My School, my property premium

PORTFOLIO POINT: High scores on the My School website could add a premium to surrounding property values.

Sometimes government initiatives have unexpected flow-on effects. Take the federal government’s new My School website: its initial media coverage focused on technical issues and comments from principals and unions; now it might be causing a small revolution in the property market.

It is well recognised in property circles that there is a direct link between the prestige and performance of schools and the values of surrounding properties. Perception here is the key. So the questions for investors are: How will greater transparency from the My School website change perceptions of schools’ performance? And if those perceptions change, what will that do to surrounding property values?

There are a couple of points to bear in mind. Australia’s top schools are often located in neighbourhoods that also have all the other attributes of high-performance investment areas, such as proximity to employment, shopping and entertainment precincts. This can make it difficult to isolate the effect of sought-after schools from other positive traits of a particular location.

Second, it is difficult to determine how much of a school’s educational standing is determined by its average TER score alone, and how much is social prestige drawn from history, fame and old students’ network. A school’s social prestige may be every bit as valued by parents as its rating on the My School website or a high TER score.

What we do know is that when government schools with a prestigious reputation recruit their students from within a particular catchment area it has a quantifiable affect on surrounding property values. In Melbourne, houses within the school zones of McKinnon High and Balwyn High typically command a premium that local agents calculate to be about $65,000.

But it is not just agents who study the “good school” phenomenon.

Andrew Leigh from ANU’s Research School of Social Sciences looked at the relationship between house prices and school quality. Data drawn from the ACT in 2007 found that parents were willing to pay an extra 3.5%, or $13,000, for their home if it meant they could send their children to a government school with a five point higher average for its year 12 tertiary entrance score. This mirrors the results of British and US studies. "If you want a house on the right side of the boundary line, you'll have to pay for it," Leigh says, “and that suggests improving outcomes in particular schools could raise local house prices.”

Jellis Craig director Scott Patterson works within Melbourne’s “school belt”, a concentration of 44 private schools in the inner suburban municipalities of Boroondara and Stonnington. He says good schools are the single biggest driving force behind families moving to these locations, which is why he believes the My School website will have a strong effect on values.

“To be able to instantaneously check and get a clearer picture on a school’s rating will certainly be a factor in buying choices,” Patterson says. He believes that the “good school” factor is so strong that as new schools build their reputation outside the established school belt, values are likely to improve in the suburbs that surround them.

Gavin Hegney of Hegney Property Group in Perth agrees. “The better schools certainly bestow a premium value in the West Australian capital,” he says. Perth’s Rossmoyne Senior High School, a strict adherent to school zoning, is often used in real estate advertising. “If a property lies within the Rossmoyne’s zone it is certainly more marketable and attracts premiums of up to 10%. This equates to $70,000 more than properties close by, but outside the zone,” he says.

Churchlands State High School was Perth’s top-rated school last year for academic achievement – scoring better than many exclusive private schools. Hegney says this will almost certainly impact on buyers’ choices of homes in future. “The My School website will focus buyers who are concerned about their child's education toward the better performing school zones and if these schools consistently perform well, then it follows that the surrounding suburbs will gain buyer preference, higher prices and capital growth rates. Similarly, schools that fail to perform consistently well will see a movement away from there and this may affect the relative values for homes in the surrounding suburbs.” Hegney says greater transparency in school performance should be looked at this way: “A good cafe adds value, a good local shop adds value and a good school adds value.”

In Sydney, sought-after schools, including Knox, Barker and Pymble Ladies College, underpin much of the strength of the north shore market. Carla Giugni Poletto, principal of Raine & Horne in Turramurra, says: “Proximity to a good school is very high on a Sydney parent’s wish list. On the north shore, the need to be near perceived high-performing school drives sales and often rentals.”

However, the bottom line for investors is not that one-dimensional. While great schools can contribute to a location’s superior property values, the location needs to have the other attributes, which create high capital growth present as well. It’s very rare to see an area achieve and maintain accelerated demand from home buyers, tenants and investors due to one positive factor alone.

The My School website will exert some influence but the reliability of its data is an unknown factor, whatever its creators say about how important and helpful it is. Investors should be wary of using this tool to direct their investment decisions. Nothing beats local knowledge and investing successfully is about pounding the pavement, not sitting in your ergonomic chair surfing the web for school scores or other data.

If you do find a precinct with a highly positive mix of services, infrastructure and local amenity and an accelerating performance by a local school, start doing your homework. You may just have found the property dux of the future.

Property Q&A

This week:

• A unit in Sydney’s east.
• Foreign buyers.
• A house in Sydney’s west.
• The population factor.

Right place, right time

My husband and I are interested in buying a unit in Sydney for $500,000–650,000. Is it a good time to buy in Coogee/Bronte/Bondi area?

The simple answer to your question is, yes, it’s a good time to buy an investment-grade property, but it’s never a good time to invest in a property that doesn’t have all the right attributes.

Most investors know intuitively that the property market works in a cycle. The property investment cycle has four distinct phases where capital values move at different speeds: correction, recovery, stabilisation and acceleration to a peak. This pattern is easy to recognise after the event, but even very experienced property analysts find it difficult to predict when the start of the next phase will be, and the length and strength of each phase.

Despite its unpredictable timing, each year some investors think they have pinpointed an upcoming change in the property investment cycle and make decisions based on their hunch, usually waiting for the “inevitable correction” they’re hearing about in the media. But astute investors realise that the market inevitably moves ahead of the last peak, even after the worst correction. These investors put their energies into ensuring they buy the right property instead of trying to predict the near future.

The eastern suburbs of Sydney combine many of the right location factors for property investors, particularly good public transport and access to jobs and the city, good schools, loads of interesting shops, restaurants and nightlife venues and some spectacular beaches as well. If you are going to be investing with the budget you outlined, you should look for a two-bedroom apartment in an established low-rise block in a quiet architecturally consistent streetscape. I would concentrate your search to streets that are no more than 15–20 minutes’ walk from either the Bondi Junction train station or some of the more direct buses services to the city.

Rules of engagement

I was concerned to hear on radio recently that a surprising proportion of property buyers are overseas residents purchasing for their children who are studying here. Is this true? I thought there were laws prohibiting foreigners from purchasing Australian residential property?

In March 2009 the federal government relaxed some of the rules restricting foreign citizens from purchasing established property, what the legislation calls “second-hand real estate”. Foreign citizens are now able to buy established residential property if they have residency for as little as 12 months.

This change in property ownership for non-residents has opened the door for these buyers and there is evidence that nationals from China and Taiwan are buying large family houses, particularly in Melbourne’s “school belt”, and high-rise apartments in Sydney, Brisbane and Melbourne.

These buyers are essentially “land banking”: buying Australian property to hedge against the economic uncertainties and risks inherent in earning a middle-class living in China. These risks include uncertain treatment of business interests by bureaucrats, uncertain property laws in China and the potential for the yuan to be devalued, which could also devalue their wealth. It’s completely understandable that foreign nationals in this situation would avail themselves of the opportunity to invest in Australian property.

About half the world’s nations restrict property purchases by foreigners and the other half allow anyone to purchase property in their country. There’s little real evidence that it affects the property market in one way or another and, to date, I have seen little evidence that overseas buyers are pushing up prices in Australia, they just aren’t appearing in those sorts of numbers yet.

New kid on the block

I'm very new to investing in property and my budget is tight, something like $300,000. After initial research, I have chosen to look at houses in western Sydney, in particular a two-bedroom flat in St Marys or Lakemba. What’s your view of growth potential in these two areas?

Congratulations on starting your new journey! To be frank, though, you will probably need a budget of about $400,000 to invest properly in the Sydney market.

Your goal here is to find a property in the best possible location, a property situated in a high-growth, high land value area. You should look for the property in these types of areas that ticks as many of the “good for investment” boxes as possible, to give you the best outcomes from a rising market and the best protection in a slowing market.

This approach will favour a one-bedroom apartment in a great location over a three-bedroom house in a compromised location, as the underlying demand for the right property in a high-demand location will see its capital growth rate outstrip that of a house in a compromised location, delivering a better investment return.

St Marys, located well out in Sydney’s west, is not an ideal location for property investment. This area saw prices first stall and actually go backwards between 2003 and 2007, mainly because travelling to the rest of Sydney from here is an ordeal. Lakemba is better positioned but I would still consider Lakemba to be outside Sydney’s prime investment areas.

If you are able to finance a budget of $400,000, then you will be able to target investment areas further towards Sydney’s centre, starting at Campsie and Ashfield moving east. For $400,000, you should be able to buy a top-notch one-bedroom apartment in the right location. But don’t try and buy an ordinary apartment for less, as this won’t deliver the investment results you need.

Moving target

We would like to invest in a house. Should we first target suburbs with the fastest-growing population?

Finding the right location is a systematic process and population growth is one of the factors you can use to assess a location, but it’s not the only one.

First and foremost, a location’s growth factor is driven by its proximity to all those things that make metropolitan living enjoyable and highly practical. The right locations have access to public transport and major roads, which make it easy to travel to other parts of the metropolitan. Other factors are proximity to top schools, universities and interesting shops, restaurants and recreation areas.

These factors create demand from all types of buyers and tenants and when this demand is met by insufficient supply of properties, you have a recipe for above market average growth. Interestingly enough, this means that many high demand suburbs have population growth slightly above those of neighbouring areas.

But the highest population growth areas are confined to areas almost exclusively in the outer suburbs and some coastal regions; Coffs Harbour in NSW is a good example. But these areas are almost always poor locations for property investment. Why? Simply because these areas have lots of new development activity and the increasing supply meets the needs of the new population.

The best areas for you to target for property investment are those with multi-faceted demand and limited supply of new properties. Don’t focus on the issues of population growth at the expense of the key drivers of demand and growth.

Monique Wakelin is co-founder of Wakelin Property Advisory, a Melbourne-based independent property acquisition and advisory company, and co-author of Streets Ahead: How to Make Money from Residential Property.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Monique Wakelin? Send an email to monique@eurekareport.com.au.