Expert Advice with Michael Yardney. 05/07/2018

One of the significant changes in the way we live in Australia over the last few decades is the gentrification of our inner suburbs.

When I was young housing in the inner suburbs was cheap and home to the working class and migrants being full of single fronted terraces, pubs and factories.  But within a few decades, the process of gentrification saw these ugly duckling suburbs transformed into graceful swans as higher income households displaced blue-collar workers; changing the character of these neighbourhoods and resulting in a significant increase in local property values.

What caused this gentrification?

One of the main factors behind this revitalisation was the exodus of manufacturing to the suburbs driven in part by cheaper transport and better roads. At the same time many migrant workers departed to the suburbs to live in detached houses with front and back yards.

Interestingly at much the same time our society started to experience higher education levels which necessitated more people being closer to campuses, which were usually in or near the CBD. Similarly, the diversity of serviced based jobs located in the CBD, the increasing number of women in the workforce, declining household sizes and lifestyle all made living in those smaller properties near the city more attractive to a larger cohort of potential buyers.

Of course, it should come as no surprise that this increasing demand led to house prices in the inner-ring rising much faster than in the outer suburbs.

Identifying gentrification

Gentrification is a change in the fortunes of a suburb as it is discovered by a higher income demographic which slowly pushes out the lower income residents. These new, more affluent residents invest time and money improving their new neighbourhood, pushing up prices and rents. As these changes take place the area loses its stigma and more individuals on higher wages move in, putting further upward pressure on values.

Looking back one of the significant transformations of our inner suburbs was that household incomes grew significantly as residents were better educated and had higher-paying jobs. Two incomes in a household instead of one meant that people had more money to spend on housing – and spend it they did!

Therefore one of the keys to identifying gentrifying location, one where property values will increase above average, is to find suburbs where incomes are growing, increasing people’s ability to afford and pay higher prices for property.

Digging into the Census data shows that while wage growth has been slow over the last few years, there are some suburbs where wages have grown 40-50% more than the State’s average. You’re likely to find these suburbs are home to a number of other identifying features of gentrification such as top-end cafes or restaurants as well as higher-end stores where the wealthier population can spend their money, because that's what they generally do.

The secret to identifying gentrification, therefore, involves researching locations where a number of economic factors are changing at the same time.

Just to make things clear…just because a suburb has cheap properties doesn't mean it's destined to become the next growth area. Some suburbs are inexpensive for a reason and won’t improve because of various socio- economic factors. There might be too much industry in the area, a lot of social / public housing or possibly a crime, gang or drug problem. Or maybe they are outlying suburbs with poor infrastructure, facilities or public transport.

On the other hand, the type of suburb to look for is one that is relatively cheap today but has the potential for future capital growth. Some of the major drivers of capital growth are:

•    Proximity to the city or the water.

•    Adjoining a more expensive neighbourhood so it can benefit from the ripple effect.

•    Desirable amenities such as good public transport, a large shopping centre, or within the catchment of a highly prized public school.

•    Older attractive houses with character features, that are ready to be renovated.

•    Areas where governments are investing in local infrastructure or beautification programs.

So what do you look for in a suburb?

Some of the steps you can take to find a suburb that is improving is to go for a drive and a walk. You’ll “know it when you see it” because you’ll find evidence that people with money are moving in.

•    They will be spending large amounts of money renovating or extending their homes.

•    There will be white (the new black) SUV’s parked in the driveways rather than old Ford Falcons and Holden utes.

•    The nature of the shops is changing. The gyms are offering Pilates; the cafés sell cold press coffee, and the deli’s serve goat’s cheese pizza.

As a property investor if you can pick an area going through gentrification, one that’s shifting from dreary to in demand, you can benefit from its accelerated growth.

And the good news is that you don’t have to get your timing perfect – the gentrification process lasts a number of decades.

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Michael Yardney is CEO of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.

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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.