Wed 11 Oct, 2017
3 minute read
The ripple effect – property prices pushing upwards from closer, more affluent suburbs to those further away like ripples in a pond. As urban centres grow, people migrate towards cities and populations expand, demand for real estate closer to urban centres increases.
People either want to minimise time travelling to work or take up a better lifestyle by living in a nicer area of town, closer to the beach or somewhere closer to the centre. With this demand, price goes up.
Once the price rises too high in a certain area, people are forced outwards to somewhere a little less expensive. But then this push puts more pressure here and so the ripple continues outwards.
As you throw a small stone right into the middle of the pond, a ripple “ripples” on outwards towards the fountains edges, slowly it pushes on out representing the price rises throughout urban centres.
"There’s no certainty the ripple effect will occur even in a booming market"
In theory, the ripple effect follows the increase in prices until we reach the urban boundary. At this point, the ripple can reverse in a strong market and ripple back towards the middle as equilibrium is sought.
Tight restriction on supply relative to this incremental demand can help to drive the ripple on outwards.
However, sometimes the ripple can fade before it reaches an urban boundary and there factors that can stop this ripple from continuing.
Affordability, interest rate increases and confidence are some of the key factors that influence the property cycle. When Australian price growth slowed towards the end of 2003, the ripple turned around and went inwards. This mean the highest capital growth occurred in the inner more affluent suburbs leaving the ripple never really making it towards the urban fringe.
This same effect happened in the aftermath of the 2012 Global Financial Crisis.
Other geographical barriers can have a surprising effect as you often see one side of a large main road or highway having far higher prices than that just across the way. There is a psychological influence of not wanting to ‘cross to the other side’. As I’m sure our Neanderthal ancestors once thought, “it’s safer to stay on this side of the river”.
There’s more to consider..
Often there is a perceived difference between two very close locations. One street may have beautiful lush trees whilst another just around the corner may feel barren or subject to a noisy road or the poor sunlight.
One home or piece of land may seem cheap until you realise it also comes with with flooding every 10 years. Really, it comes down to knowing the location intimately and how the community perceives the value of the location. Couple this with the knowledge of where we are in the property cycle and where the ripple is heading and you stand at a good advantage over other potential buyers.
What does this mean for developments?
As the ripple spreads outwards and people are pushed out with it, industrial and commercial land gets converted to residential. Warehouses become homes. Vacant land becomes townhouses.
As a property developer, one of the most integral pieces of the game is buying the right land, at the right price, in the right location and at the right time.
What we don’t want to do is buy land at the peak of the ripple. We want to buy just before the ripple hits. Of course, unlike the ripple in our pond, the property price ripple can move at different paces, in different areas and with different ferocities – and judging it is not easy.
Get it right, and you could be surfing the uplift in property values. From here you can stand in the enviable position of valuable land purchased at a good price – ready to deliver good homes at healthy margins.