I'm Jeremy Shepherd. >> And I'm Damian. >> We use data to expose deceitful property experts and their marketing BS. >> This is the Expert Busting Series. This is episode 19 of the Expert Busting Series, Desirable Areas, Why They Are Not Always in High Demand, Jeremy. >> Yeah, you've ever heard this uh phrase from like a selling agent, "This area will always be in high demand." Uh it's a little bit misleading uh because the kind of demand that we're after is the demand that pushes up prices of property.
And what they're really thinking is people will find this area always desirable. And just show the difference what I'm talking about, desire versus demand. Uh I like the Ferrari example. So, a teenage boy may want to Ferrari, but that kind of demand won't affect the price of Ferraris because teenage boys don't have the financial capacity uh to purchase them. Nor do they have a driver's license. Um God help us if they did.
So, both millionaires and teenage boys want Ferraris, well, they may want Ferraris, but only the demand from one of those cohorts is going to affect the price of Ferraris. >> Mhm. >> And that's the demand we want to monitor in the property market. Uh not the wishful thinking kind of desire, but the hand up at auction, counter offer kind of demand. That's what we're interested in. So, always being an appealing area um just isn't good enough.
It needs to be affordable enough to appeal to a larger number of buyers to have them scrambling over each other uh making counter offers, creating the kind of demand that pushes prices up. Uh so, it's no good uh looking around for lovely places to invest in if if nobody can afford uh to buy there. And the most affluent property markets in the country may not have many genuine buyers. Sometimes they will, uh sometimes they won't. Just because all year round they continue to be appealing areas, nice places to live, doesn't mean uh that demand is high all year round. Uh in fact, the whole concept behind the ripple effect refutes this constant demand uh suggestion.
So, the ripple effect says that the start of a new growth cycle for let's say a city, the affluent areas generally supposedly start to take off first, and then that growth subdues uh and ripples outwards to neighboring suburbs. And after a few years of rapid growth, buyers eventually consider the properties in those affluent areas to be too expensive, and so they start looking for the next best alternative. And that reduces demand for the affluent area and increases demand for its neighbor. And for more detail on why that happens, check out episode number 11. It's called Apples and Oranges. So, there will be periods of accelerated growth, uh periods of reduced growth for both the ideal market and the bridesmaid suburbs that neighbor it.
Uh and that's the ripple effect. And historical data supports the fact that desirable areas are not always in high demand. Okay, so I uh conducted some research in the past to examine the fortunes of affluent areas versus uh lower socioeconomic areas during these periods of national price falls. And interestingly, the more expensive suburbs closer to the CBD fell more sharply than the cheaper areas that are further from it. And for more on that, check out episode number five. Uh it's titled proximity to the CBD.
Uh you might also like to look at episode number six, high wage areas. >> Talking about the EBS. Six, yes. >> Expert busting series episode number five, six, and another one, number 10, property growth history. All right, this is uh a chart not from any of that research I did. This is a chart from CoreLogic, uh as they're called, now formerly known as CoreLogic, formerly known as RP Data, and it shows the the this concept that I'm talking about quite clearly.
So, it agrees with the same conclusion that I came to. Uh let me just explain this chart. Okay, so the three lines on the chart show the growth rate of three segments of the Australian property market. Uh the growth rate is plotted for a 20-year period from 1998 to 2018. I couldn't find uh a more up-to-date version of this chart, but it doesn't matter. This This is seen throughout history uh Australian real estate history.
So, the gray line is the top 10% most expensive suburbs of the state capitals, and the blue line is the bottom most expensive, whilst the black line is the median. So, the median of the state capitals. Now, the upper class markets will not always be in high demand in tough times, which I've highlighted in the red red rectangles. Uh it's quite the reverse. Uh demand for them drops more noticeably than in the cheaper areas. In fact, for this chart, there were four occasions when the state capital's median price went into the negative, had negative growth.
And in all four cases, it was the most affluent areas that dropped the most. The cheapest 10% of suburbs, that's the blue line, did not even go negative except for one of those four cases. The cheaper markets were less volatile and less likely to have negative growth. Now, why is this the case uh when the up-market areas are so much nicer than the bottom of the barrel? Uh the following analogy might help. >> You know, it's wild there over that 20-year period.
You've got like what, maybe 3 to 4 years of negative growth, would you say? >> Some of them were lasted a bit longer than a year, but yeah, occasions. Occasions yeah. >> yeah, overall. So, it's like out of those, let's say 16 years, you just had this constant capital growth in these markets. >> All right, yes.
>> Like annual growth. Like you've got like you're holding up you buy a property, you forget about it, you're just getting growth every and this is the power of property. There is just always this constant demand. >> Yeah, so in Australia, there has been more growth positive growth than negative growth. Those are those rectangles mark the areas where there was some negative growth. >> Mhm.
>> But the point I was trying to make about this chart is that uh the >> The drop. >> the cheaper the cheaper uh markets actually did not dip below zero. They didn't have negative growth except in one out of those four occasions. And they're less volatile than the more expensive markets. >> Which makes sense when you talk about affordability, you would think, right? >> Yeah, yeah.
So, it's funny when when we're in tough times, uh people say there's a flight to quality, but there isn't. There's a flight to affordability. >> Mhm. >> All right, so if there are too many mansions and not enough millionaires, then ritzy area prices, they can fall. Uh if there are 100 mansions and only 10 millionaires, then the price of mansions is likely to drop. Mhm.
Uh conversely, if there are 1,000 bogans and only 10 dog boxes, well, the price of dog boxes is going to rise. So, it's all about supply and demand. It's got nothing to do with whether it's a nice property or a nice area. It's all about supply and demand. This is a big point and deserves being reiterated. So, prices change due to supply and demand, nothing else.
And it's been this way for centuries. The problem is that people assume a property or a street or a suburb that has nice features will therefore have more demand. And although those features are relevant, there's something else involved in determining demand that has nothing to do with nice features. And I'll show that on the next slide. So, features alone do not dictate demand. And I've heard selling agents, as well as buyers agents, say this area will always be in high demand.
And usually it is with respect to an affluent area with lots of wonderful features where everybody wants to live, but the demand is not perennial. It's not every year. If it was, the growth would be, too. But instead, the growth in these nice areas has the same ebbs and flows as any other suburb around the country. And the reason is because demand is not a function of features. That is, features do not dictate demand.
Hypothetical example might help. Imagine two properties, A and Z. A has all the features you could ever possibly want. So, it's close to shops, schools, transport nodes, employment opportunities, parks. It's in a quiet tree-lined street. It's on 4,000 square meter block.
It's got 10 bath- 10 bedrooms, four bathrooms. It's got a tennis court, two swimming pools, and a helipad. Right? It's got everything. It is feature-rich. Now, you compare that to property Z, it is the polar opposite.
So, it's miles away from anything. You've got to drive 5 minutes to get to the nearest shop, which is just a petrol station. They don't even sell a packet chips. And it's on a 400 square meter block of sloping sandy soil, and it's got nothing on it except a rusty shed, which you'd need to remove. Okay, so property A feature-full, property Z feature-less. So, if features dictate demand, then you would expect the demand for property A to be light-years ahead of the demand for property Z.
But here's the thing, demand is not a function of features in isolation of price. You put a $150 price tag on property A, now what do you think the demand's going to be for that property? Practically nothing. You put $150, not million, $150 on property Z, and there'll be people who who'd buy that just for shits and giggles because it's so cheap. So, demand is a function of features and price. So, you'll hear agents and maybe even buyer's agents rattle off, "Oh, it's got this, it's got that." And then they think the demand is going to be high.
It's It's got to include the price. And nothing subdues the demand more so than sky-high prices. And because the price changes, a property with all the right features, a suburb with all the right features, cannot always be in high demand because it's dependent on the price. I think a lot of the features a lot of the time is most probably bedroom count, bathroom count, toilets, that type of stuff is most probably the big influence if the houses are next door to each other, for example. Yeah, well, gee, our buyer's agents consider a lot more than that. You know, is it on the Is it north facing?
Is it um open plan? Is it feng shui? Is it God Yeah, yeah. Getting right into it. >> Are features useless? >> Uh well, actually, just before we go on from the features, I did some more research on features like schools, proximity to schools, beaches, train stations, shopping centers, and airports.
For more on that, check out episode number four. It's titled Amenities. Sorry, Damo. Yeah, next What was the next slide? >> Are features useless? >> Yeah.
So, uh can we just ignore these sorts of things? Well, no, because features play a role in determining current price, not price growth, price right now. And yeah, I always leave these sort of price estimates up to um people on the ground, like the selling agents, so on. Um I'm happy to hear them talk through all the features. I never argue with their estimate. I don't care.
What I'm more interested is in capital growth. Uh but I never let them try and tell me, "Hey, it's got all these features. You're going to get great great growth." That's That's nonsense. Uh that's my lane. That's what I work in. Um so, features alone uh do not dictate price.
So, don't let anyone rattle off a bunch of features and try and tell you you're going to have higher growth. That's That's not the case. Um yeah, so negative features will tell you uh about growth just as much as uh Well, they'll tell they'll talk about negative features and say, "This is uh right across the road from the school. Therefore, it's not going to have good capital growth." That's That's rubbish. Uh it's close to public housing, which we did in episode 17, I think. Um so, it won't have good capital growth.
That's That's not true, as evidenced by the data. So, yeah, all of this sort of stuff um features aren't useless in determining current price, but they are useless in determining cap future capital growth. Uh okay. So, if you are after capital growth, uh you need to pay heed to supply and demand. Uh and these are the only two factors that affect price growth. It is supply and demand.
It's been like that for centuries. Um and remember that you don't need to live in your investment property. So, if you don't like that area, that doesn't matter. You just need to find a tenant [music] who does. Uh and it doesn't matter whether it's a nice area um to you or not. It matters if demand outweighs supply.
Uh and that can happen even in undesirable areas. >> In our next episode of the Expert Bashing series, EBS 20, buy at the bottom or buy in a boom, which is [music] best? Thanks for watching.