What is Urban Gentrification and How Does It Work?

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You’ve heard the term gentrification, and you may even have an understanding of what it means.

Cityscape With Buildings And Skyscrapers, Small Private Suburban Houses.But for investors, gentrification takes on a whole new meaning – as it actually represents a powerful opportunity to increase both your property returns in the short term, and your overall real estate wealth in the long term.

Let me explain how.

I’ve discussed many times the fact that there is no such thing as one property market in Australia – instead, there are multiple property markets, each with their own specific drivers and fundamentals.

While each state has its own property cycle, suburbs have their own cycles as well.

Yes, there are suburbs where something different is going on.

What is gentrification in real estate?

The suburbs are gentrifying means that they are going through a period of improvement.

Many people misunderstand what gentrification really is.

Getting an upgrade in infrastructure, or a new Coles supermarket or Bunnings or some new shops in the area is not gentrification.

While this may improve the suburb, gentrification is something else altogether: it is when more affluent people move into the area.

As an investor and a Property Strategist, I look for areas that are going through gentrification because these suburbs have their own cycle of growth independent of what’s happening in the broader market.

In general, capital growth in these areas will outperform the averages.

These areas go from and ugly ducklings to a beautiful swan and therefore the homes in these suburbs increase in capital value faster than the average.

As a property investor, if you can identify an area at the earlier stages of gentrification and buy while prices are more affordable – you stand to benefit from ongoing capital growth.

How (and why) does gentrification happen?

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

When I was young, housing in the inner suburbs was cheap as home to the working class and migrants.

These inner suburbs teamed with single-fronted terraces, pubs and factories.

Gentrification1But 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; changing the character of these neighbourhoods and 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 around the same time, our society started to experience higher education levels, which necessitated more people being closer to campuses.

These were usually in or near the CBD, and so being close to the city became more desirable.

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

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.

How to identify a suburb going through 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.

The word gentrification comes from the old English Gentry where more affluent people move into an area.

Gentrification2This usually occurs where working-class people, tenants and migrants move out as the land becomes too valuable and more affluent people move in renovating the old homes and improving the surrounding shops.

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

So how do you spot a suburb that is in the process of going through this metamorphosis?

One unusual and unexpected property research strategy to help in this regard might be through look at the dogs walking around the neighbourhood.

Yes, you read that correctly – I am suggesting that you look to the dog breeds for a sneaky clue!

I recently read this fantastic article about the three stages of gentrification, according to dog breed and I tell you what – they’re not wrong.

It might be a light-hearted spin on gentrification, but there’s a lot of truth in humour!

In the article, the writer shares:

There used to be two types of dog prevalent hereabouts: small, short-haired yappy things that belonged to old anglo-Aussies; and small, fluffy yappy things that belonged to old Greeks and Italians. You only knew these dogs existed when they ran up to a front gate and yapped at you (unless you lived next door to one, in which case you heard them yapping all the time).

One of the first signs of gentrification was the appearance of blue heelers riding shotgun in beaten-up utes driven by sculptors freshly graduated from art school. That was a long time ago now; the sculptors have grown up and moved to workshops in the outer-urban factory belt, where their cattle dogs chase tiger snakes in the outer-urban creek valleys.

The second canine wave was an influx of the dogs young couples buy just before they have kids: usually some kind of whatever-doodle: a practice dog for people who want to learn how to take responsibility for another creature before an actual human child’s life depends on them.

“The latest wave is a direct result of the property developers’ vision: they are the dogs who live in the dog box apartments (sorry), companion animals for young singles who can probably barely take care of themselves.

Of course, I’m being a little tongue in cheek here and in a few moments, I’ll share a more strategic approach to help you identify a gentrifying suburb (along with an example).

Commercial PropertyBut first, a note on the unintended impact that comes about when suburbs go through this transformation.

The process of gentrification and rising prices has in the past locked a generation of younger people out of inner-city housing, and it is likely that the gap will only widen over the years.

When a suburb is gentrifying and an area loses its stigma, and more individuals on higher wages move in, this puts further upward pressure on property values and it makes homes in the area even less affordable to its previous residents.

I’ll leave a discussion of the remedy for this to the politicians and town planners.

Homeowners and landlords take a different approach to each other and have different outcomes in mind, so the conclusion for property investors here is that if you want to own the type of property that will outperform the averages, the inner and middle-ring suburbs are the place to be.

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!

Example of gentrification: Redfern, NSW

Gentrification has occurred in the old working-class inner and port suburbs of many of our capital cities in the 1990s and 2000s: think of Port Melbourne and St Kilda in Melbourne, and Balmain and Redfern in Sydney.

A great example of a recent gentrifying suburb is Redfern in Sydney’s inner city. Just twenty years ago, Redfern was considered a seedy neighbourhood.

Crime rates were higher, unemployment levels amongst local residents were higher, and it was generally considered to be a “dodgy” neighbourhood.

Houses Units
Median property value 2020 $1.5m $920,000
Median rental return

2020

$800 $600
Median value

2010

$547,000 $450,000
Capital growth in 10 years

 

273% 204%

Source: CoreLogic; Redwatch

What happened between 2010 and 2020?

Well, in reality, the process of gentrification started earlier – perhaps a decade earlier.

As the suburb’s proximity to the CBD and all of the appealing local amenities drew a more affluent crowd to live there, the dynamics of the suburb evolved.

The people moving in had better jobs, higher incomes and more employment stability.

Stats from the Bureau of Crime Statistics and Research released in 2010 revealed that in the two years to September 2009:

  • Robbery without a weapon fell 27.6 per cent;
  • Robbery with a weapon, not a firearm fell 48.8 per cent;
  • Motor vehicle theft fell 29.6 per cent; and
  • Steal from a person fell 36.8 per cent.

Overall, the suburb was on its way up – and those who bought in the area during that gentrifying period benefitted many times over.

So what is the key to identifying a gentrifying location, one where property values will increase above average?

First, you need 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 20-30% more than the State’s average.

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

Not surprisingly, household sizes tend to be smaller in these locations with more interest from empty nesters, young professionals and DINKs (Double Income, No Kids).

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, that 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 social or public housing or possibly an ongoing crime, gang or drug problem.

Or maybe they are outlying suburbs with poor infrastructure, facilities or public transport, and little prospect for change.

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