Melbourne House Prices: What the media aren’t telling you

You may have heard that over the long term, property prices tend to double every 7-10 years.

This is based on the assumption that property, on average, grows by 10% per year.

As evidenced in the graph above, courtesy of RPData, this seems to be proving true in the Melbourne property market.

Or is it?

Melbourne House Prices: What the media aren’t telling you

All maxims are only as good as the assumptions that support them.

Media reports of rising median Melbourne house prices, rarely mention one critical factor:

“At the same time that median Melbourne house prices have been rising,
median Melbourne lot sizes have been shrinking”.

In other words, we’re not just paying more for the same thing.

We are paying more for less.

Melbourne Median Lot Sizes

The graph above (courtesy of HIA-RPData Residential Land Report 2009) shows that:

• Melbourne’s median lot size has fallen from 640 m2 to 540 m2 between June 1992 and June 2009.

What does this all mean?

If we test our maxim and analyse a 7 year period period from Jul 02 to Jun 09:

• The Melbourne median house price grew from $300,000 to $470,000
• This represents respectable growth of $170,000, or 56%.

However, in the same 7 year period:

• The Melbourne median lot size shrank from 610 m2 to 540 m2

In other words:

• In Jul 02, $300,000 would buy property on 610 m2 of land (or $491.80/m2)
• In Jun 09, $470,000 would buy property on 540 m2 of land (or $870.37/m2)

If we ‘normalised’ the lot size in order to perform a like-with-like comparison, then:

• In Jun 09, a property on 610 m2 of land would actually be worth $530,926  (610 m2 x $870.37 / m2)
• This represents like-for-like actual growth between Jul 02 to Jun 09 of $230,926, or 76.98%

This is a rare case where media reports are less sensational than real life.

The maxim that property prices tend to double every 7-10 years is actually not true.

Melbourne property has actually performed even better when a like-with-like lot size comparison is taken into account.

What do I do with this information?

You might say this is all well and good, however in the real world people only buy whole properties – they don’t buy by the square meter.

That is true – except in the case of properties suitable for subdivision/development.

If a property is unable to be subdivided – an extra 75 m2 won’t make any quantifiable difference to the end purchaser (though it may make a qualitative difference).

However if a property is suitable for development, to a developer that 75 m2 may mean the difference between being able to fit an extra townhouse or extra carparks, etc.

In such a scenario, every square meter counts.

If you’re in the market to purchase a property as an Investment Property (IP) or Principal Place of Residence (PPOR), ensure you purchase a property that has strong development potential.

Even if you never go ahead with the development, the extra equity inherent in the land can still be realised either by obtaining a planning permit and/or targeting the developer market when it comes time to sell.

Conclusion

• Melbourne house prices have been doubling every 7-10 years.
• At the same time Melbourne median lot sizes have been shrinking.
• When lot size is taken into account, Melbourne property is actually performing even better than the “7-10 year doubling” maxim.
• In short, we are paying more money for less land.
• The best way to maximise on this is to invest in properties that have strong development potential.

PURCHASING A PROPERTY?
Ask us how a Development Assessment can confirm development potential – before you buy.

Related posts:

1. The Corner Block Advantage
2. House Build Cost Savings: Design for Roofline
3. How to get a Planning Permit – the easy way
4. How to get an Additional Crossover: Think Parking Part III
5. Property Investment Strategies: How to proactively add significant equity without building or renovating

Tagged as: Melbourne, Multi Unit Development, Planning Permit, Property Development, Property investing strategies, Subdividing Land