEPPARD ROUND

Commentary by

JEREMY SHEPPARD
 

Director of Select Residential Property
Founder of DSR Data

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