Rethinking Property Investment: Why Purchase Price Trumps Location

In the world of real estate, the allure of prestigious locations often blinds investors to the fundamental principle that drives long-term profitability: capital growth. Many investors, caught in the glamour of certain suburbs, often make the mistake of prioritising location over other critical factors, leading to potentially skewed investment decisions.

While location undoubtedly plays a pivotal role in property value, basing comparisons solely on this aspect can be misleading, especially for investors seeking optimal returns. The purchase price, combined with the historical capital growth, serves as a fairer and more pragmatic yardstick when evaluating investment options.

Consider the common scenario of comparing properties in different areas of Melbourne. Take Brighton, a blue-chip suburb synonymous with high property values. A glance at its median house price of $3,210,000 might make it seem like the pinnacle of investment opportunities. However, a deeper examination reveals a more nuanced reality.

Since 2004, houses in Brighton have exhibited an average annual growth rate of 5.80%, while units have seen a 5.30% growth rate annually over the same period taking the median unit price today to $1,202,500. If you were entering the market with a budget of $1,200,000 you need to contrast this with other areas in Melbourne.

In the northern suburb of Preston, where the median house price stands at $1,128,000, the average annual growth rate for houses has been an impressive 6.83% since 2004. Similarly, the inner-west suburb of Seddon boasts a median house price of $1,168,000 and an even higher growth rate of 7.13% annually over the same period.

These statistics shed light on a crucial aspect: while location certainly influences property prices, it's the purchase price and subsequent performance that significantly impacts long-term returns. Investing in properties in Preston or Seddon, with lower house prices compared to Brighton, has yielded higher growth rates and therefore greater equity for investors.

The mistake many make is equating an esteemed location like Brighton with superior investment potential without considering the crucial metric of purchase price. Sure, owning property in prestigious areas may have its allure, but when it comes to building a robust investment portfolio, focusing on properties that offer more favourable growth rates for their purchase price is paramount.

In essence, comparing properties based on their purchase price rather than solely on location provides a fairer and more insightful perspective for investors. It allows for a more balanced assessment of potential returns, enabling investors to make informed decisions aligned with their financial objectives.

Ultimately, while location adds a certain appeal to real estate, it's the purchase price that often determines the viability of an investment. By prioritising this metric in comparisons, investors can unlock hidden opportunities and maximize their chances of achieving substantial returns in the dynamic landscape of property investment.