How ‘Superior Increase’ Can Affect Property Value

By Justin Wang

Property investors often ask one question, “Is this a good time to purchase a property?” However, the answer does not lie in “when” to buy, but more in “where” to buy. Thus, it can be said that it is always a good time to buy property, but the key to successful property investment is finding a location where general and superior increase occur.

The Property Investors Alliance (PIA) believes that property investment success comes from conducting a specific analysis of different suburbs and individual projects. In our experience, while property market data may indicate that it may not be theoretically the “right time” to buy, proven records in some suburbs may indicate otherwise. This is because you are not just purchasing a home on a block of land, rather you are buying a home, on a block of land that is situated in a suburb, which is located in a city or town that is made up of many suburban markets. So, you now need to ask, “How do I find the right suburb?”

General Increase and Superior Increase

According to the PIA philosophy of property investment, there are two different types of increases in property value. These being a ‘general increase’ and a ‘superior increase’. Let’s look at these in greater detail:

• General increase – This occurs when the value of a property market rises due to inflation and the need for shelter. In a mature property market, such as Sydney, we typically see a general increase in property value occur in ‘waves’. This means when property prices in one suburb go up, then they ‘pull-up’ the prices of surrounding suburbs as well. Therefore, speaking from a long-term perspective, while each suburb increases in value, these increases will be different due to each property and suburb having individual characteristics, but the percentages of the increment in each suburb should be similar.

PIA have looked at the statistics over the last 10 years and have concluded that based on this theory, there is potential for a general increase in property value, to some degree, in all suburbs.

• Superior increase – If the value of property in a suburb rises quickly, over a short timeframe, or the percentage of property price rise is far higher than the average market value, over a certain timeframe, then this is called a ‘superior increase’.

Professional investors should seek to buy property that has the potential for ‘superior increase’. Having said this, investors should not overlook ‘general increase’ otherwise they may miss opportunities. These opportunities can occur in two instances, such as:

1. An investor will only seek to find and buy property with a ‘superior increase’ and become obsessed with finding the ‘best’ value increase.
2. Investors have sold property in a particular suburb because they thought there would be no ‘superior increase’ in the future, but this move resulted in losing the ‘general increase’ on the property as well.

Let’s look at what defines a suburb as ‘good’ and ‘not-so-good’ in terms of property investment.
The ‘Good Suburb’ and the ‘Not-so-good Suburb’

When PIA asked people about suburbs with ‘superior increase’, a number of those questioned had varying ideas about what ‘superior increase’ actually meant. Some people said ‘superior increase’ occurs when you like the suburb you currently live in or that ‘superior increase’ only happens in suburbs that are considered as a ‘good’ place to live. While other people believed that ‘superior increase’ only happens in cheaper suburbs as price rises would be more dramatic with a low starting point. While all of these assumptions make sense, they are not really correct. In order for us to clarify exactly how ‘superior increase’ affects property price, let’s look at what defines a suburb as ‘good’ and ‘not-so-good’ in terms of property investment.

1. Life experience and cultural background – When we classify anything in life, this tends to be based on what we’ve experienced, such as how we’ve been raised, what type of schooling we’ve had, and the type of culture we’ve been raised in. For instance, an Australian may have different beliefs to a New Zealander. Therefore, what an Australian considers as ‘good’ and ‘not-so-good’ depends on their own perceptions, while a New Zealander, on the other hand, may have completely different perceptions. In this respect, a suburb may be perceived as ‘good’ by the Australian, whereas the New Zealander may view this suburb as ‘not-so-good’.
2. Meeting our expectations – We may also view a suburb as ‘good’ because it meets our requirements. For example, transport may be close to homes in a suburb, which suits ‘person A’ because they don’t have a vehicle. But, ‘person B’ may have a car so they are not as concerned with public transport.
3. Variations between impression and reality – Many people do not pay much attention to the changes happening around them and tend to judge a suburb based on their memory or the impression they formed of that suburb many years back. This gives them a false impression of reality or how the suburb is today.

Three Factors or Differences that Determine a Superior Increase in Property Value

Whether a suburb is ‘good’ or ‘not so good’ in terms of investment is typically defined by the rise and fall of housing prices in the suburb. As an investor, we typically buy property so that our wealth grows and we make a general or superior increase. To do this, we must hold onto the property long-term, as we are investing for the future and not for today.

When investing long-term, a property will only realize a ‘superior increase’ if three factors, also known as differences, are present. These differences are as follows:

1. Will there be a price difference between now or when the property is purchased, and the future or when the property is sold?
2. Is there a difference between impression, what you perceive the property to be, and reality, what the property actually is?
3. Is there a difference between the ‘waves’, where property prices in surrounding suburbs are being ‘pulled-up’ by price growth in a particular suburb?

Let’s look at these three differences in greater detail to understand how they play a role in property investment.

The Price Difference Between Now and the Future

If changes occur in a suburb over a number of years, such as increased job opportunities, improved transport and infrastructure, and the introduction or improvement of shopping facilities and the environment due to government planning and major building projects, then there is potential for ‘superior increase’ in this suburb. For example, the opening of the M2 and M5 in Sydney stimulated property prices in suburbs that were situated near these roadways as commuting times to and from these regions were reduced, which, in turn made these suburbs more accessible and desirable.

Therefore, when it comes to deciding whether or not a suburb has the potential for ‘superior increase’, we shouldn’t just focus on the present status of the suburb. Instead, we should be gathering information on government and investor plans for the suburb’s future. While individual investors can gather some of the information pertaining to future developments in a suburb, many find it difficult to carry out the necessary scientific analysis that is needed to determine whether or not a ‘superior increase’ will be realized at a later date.

Another challenge is many property investors have a ‘let’s wait and see what happens’ approach. Unfortunately, by the time these investors wait and see, property prices in a suburb have peaked, with a ‘general increase’ being likely for the future. For instance, the opening of the Anzac Bridge in Sydney shortened the driving distance between the city and suburbs located along the Parramatta River. As a result, a superior increase in the inner western suburbs was witnessed. But buying in these areas after the completion of the bridge would be too late to realize a ‘superior increase’.

The people who captured the opportunity of ‘superior increase’ were those who invested in these suburbs during the planning stages of the Anzac bridge. Those who waited until the bridge was being built would’ve paid higher prices for their property, and those who waited until it was nearing completion paid even higher prices again. In this respect, timing will allow you to gain the most ‘superior increase’ in the price of a property.

Lastly, in order to judge how much ‘superior increase’ a property may have, we need to ask ourselves, “How much information have I collected to prove that the suburb where the property is situated will have notable growth?” If the information collected is substantial, changes are expected to have a significant impact on the suburb, and the longevity of these changes is projected over a number of years, then it is highly likely that ‘superior increase’ will be realized.

The Difference Between Impression and Reality

The Sydney property market is a network of many suburban markets. While these suburban markets are classified as individual suburbs, they are also related to each other. The relationship between suburbs is created by the impressions we have of the various markets. For example, let’s say there are approximately 660 suburban markets in Sydney. The price of a particular market is not only influenced by the impression the residents who live in the market have of this market, but also by the impression the residents in the other 659 markets have of this market. The closer these markets are, the greater the impact of the impression.

Impression occurs when a person or a group of people have not heard about changes occurring in a suburb or they cannot keep-up with what is happening around them, and they then develop an impression of this market based on their own memories of this market, which may be from 10, 20 or 30 years ago. Over this time, a great deal may have changed. For example, many people think that it takes approximately an hour to drive from the Sydney city centre to Liverpool in off-peak traffic, when, in actual fact, it only takes 30 minutes since the M5 was introduced. Thus, a difference between impression and reality exists for the suburb of Liverpool.

Over time, impressions transform as more people become aware of changes in a suburb. When an impression of a suburb changes to one that is more realistic, this is when a suburb begins to experience ‘superior increase’. To decide whether a suburb has a difference between impression and reality, we suggest that you visit the suburb yourself and then jot down your impressions of the suburb. Then ask your friends, family, and even work colleagues to give you their impressions of the suburb. If the impressions from friends, family and work colleagues are far lower than yours, then this suburb is usually the right choice for property investment.

The Difference Between the ‘Waves’

Most people not only struggle to keep up with changes, but they also tend to follow suit. When this occurs in property investment, many want to follow the ‘ride up’ but not the ‘slide down’. Waves occur when property prices in a suburb increase, and over time, surrounding suburbs also begin to witness price increases. For instance, in 2000, the property value of Sydney’s eastern and northern suburbs were increasing rapidly, but not a great deal of change was witnessed in the west. However, approximately 2 years later, in 2002, property values in the western suburbs of Sydney were ahead of eastern and northern suburbs. When people realized they could no longer afford the property prices in these areas, they turned to neighboring suburbs that had cheaper property prices.

However, the ‘effect of waves’ does not just occur in suburbs, it is also witnessed between house and unit prices. In this respect, when the price of homes increases, the price of units is typically ‘pulled-up’. For example, let’s say that house prices in a suburb had a median of $450,000, but rose by 10 percent. Therefore, the prices of units in this suburb should also increase in value.

Overall, it can be said that the search for a ‘superior increase’ when property investing is both time and energy consuming, and it requires calm and logical evaluation. Unfortunately, most individual property investors do not have the resources, or needed instincts to find, and then invest in property that will experience a ‘superior increase’.