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Ben Kingsley Blog post by Ben Kingsley

Will Property Prices Keep Increasing – a 38 Year Analysis – part 2

In last month article I highlighted the returns of 3 different Melbourne suburbs over a 38 year period and in this article I promised to explain how this happened.  In doing so, I have included three new graphs of each Suburb to help illustrate my findings.

To help you interpret them I will just explain what is consistently measured in each graph.  The left hand axis illustrates a measure by Median Household Incomes and to interpret this measure you need to be looking at the blue and gold bar graph indicators.  The Blue ones shows median household Incomes for the suburb in question and the Gold one shows the Greater Melbourne’s Median household Incomes.

The Right hand axis illustrates the measure of Median House Prices and to interpret this measure you need to be focusing on the line graphs.  The blue line shows Median House Prices for the suburb in question and the gold one shows the Greater Melbourne’s Median House Prices.

In summary, what we are trying to measure is if there is a relationship between income and property prices and, as I highlighted in last month’s article the vast difference in prices and how one suburb’s price increases ‘outperforms’ the other suburbs over time.

* Source: Residex, ABS Census, Empower Wealth

As you can see from studying the Melton story, the starting time we are measuring from shows us that Melton had a lower median income than the greater Melbourne Metro area and this trend has continued over the following years, whereby the combined greater Melbourne Metro areas income has grown significantly more than the suburb of Melton and as a consequence the prices for property have remained below the growth of the greater Melbourne Metro house prices.  It has underperformed.

* Source: Residex, ABS Census, Empower Wealth

In studying the Yarraville story you can see that Yarraville also started with a lower median income than the greater Melbourne Metro area.  However, during the first decade of the twenty-first century, the incomes grew quicker than the greater Melbourne Metro area and interestingly, the median house prices started to move past the median of the greater Melbourne market also.  It has certainly outperformed over the past decade compared to the broader market.

The million dollar question is; has this market performed better because the people in the suburb just started earning more money or was it the increasing prices which lead to higher income earners moving in?

Well the answer is the area starts offering a compelling appeal to people within Melbourne who wanted what Yarraville had to offer, such as convenient distance to the city, rail infrastructure, very liveable amenities and, compared to other locations close to the city in the north and the east, it offered them more affordable housing.  So we have seen Yarraville break its mould from being a lower socio-demographic working class suburb to being a more chic and groovy place to live while at the same time, the money has started to flow in, putting upward pressure on values.

* Source: Residex, ABS Census, Empower Wealth

If you again recalled my last month’s article you would remember that over the last 38 years Middle Park has had a 5841% increase in median price.  An amazing 11.4% compounding capital growth return per year.  So by studying the Middle Park numbers you can see that Middle Park had a higher Median Household Income than the Greater Melbourne Metro area and over the following years the median income in this location has grown significantly more than the broader Melbourne incomes.

It stands to reason that values have grown so significantly because people with superior incomes and ultimately superior borrowing capacity has moved into Middle Park over this period of time.

To me, Middle Park is one of a handful of Melbourne suburbs which has the perfect mix of lifestyle, infrastructure, conveniences, social status and property options in very limited supply which is why it is in such high demand for budding buyers and the proof is well documented in people willingness to pay a premium to get into this market.

Now, we have gone back in time to look at history of performance to try to work out why the difference between those three suburbs happened and we can see there is a direct correlation between incomes and rate of price growth.  The future of property price increases cannot occur without people’s desire and just as importantly, their ability to afford property as this is where the price growth of tomorrow will come from. That is why trends like some suburbs growing quicker than others will continue, so just buying any property in any suburb is a huge mistake.  You will more than likely lose out and make a bad investment if you don’t know what you’re doing.

In closing, I’m the first to acknowledge that although there is a direct correlation between property values and income, there is a far more detailed understanding one must consider.  One must work out the human nature elements that make us do what we do in terms of where we chose to live and why – on mass.  This is a lot more fascinating to me and it’s the area I put a lot of my thoughts and research efforts into because this will tell me where the next Yarraville or Middle Park will be across Australia and that’s the holy grail for me and our clients, in terms of building them serious wealth.

Remember, Knowledge is empowering if you act on it.

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