Gentrification is the process by which the character of a poor or rundown urban area is changed by a wealthier demographic moving, improving housing, attracting new businesses, and somewhat controversially, usually displacing the current inhabitants.
While the term was coined in the 1960s in England, the phenomena itself appears to have been happening as long as there have been cities around. It has been traced back to ancient Rome with the restoration of certain parts of the city in a planned manner by wealthy elites – there are even documented cases of Julius Caesar himself spending money to restore the temple of Venus and Mars. Today in western democracies, the process occurs without centralised planning, and largely from a bottom-up process driven by the invisible hand of market forces.
The area being gentrified is almost invariably surrounded by wealthier suburbs. On the east coast of Australia, the vast majority of examples have historically happened within a 5km radius of the CBD. There are few areas in the inner ring left that haven’t been gentrified and the process has largely been pushed out to the 5-15km radius now.
As Sydney was a city that largely rose organically and without town planning, a peculiar quirk exists where public housing is found peppered in alongside some of the most expensive property not only in Australia but in the world.
Redfern is one example – situated 3kms from the CBD, with good public transport, yet housing prices remained depressed due to a social stigma of a lower-income demographic and high crime rates. Redfern was known for being the closest thing Australia had to a ghetto and “the block” on the notorious Eveleigh Street consisted almost entirely of public housing for indigenous Australians. In 1999 most afternoons there would be the smell of a campfire burning on top of the building as we were walking to the station from Sydney Uni.
As property prices rose in surrounding suburbs people began to look to Redfern for cheaper housing and a different demographic began to move in around the edges. The tipping point in terms of crime occurred somewhere between 2008 and 2009 with our researcher John Bekiaris finding that the in the two years leading up to September 2009:
- Unarmed robbery fell 27.6%
- Vehicle theft fell 29.6%
- Theft fell 36.8%
- Armed robbery fell 48.8%
However, asset markets have an uncanny ability of sniffing out what’s happening ahead of time. By 2004 Redfern’s median house price was $575,000 already slightly surpassing Sydney’s median house price of $545,000. Fast forward 18 years and today the median house price is $1.88m while the median house price of Sydney is $1.1m. While Redfern still has ties to its past it is now also surrounded by trendy cafes and restaurants as well as art galleries.
This relative outperformance compared to the surrounding suburbs is rather typical of suburbs undergoing a process of gentrification as property prices are usually held back for one reason or another. The impediments to growth are usually removed in a gradual process as younger more liberal-minded people move in. Cafes and eateries are then opened to cater to them. This creates a cascading effect that gradually causes a permanent change to crime levels and overall prosperity. Being able to identify some of these areas before the price rises occur can significantly boost the returns on your investment portfolio.