The most common question asked of a real estate analyst… Where should I invest?

Written by Andrew Stone

It’s never a simple answer I’m afraid (think timing, budget, objective, openness to risk and value add, etc), but I reckon the below graph illustrates a few principles pretty clearly. We’ve broken Melbourne’s suburbs into 3 groups based on their current Median $ House Price, and tracked how each group has performed historically re price growth.

Firstly, regardless of price, investment in Melbourne houses has proven a very successful long-term wealth strategy. Since the turn of the century, prices have increased 90% of the time; in other words, at any point in time, there’s a 90% probability that your house is worth more than it was the year before.

Second, property prices move in cycles. From 2000-2009, prices increased dramatically, but the rate of increase was high in some periods (e.g. 2002) and low in others (e.g. 2005). What this means is that timing can be really important to those seeking near-term equity gains, perhaps as part of a larger investment portfolio building strategy.

This leads to the fundamental point of the graph. These 3 suburb categories perform a bit differently from one another. The most expensive suburbs (think those in Boroondara, Stonnington, Bayside) tend to experience sharp increases in price at the beginning of growth cycles, but are more susceptible to falls at the end, or in between, cycles. Low priced suburbs don’t typically hit the peak growth that others do, but they’re far less prone to downturns, and they tend to experience good sustained growth at the end of cycles. And, the middle suburbs, as you’d expect, perform somewhere in the middle. They don’t fluctuate as dramatically as high priced suburbs do, but they peak stronger than lower priced suburbs.

As I’ve written above, it certainly feels like we’re at the end of the current growth cycle, and there are early indications of high priced suburbs starting to experience moderate price falls. Knowing this, and understanding that many suburbs in Melbourne’s West and North have underperformed relative to others, I reckon some of the best investment opportunities are in our own backyard.