Size Matters – A Case Study

Posted by Daniel Joseph

Get your head out of the gutter! We’d all like more of a good thing and the same is true when we’re investing in property. What we’ve seen over the last couple of decades is a rather dramatic decline in dwelling sizes, be it house and land in our outer suburbs or apartments in the inner city. This has been largely driven by affordability constraints in our capital cities with developers reducing sizes rather than increasing costs.

What effect has this shift had on price growth? Blue Wealth has long advocated strict guidelines with respect to both minimum sizes and design. These have effectively restricted approval of studio apartments from both a size and design perspective. To shed some light on the extent to which these factors effect capital growth, I conducted the analysis below on a sample of 25 of the most recent sales of studio apartments in Sydney City. The sales had the following in common:

Last sold between January 2015 and October 2015
Internal sizes of 49 square metres or less
Internal bedrooms (without windows)
Previous sale date before January 2006 to allow for a 10 year holding period. 21 of the 25 sales in 2015 had been bought in 2005 (this is no coincidence, Sydney had its last cycle peak in 2004, spurring a high degree of sales activity in the subsequent 12 months)

The average annual growth rate for this sample of 25 apartments over the last decade was 3.3 per cent, that’s well below the gains of Greater Sydney over the same timeframe. For a more accurate account of affairs let’s look at how the one bedroom apartment market in the city performed compared to that detailed above.

The median price of a one bedroom apartment in Sydney City at October 2015 was $650,000, representing an annual growth rate of 5.6 per cent from the 2005 median price of $375,000. That means you earned an average 2.3 per cent additional capital gain per annum on a one bedroom apartment than you would have for the typical apartment in the sample described above. This highlights the importance of selecting an asset with a wider resale appeal rather than the more investor focused studio market. Had you invested in a $400,000 one bedroom apartment in 2005 you’d have an additional $156,000 capital gain to what you would have earned on a studio of the same price!

Say it with me; RIGHT PROPERTY, IN THE RIGHT MARKET AT THE RIGHT TIME.

Posted by Daniel Joseph, on 20th Oct 2015