Today, I put on my thinking cap and try and explain why inner-suburban house prices always grow faster than fringe housing. It has a lot to do with transport infrastructure. Feel free to give me a grade.
Why does the inner city grow faster than the suburbs?
It’s not always true, but true enough to be a workable rule of thumb. House prices grow quicker in the inner-city than in the outer areas.
This is a bit surprising when you think about it, or it’s at least a bit of a puzzle.
You would expect prices to grow more in existing suburbs in absolute terms. If a million dollar home grows by ten percent, it’s value goes up $100K. 10% on a $500K house is only $50K.
But we’re not talking absolute levels. We’re talking percentage terms. We’re talking growth rates.
And it’s easier to get bigger growth rates off a smaller base.
And what that means is that the price gap between the inner and outer city is just getting wider.
Or another way of putting it, the premium people are willing to pay to live closer to the CBD is going up.
I never expected prices to equalise across the city, but I did think at some point, this premium would settle down somewhere.
So why hasn’t it?
To understand that we need to understand the key drivers of price in the outer suburbs.
First up, there’s the treatment of infrastructure expenses – roads, sewage etc.
In the past (around when the inner city was being built) governments used to foot the bill for these things, and then recoup the expenses from rate payers over a number of decades.
Now, these costs are pushed back to the developer, who, of course, just passes it on to the home-buyer.
So while infrastructure cost used to be deferred, they’re now an up-front expense, pushing the price of new land and homes higher.
Second, the price of new land has been jacked up by land-banking developers, and bumbling or corrupt planning authorities.
(Of course land banking only works when authorities keep supply on a short leash for you.)
New lot prices have spiked in recent years. According to HIA, the median vacant lot price is now up to a record $212,727 per lot.
Lot prices are up over 10% in the past year and a bit. But lot sales are actually down 20%!
And in Sydney, it’s gone to stupid town. Median lot prices increased 20% in 2014 alone, to $390,000.
Add the most basic of houses on top of that and you’re easily up around the $600K mark.
But hang on. Why are we talking about fringe inflation if we’re trying to explain why the inner suburbs are growing so quickly?
The reason for that is that inflation on the fringe pushes back to the inner city. If a basic fringe house costs $600K, this puts a floor under inner-city prices.
A very-expensive floor. Like, slate or something…
Everything in the inner suburbs is going to be north of that… unless the house is in really bad shape.
And that means that if outer suburbs are growing by 10%, then the inner suburbs will also be growing at 10%.
If you raise the floor a foot, you raise the whole house a foot.
(hey? Property analogies about property. I’m so meta.)
But there’s also a premium.
And where does that premium come from?
It comes from the relative attractiveness of the inner-city over the fringes.
And that attractiveness is built on location, location, location.
In part it’s about access to amenities – lifestyle and culture. In that sense, our cities are very centralised. Our central business districts also tend to be our central entertainment districts.
There are alternative entertainment ‘hubs’, but these tend to a long drunken walk from the CBD anyway.
Not to say there’s nothing going on out in the suburbs, but the further out you go, the more limited your options become.
That puts a premium on inner city living.
But probably the main factor is transport. No government has invested enough in transport infrastructure in recent years.
And if we took the kind of transport investments that supported the growth of the inner-suburbs 50 odd years ago, we are miles behind.
This is partly about public transport, particularly trains. But it’s also about roads.
And you could maybe get away with underinvesting in trains if you put the extra work into roads, but that hasn’t happened.
And so what that means is that commute times start to hurt. If you live in the outer suburbs, your daily commute could be long, difficult, or both.
Let’s put some numbers on it.
Let’s imagine that you live in the outer suburbs and travel an hour and twenty minutes more than you would if you were living closer in. That’s not hard to imagine.
Effectively you ‘work’ an extra day a week, just in commuting.
That starts to make a difference.
And so this is what explains the premium.
The question then is, is the premium getting bigger?
Well, it’s going to get bigger if the perceived inconvenience of the outer-fringes gets bigger.
And what’s happening there? Well, I don’t see anybody in government falling over themselves to fix it.
And with our cities growing rapidly, it seems that our ‘infrastructure deficit’ is only getting worse.
And if that’s true, then we should see the premium between the inner and outer suburbs continue to widen.
And that means that inner-subruban house prices will grow even faster than outer suburbs.
There. We solved that little puzzle.
What do you think?
Is there a growth premium on inner suburbs in your city?
Is it going to last?