Understanding Price Premium and Growth Premium in Property Investments
Updated: Sep 24
When buying property, especially in crowded cities where space is tight, buyers have many choices. One important thing to know is the difference between a price premium and a growth premium. Both involve the cost of a property, but they mean different things for long-term investment.
Price Premium vs. Growth Premium: A price premium is the extra money people are willing to pay for a property because of its location, features, and perceived value. A growth premium, on the other hand, refers to how much the property's value might increase over time. Understanding these differences is important as cities get more crowded and new housing options, like 3 & 4 bedroom townhouses, become more common.
Infill Developments and Price Point: Infill developments, especially those with townhouses, are popular because they offer housing in areas where there isn't much space left. These properties are often priced at a level that attracts both investors and homebuyers. But it's important to remember that this price doesn't always match the value of the land they’re built on.
Developers price their properties based on what the market demands, aiming to make a profit. While these new developments might seem like a good deal at first, buyers should consider that without a significant land component, the property's value might not grow much in the long run.
The Lack of Growth Premium: Just because a property has a price premium doesn't mean it will have a growth premium. New developments might be appealing because of their modern features and comfort, but over time, as these features become less new, the property’s value might not increase much.
Investment Considerations: For investors, putting money into properties with a high price premium but no growth premium might not be the best choice. These properties might offer some short-term gains, but their value might not grow as much as older, more established properties in the same area.
Homebuyer Awareness: People looking to buy a home, especially in popular suburbs, should know that properties without a growth premium might not increase in value as much as older homes. While these new homes can be great for moving in right away, their long-term value might not rise as quickly as other homes in the area.
As cities become more crowded, the property market offers a wide range of choices. Knowing the difference between price premium and growth premium is key to making smart decisions. While new developments like townhouses can be appealing, buyers should carefully think about the long-term investment potential. Making informed choices today can lead to better outcomes in the future.
We discussed this topic in a recent episode of The Property Files.
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