How Does ‘Water’ Affect Real Estate Growth?

Just imagine making a capital outlay of $450,000 in 2003 to buy a standard piece of real estate adjacent to one of the most popular beaches in the world and, in 2023, it is worth $1.5 million. Nice, right?

In comparison, a standard piece of real estate could have been purchased in each of four (4) different locations for a combined value of $450,000. None of the locations are near the ocean, they all produced a higher annual average rate of growth than Bondi and increased to $2.1 million over the same 20-year period ($600,000 more capital growth).

This remarkable contrast raises the question: What influence does ‘water’ have on changes to property values?

Coastal versus inland

During the 5-year period ending 2011, the median house value on the Gold Coast (with beautiful beaches, great amenities and year-round awesome weather) increased by 13 percent.

Meanwhile, in the red centre of Australia, and with only half the population growth rate of Gold Coast during the 5-year period, Alice Springs produced 5-times more capital growth (66 percent).

Melbourne is a great global city, the port city of Albany in Western Australia is an understated gem, and Geelong is one of my favourite regional cities.

The capital growth rates over the 5-year ending 2023 of are those coastal locations was 20 percent, 35 percent and 35 percent, respectively. They are very solid results, although inferior to numerous inland locations.

Albury NSW (75 percent), Toowoomba QLD (65 percent), Launceston TAS (65 percent), Mount Barker SA (60 percent), Bendigo VIC (60 percent), Dubbo NSW (55 percent) and Armidale NSW (50 percent) are nowhere near coastal, but where among Australia’s best property markets over the last 5-years.

Any suggestion that a location being coastal or inland has any impact whatsoever on property market performance has as much substance as watery soup.

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From time to time during a consultation with a budding property investor, someone will express to Propertyology that they have a ‘preference’ for investing in a coastal location. Why?

Personal hobbies such as fishing or surfing, a bias towards seaside townships for holidays or just factually false assumptions are behind so-called ‘preferences’ for coastal locations.

Human emotions and personal connections with different corners of the country are unique to each person. Those highly subjective personal biases and preferences do not have a tangible influence of property market performance.

Real estate is not an organism, folks. Even the perfect amount of sunshine, rain and fertiliser will not make the bricks, timber, concrete and steel grow. For avoidance of all doubt, refer to the aforementioned parcel of evidence.

Raining capital growth

The volume of rainfall that an individual city or town gets in an average year does not influence property markets either.

The township of Alice Springs has an average annual rainfall of just 285 millimetres, yet $500,000 for a standard house is higher than 3 of Australia’s 20 largest townships (out of 400+).

It is impossible for one to know what they don’t know. But those who work in a chosen field every day will always know more than those who don’t.

Among Australia’s 8x capital cities, Darwin NT (1,720mm) and Sydney NSW (1,210mm) receive the highest annual rainfall, while Hobart TAS (610mm) and Adelaide SA (530mm) are the driest capital cities.

In comparison, the average annual rainfall in Townsville, Australia’s 13^th largest city, is close to the national average of 1,200mm.

‘The weather’ is often cited as a major drawcard for very popular holiday hotspots such as Byron NSW (1,720mm), Sunshine Coast QLD (1,515mm) and Cairns QLD (1,990 mm). They are among Australia’s ‘wettest’ locations.

At the other end of the spectrum, well below average annual rainfall is received in Toowoomba QLD (735mm), Launceston TAS (665mm), Dubbo NSW (605mm), Wagga Wagga NSW (575mm) and Mildura VIC (280mm).

Those amazing regional cities, and many others, play the role of ‘mini capital city’ for Australia’s most productive food bowl jurisdictions.

And their property markets have a long history of resilience, indisputably lower risk than several capital cities and strong performance.

A few clouds still produce a nice day

According to the Bureau of Meteorology, most of Australia’s 400+ cities and towns register rainfall in 120 to 170 days per year. That’s an average of once every 2 to 3 days.

Whilst there is some level of cloud in the sky during most days of the year, those clouds in the sky do not define the day.

Property markets are like that, too.

Given the several dozen factors listed in the above graphic which influence property market performance, it is unrealistic to ever expect every single metric to be tracking in an ideal direction. Perfection is impossible!

For some frustrating reason, the economists, boffins and lemon-suckers of the world seem to have a deeply ingrained tendency to obsess about imperfections. That’s reflected in their year-after-year “… I am worried about [x]…” commentary.

Yet asset values still manage to increase in most years, culminating in Australia’s combined capital city house value to increase from $25,000 in 1974 to $1,025,000 in 2024.

Beachie ‘blue-chip’ BS

Everyone can relate to the high desirability of living in one of the affluent, seaside suburbs that exist in each of the 7 coastal capital cities. Hats off to anyone who’s career choices, work ethic and discipline over many years has enabled them to reap the lifestyle rewards of living in such a home.

But ‘high desire’ is a completely different metric to ‘high demand’ and to ‘highest return on investment’.

Higher price tags mean fewer competing buyers.

As illustrated in this next graphic, many other locations across Australia, inland and coastal, do not have the Hollywood profile but have produced superior rates of capital growth over time (not to mention the far superior cash flow returns).

From an investor’s perspective, it’s akin to paying a fortune for wagyu and being served rump steak.

From a property investor’s perspective, whether now or 20-years ago, very few people could have afforded to buy a detached house in Cottesloe WA ($645,000 in 2003 versus $3.4 million in 2023), Glenelg SA ($285,000 to $1.3 million), Bondi NSW ($900,000 to $3.8 million) or St Kilda VIC ($525,000 to $1.5 million).

But plenty of people might have let the alure of ‘water’ (and perhaps a stroke of the ego) to heavily influence their decision to invest in an apartment in these seaside capital city suburbs.

Over time, the same people ought not be complaining about the dollar-value capital growth.

But placing so many eggs into one basket has never been an intelligent strategy.

The potential risks include prolonged periods of portfolio performance stagnation, very unattractive cash flow returns and complete ignorance to opportunities in other locations where the rates of capital growth proved to be stronger.

Case Study: Bondi NSW

Let’s say a property investor purchased a standard apartment in beautiful Bondi in 2003 for the (then) median apartment value of $450,000.

That was a lot of money in 2003. For perspective, the median house value in 7 out of 8 capital cities in that year was between $210,000 (Darwin) and $350,000 (Canberra).

20-years later, that $450,000 Bondi apartment would have enjoyed an average annual growth rate of 4.9 percent and be worth $1.5 million in 2023. Handsome!

For the same capital outlay of $450,000 in 2003, a savvy property investor could have purchased a detached house in each of Dubbo NSW ($130,000), Bendigo VIC ($130,000), Gympie QLD ($110,000) and Launceston TAS ($80,000).

Each of those four (inland) ‘mini capital cities’ enjoyed superior average annual capital growth rates than Bondi over that 20-year period, along with much healthier cash flows.

The value of those investments in 2023 had increased to $485,000 (Dubbo), $560,000 (Bendigo), $542,000 (Gympie) and $550,000 (Launceston).

Skill and market intelligence, as opposed to a bias towards water, resulted in the total asset value of this significantly more diversified property portfolio to increase to $2,137,000.

So, the same initial capital outlay ($450,000) over the same period of time (20-years ending 2023) produced $637,000 more capital growth than an investment near one of the world’s most popular beaches. And better cash flow.

Knowledge is the best currency!

Anyone buying real estate for investment purposes owe it to themselves to give their money a chance to achieve best performance. Don’t be fooled into thinking that ‘water’ is a component to the most intelligent strategy.

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