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Australian Property Investor

August Issue 2008 - Petrol prices to reshape urban investment

Rising prices at the pump will curtail Australia's love affair with the family car, affecting property values in the suburbs that rely on it, writes Mark Armstrong.

Australia's suburban sprawl was built off the back of the family car. In the post-war years, as mass production put motor vehicle prices within reach of ordinary Australians, people didn't have to stay in inner city areas where public transport provided access to workplaces and social networks. Instead, they could move to outlying areas where land was cheap. Here, they could afford larger homes on larger blocks. And when they needed to go to work or see family and friends, all they had to do was get in the car and drive.

Now, the car-dependent suburban revolution is set to swing back in the other direction. Despite faint promises from both sides of federal Parliament to stem spiralling petrol prices, the reality is that they can do little to intervene in a free market commodity controlled by the global giant OPEC. And even if OPEC increases supply, rising demand from mass population bases with growing economies like India and China will see to it that oil prices continue to rise.

With Australian consumers at the mercy of global markets, many homeowners will be increasingly unable to afford the cost of commuting long distances from the outer suburbs. Today's bright, shiny new housing developments-the vast majority of which have been built some distance away from public transport corridors-will experience a marked decline in demand.

Property values in these areas are already volatile. Most people who buy there are first-time homeowners, so demand fluctuates along with interest rate movements. An ongoing decline in demand due to petrol price hikes will further destabilise property values. Existing homeowners will find it harder to sell their properties, and when they do, sale prices will be subdued. More owners could find themselves in a state of 'negative equity'; that is, they will owe more on their mortgage than their properties are worth.

This desertion of the outer suburbs will also have an impact on the socio-economic map of Australia's large cities. As fewer middle-income first homebuyers shun outlying areas because of the lack of public transport, they will be replaced by people from lower socio-economic backgrounds who are forced to live there because property prices are much cheaper. The lack of infrastructure will limit the options of these residents, putting them at a further disadvantage compared with other Australians.

On the flipside of this grim prognosis for the outer suburbs lies a positive outlook for investors. As more homebuyers spurn outlying areas, we will see the emergence of new investment opportunities centred around today's public transport hubs located along the suburban corridors of major capital cities. In keeping with rising demand, developers will build or renew infrastructure around these hubs, including educational and medical facilities, professional services, shops, cafés and cinemas. This will create the characteristics of long-term demand and capital growth potential.

If you're among the many investors unable to afford the high buy-in price and low rental returns of today's 'blue ribbon' areas, the emerging markets around public transport hubs could provide an affordable alternative. The entry level is still low relative to blue ribbon areas, and rental returns are comparatively high. By purchasing in these areas before the great bulk of investors cotton on, you may not only benefit from lower entry and holding costs, but experience a full market cycle of capital growth-putting you in a strong position to leverage off the equity for further investment or lifestyle opportunities.

Mark Armstrong is a director of Property Planning Australia, propertyplanning.com.au