Does size matter? Should you buy a small block of land in a great location or a bigger block further out? (Ep.125)

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In this week’s episode, Dave, Cate and Pete take you through:

The trap of bigger equals better. In this week’s episode the trio tackle the misconception that when it comes to capital growth, bigger land size is better. Where you consider properties on the same street with the same orientation, the bigger block of land will be valued higher (provided there are no encumbrances or other physical detractors). But where you are making a decision between a bigger block of land in one location and smaller block of land in a different location, people can make a lot of mistakes by chasing the bigger land.
Where did the idea of bigger is better originate? The great Australian dream of having a quarter acre block, with a hills hoist in the backyard and mowing the lawn on Sundays was the aspirational model for family living. That is not necessarily the case now, where suburbs close to the city where the not-so wealthy historically lived in closer confines are now highly sought after. Magazines and seminars have also created hype around bigger land and development potential, creating the misconception that people can get rich if they subdivide the land.
Land value, not land size! The trio discuss the importance of considering the land value, rather than the land size. Location is particularly important here and will have a significant impact on the land value. A smaller block of land in a location closer to the city with have a higher land value than a bigger block of land on the fringes. Think back to Christmas day with the kids, who would much prefer a giant Santa sack filled with gifts from the reject shop because there’s more of it, but the smaller Tiffany box is much more valuable!
When is the land size too small? If the size of the land is too unworkable or quirky, then it may not have the same capital growth prospects or value as the land around it. If you are planning a development or renovation, then the land size does matter and should be considered carefully along with other planning regulations. The trio discuss the dangers of targeting blocks with future development potential if you are not serious about completing a development now.
Orientation can impact land value. The Property Buyer shares her tips on what orientation to target to have optimised sunlight throughout the day. However, a clever dwelling design can maximise sunlight, even if the property doesn’t have the ideal orientation.
Corner blocks – blessing or curse? Depending on your plans for the property, a corner block can be a positive or a negative. The feeling of exposure and bedrooms against footpaths are generally a reason why people will give corner blocks a wide birth when purchasing, but they can be great development opportunities (if you are serious about being a developer).
How the land to asset ratio drives capital growth. Many people get themselves into trouble when they are looking for capital growth and buy brand new. In this scenario, the majority of the price tag is often in the dwelling component of the property, (which is depreciating) and not the land, (which is appreciating). Similarly, you can go too far in the opposite direction and purchase a property where the land to asset ratio is really high, but because the dwelling is uninhabitable or compromised, the costs of rectifying the dwelling will eat into your yield. Understanding the land value per square metre is important here to work out the land to asset ratio. Once you have that, you can focus on properties with an optimal land to asset ratio rather than land size.

Resources

Show notes

Where did the idea of bigger equals better originate?
Assumption that having more land is better, when it comes to capital growth.
If we are talking about the same street, same orientation, one is bigger and one is smaller, the valuation will come in higher for the bigger block (provided there are no encumbrances). But when you’re talking about the same budget in two different areas, people can make a lot of mistakes by chasing big.
Great Australian dream – quarter acre block with the hills hoist in the backyard and you mowed the lawn on Sunday, that was the way of the world and it was aspirational.
The beautiful terraces we get excited about now, close to the city, was where the not so wealthy lived and in close confines.
Magazines and seminars, people think they can get rich if they subdivide the land.
Location is particularly important – smaller block of land in a location closer to the city, than a large block of land closer to the fringe, where there are heaps of houses exactly like yours, and then next year there will be a further 500 houses just like yours.
Land value per square metre
You may just think that the bigger land is better, but it does come down to the value of the land.
It’s like kids on Xmas day, they don’t want a little tiffany box, they’d prefer the giant Santa sack filled with things from the reject shop because there’s a lot of it.
If the land is too small, too unworkable or too quirky, then it may not have the same capital growth prospects or value as the land around it.
It’s like saying if you have $1M, should you buy one proeprty or two? If you’re buying two, your probably going for units which have less capital growth prospects.
Just because a block is twice as big, doesn’t mean it’s worth twice as much.
When land size IS important
If you’re planning on doing something with the land, the size does matter.
Orientation – north facing backyard is best as you’ll have optimised sunlight throughout the day. Then east, then West and then south.
It’s not a detriment to your plans if you haven’t got a north facing backyard, if you have a clever design that can capture the sunlight.
Corner block vs non-corner block
Set backs, you lose usable space, the block next door may be able to build to the boundary.
People don’t love the feeling of exposure, depends on the dwelling and fence heights – placement of bedroom windows. Will you have a sound sleep if your window is up against a foot path, which will have noise and foot traffic.
A corner block can be valuable where you have access to the backyard or a cross over, providing vehicle access. If council will let you have a cross over, you may be able to put a roller door in and drive straight in.
If it does have development potential, you could save driveway space and not have any shared spaces.
A lot of people assume a corner block is always a good thing, but unless you have plans to develop and can get more bang for your buck, it can be a negative.
Smaller blocks in inner-ring locations are the norm
A lot of new arrivals who are not comfortable or confident putting money into an old property on a small bit of land. There is a cultural difference in opinions around what is desirable and people who don’t want to be restricted by overlays.
Unless you genuinely want to be a developer, there is little point in targeting a property that has development potential, if you’re thinking about developing in 20 years time. You can’t assume that it will be suitable for development years down the track.
If you’re interested in development, buy it, get your planning approvals now (they only last for 12 months), but sooner or later you need to act on the approval or it will lapse.
If you have a block that is bigger than everyone elses, or you can buy next door or behind, that is where you could create greater opportunity. Unless you have that unique opportunity, buying a big block for the sake of it isn’t creating anything different or special that will outperform from a development perspective.
House and land, outer ring fringe and land banking
You can get yourself into trouble if you’re looking for capital growth and you buy brand new, the land to asset ratio will not be desirable.
The land to asset ratio – even though you’re buying a smaller block of land, the land to asset ratio could be higher depending on the land value per square metre vs the dwelling and capital improvements.
If you think about land value, the size of the land is not as important.
In fringe suburbs or land releases, the land value is too low. But you can also go too far the other way and purchase too much land with a problematic dwelling that will reduce your yield or be more trouble than it’s worth.

Gold Nuggets

Cate Bakos – The Property Buyer’s Golden nugget: investors who are looking at optimising their capital growth outcomes and who are working to a certain budget and compromising on the location or the quality of the site. It’s a common mistake. Do you want to see a huge present under the Christmas tree or the small box?

Peter Koulizos – The Property Professor’s Golden nugget: when looking at the value of a particular block, it’s not just the size, it’s the frontage as well. You could have two similar houses next door to each other. Generally speaking the house with the more frontage has a higher value because there is more development potential. When you are valuing land, it’s the size, frontage, orientation, corner, overlays, other restrictions because of flooding or flight path?

Market Updates

Spotting the suburbs across Australia that are suffering rental losses Our good friend Mike Mortlock from MCG Quantity Surveyors has instituted a rental losses index, which is a direct reflection of vacancy rates. A fantastic tool for any investor to add to their toolkit for identifying whether a location is a good area to invest in. The rental losses index has put a spotlight on university precincts in Melbourne in particular, but also Tarneit where brand new house and land packages dominate. Check out Cate’s article for more insights.
Lowest performing suburbs were on the fringe. CoreLogic data reveals that the lowest performing suburbs in terms of capital growth were on the outskirts of capital cities. The largest declines in unit values have been in the outer fringe locations, rather than inner city high rise precincts, where higher density housing has historically been less common and therefore in is less demand. The oversupply of house and land packages has also dampened growth for detached houses.
The gap between houses and units is the greatest it’s ever been. House prices have surged by 28.9% in the 12 months to September 2021, which is more than double the 11.6% gain in unit values for the same period. CoreLogic data reveals the gap in Sydney to be 59% between median house price compared with median apartments, while in Melbourne the gap is 55.3%. These kind of stats would often scare people off, but there is a rising opportunity here in the unit market, as growth is likely to catch up to houses mainly because of affordability.
Is now a good time to sell? There is so much exuberance in the market, that now could be a great time to offload B-grade properties, which will have subdued capital growth in softer markets.