Expert Bust #36 – Cheap suburb, low growth?

Do cheap suburbs under-perform?

I split Australia into 2 groups based on whether a suburb is below or above the national median. Then I compared the performance of the cheaper half vs. the more expensive half over 3 years, 4 years, 5, 10 and 20 years.

For each growth period, the cheaper group outperformed the more expensive. And they outperformed to a larger degree over the shorter periods. Things started to balance out over longer time-frames.

I aggregated to the region (Statistical Area level 4) to make sure suburb growth figures weren’t funny. Same result.

Perhaps 2 groups is a bit blunt, so I split into 4. But it gave me the same result.

Splitting into 10 groups looks like this…

D1 on the left is Decile 1, a group of the cheapest 10% of suburbs. D10 on the right has the top 10 most expensive suburbs.

Each line represents the growth period that was used to compare deciles. For example, the amber coloured line at the bottom was for a 28-year period. Decile 5, near the middle, had an annual growth rate of about 6.5% over 28 years.

Caution: there are anomalies with calculating values for a property market. Extreme anomalies might put a suburb in the lowest decile when the true value for that suburb might not be that low. In other words, ignore D1 and D10.

The most important thing to observe is the general trend of most lines, sloping downward towards the right. This suggests that cheaper suburbs outperform more expensive ones.

The following chart shows a comparison over a much longer time-frame, 40 years. Time is the great balancer of growth rates…

This was based on data for Victoria only from the Valuer General dating back to 1974. Same story, but less pronounced.

I suspect a lot of people believe that expensive property markets became more expensive due to higher growth rates over the decades. But in most cases, they’ve always been more expensive – at least for the last 40 years anyway.