How to identify a gentrifying area and capitalise on its growth

One of the significant changes in the way we live in Australia over the last few decades is the gentrification of our inner suburbs.

When I was young, housing in the inner suburbs was cheap, home to the working class and migrants, and full of single fronted terraces, pubs and factories.

But within a few decades, the process of gentrification saw these ugly-duckling suburbs transformed into graceful swans as higher income households displaced blue-collar workers. The character of these neighbourhoods changed, resulting in a significant increase in local property values.

What caused this gentrification?

One of the main factors behind this revitalisation was the exodus of manufacturing to the suburbs driven, in part, by cheaper transport and better roads.

At the same time, many migrant workers departed to the suburbs to live in detached houses with front and back yards.

Interestingly, at the same time, our society started to experience higher education levels which necessitated more people being closer to campuses, that were usually in or near the CBD.

Similarly, the diversity of serviced-based jobs located in the CBD, the increasing number of women in the workforce, declining household sizes and lifestyle all made living in those smaller properties near the city more attractive to a larger cohort of potential buyers.

Of course, it should come as no surprise that this increasing demand led to house prices in the inner-ring rising much faster than in the outer suburbs.

Identifying gentrification

Gentrification is a change in the fortunes of a suburb as it is discovered by a higher-income demographic which slowly pushes out the lower-income residents.

These new, more affluent residents invest time and money improving their new neighbourhood, pushing up prices and rents.

As these changes take place, the area loses its stigma and more individuals on higher wages move in, putting further upward pressure on values.

Looking back, one of the significant transformations of our inner suburbs was that household incomes grew significantly as residents were better educated and had higher-paying jobs.

Two incomes in a household instead of one meant that people had more money to spend on housing — and spend it they did!

Therefore, one of the keys to identifying a gentrifying location, where property values will increase above average, is to find suburbs where incomes are growing, increasing people’s ability to afford and pay higher prices for property.

Digging into the Census data shows that while wage growth has been slow over the last few years, there are some suburbs where wages have grown 40-50% more than the Victorian average.

You’re likely to find these suburbs are home to a number of other identifying features of gentrification too — such as top-end cafes or restaurants and higher-end stores where the wealthier population can spend their money, because that’s what they generally do.

The secret to identifying gentrification, therefore, involves researching locations where a number of economic factors are changing at the same time.

To make things clear … just because a suburb has cheap properties doesn’t mean it’s destined to become the next growth area.

Some suburbs are inexpensive for a reason and won’t improve because of various socio-economic factors.

There might be too much industry in the area, a lot of public housing or possibly a crime, gang or drug problem. Or maybe they are outlying suburbs with poor infrastructure, facilities or public transport.

On the other hand, the type of suburb to look for is one that is relatively cheap today but has the potential for future capital growth. Some of the major drivers of capital growth are:

• proximity to the city or the water;
• adjoining a more expensive neighbourhood so it can benefit from the ripple effect;
• desirable amenities such as good public transport, a large shopping centre, or within the catchment of a highly prized public school;
• older attractive houses with character features, that are ready to be renovated; and
• areas where governments are investing in local infrastructure or beautification programs.

So what do you look for in a suburb?

Some of the steps you can take to find a suburb that is improving is to go for a drive and then a walk.

You’ll know a soon-to-be-gentrified suburb when you see it because you’ll find evidence that people with money are moving in. Some giveaways include:

• people spending large amounts of money renovating or extending their homes;
• white (the new black) SUV’s parked in the driveways rather than old Toyota Camry’s or Holden Commodores; and
• the nature of the shops will be changing — the gyms are offering pilates, the cafés sell cold press coffee, and the deli’s serve goat’s cheese pizza.

As a property investor, if you can pick an area going through gentrification, one that’s shifting from dreary to in demand, you can benefit from its accelerated growth.

And the good news is that you don’t have to get your timing perfect — the gentrification process lasts a number of decades.

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