Blue chip suburbs: property investor prize or trap?

The term blue chip is overused in property asset selection. It’s often the suburb that is considered a blue-chip area, but there is so much more to successful property investing than a postcode.

Likewise, there are some poor performing locations within any specific locale. The quest for the ‘blue chip’ suburb can sometimes spell disappointment for investors and owner-occupiers alike.

What attributes do most buyers assume a blue chip area offers?

It usually starts with household incomes. Many insightful property experts have spoken about some of the demographic hallmarks of a suburb; from tree-lined streets to high amenity, beautiful period houses to exciting high streets. 

But targeting an aspirational area without questioning the other important facets of property selection can sometimes lead a buyer astray.

Suburb stubbornness can be costly

I’ve worked over the years with many buyers who have set their sights on an coveted wealthy area to call home.

Often, buyers select locations that don’t offer a suitable home within their nominated budget.

The challenge they face when they adhere to a particular suburb is that of compromise.

If they aren’t willing to compromise on their location, they will ultimately be forced to compromise on another aspect. It may be the dwelling, condition, it could be the land size, or it could be the micro-location.

A common example is a main road or a compromised address. Not every homeowner has regret after purchasing on a heavy-traffic street, but many do.

Main road addresses exhibit higher turnover and shorter periods of tenure for a reason. Road noise, difficulty turning in and out of a drive, additional dust inside the house, and challenges with off-street parking are the main concerns.

For those buyers who are sensitive to compromised locations, they may decide to purchase a smaller dwelling, (or unit) before they accept the idea of moving out to the next suburb to find their home.

While this decision can feel great at the time, their tenure of the property is shorter because they often outgrow the home. Faster turnover equates to higher trading costs, including stamp duty, agent’s selling fees and marketing costs.

Bridesmaid suburbs in spotlight

In many cases, buyers ultimately enjoy longer ownership tenure when they consider ‘futureproofing’ their decision, or at least, targeting a property that will broadly serve their needs for longer.

It is for this reason we suggest the idea of a bridesmaid suburb, as opposed to the bride.

Simply moving out one or two suburbs further, a homebuyer can enjoy the value proposition of their higher affordability, relative to the blue chip area they’d gotten starry-eyed about.

And often, these ‘bridesmaid’ areas experience strong capital growth as other like-minded buyers flood the market for similar reasons.

Every city has examples of this type of growth, and relative to the popular, high-income driven areas, the bridesmaid locations still offer similar attributes.

The latest CoreLogic property price data reveals that its the cheapest suburbs driving the market now.

The lower quartile of the combined capital city market, which makes up the most affordable 25 per cent of dwellings, rose 2.7 per cent in the three months to August, compared to a 0.3 per cent lift across the upper quartile.

Blue chip suburb demographics

When it comes to investors, however, blue-chip suburbs need to be segmented and understood.

The tenant demographic (age, formation rates, employment type, lifestyle) and the overall rental demand is important to note.

Depending on the supply and demand ratios between houses and units, different patterns will be evident across the dwelling types in the area.

For example, if a blue chip, high land value area has an abundance of units, the higher income earners will likely target the larger homes, but the incomes of the unit inhabitants will contrast sharply.

Areas of over-supplied units could exhibit disappointing growth, particularly where floor areas are small and strata outgoings are high.

Rental demand doesn’t always correlate with owner-occupier demand either.

Locations with higher proportions of wealthy holiday home owners may not offer ideal properties that attract long term tenants.

The local demographic can be quite different to the ownership demographic, particularly in coastal areas.

Where incomes are insufficient to cover the owner’s expected rental income, financial stress can strike. Rental yields are particularly low in some high-profile, holiday locations for this reason.

Holding costs and cashflow are critical considerations for any investor. Targeting capital growth assets often comes with accepting lower rental yields. To compound this challenge, a property purchase that maximises a borrower’s servicing capacity (ability to borrow) can preclude them from further investing activity.

While we’d all like blue chip, capital growth outperformance, this type of investment isn’t always practical.

For investors, paving out a feasible strategy is key to playing the long game of buy and hold. Leaving borrowing capacity available for a subsequent purchase is the key to success for those who desire to have a multi-property portfolio.

For owner-occupiers, finding and securing a home which ticks all the must-have criteria can be the perfect reward for long, happy tenure.

And postcodes that are near ‘blue chip’ suburbs?... well, they too can become blue chip one day.

Gentrification is very real and often strikes when surrounding areas have proven to be popular for higher income households.