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The Deal vs. The Location

“You make money when you buy.”This is a common saying in the real estate industry, meaning the price you pay for a property affects a lot the profit you’ll make. However, it doesn’t mean the better deal (cheaper/higher vendor discount) the more profit (capital growth).We’re going to dive into data and find out why.

“You make money when you buy.”

This is a common saying in the real estate industry, meaning the price you pay for a property affects a lot the profit you’ll make. However, it doesn’t mean the better deal (cheaper/higher vendor discount) the more profit (capital growth).

We’re going to dive into data and find out why.


Let’s assume it’s all about the deal.

There are two groups of regions listed below. If you were to choose one region in each group to buy an investment property in the listed year, how would you choose?

If one believed that a good deal at purchase secures good growth, they would probably choose Gippsland – East in Group A, and Upper Hunter in Group B, as they were slightly cheaper and offered higher vendor discount, which seemed to be “better deals”.

Image of 628b2376c4b954bc3ff270d6 1.%20Table%20 %204%20Regions

However, how have these regions grown over time? Let’s check data.

Image of 628b23b65825b810a564926e 2.%20Gippsland%20vs%20Ballarat%20Price
Image of 628b23c87475d39631c8ad38 3.%20Upper%20Hunter%20vs%20Lower%20Hunter%20Price

The regions with higher median price and lower vendor discount have performed better than the regions with “better deals”.

This is because strong growth doesn’t happen to a low initial price, but high market pressure. In the above groups, the higher-priced regions all enjoyed higher market pressure at the beginning.

We use inventory (the ratio of for-sale listing numbers to the sale volume) as an indicator of market pressure – the lower inventory, the higher pressure. The below charts show the inventory trends of the six regions over time.

Image of 628b23ffc4b95426bcf2e50b 4.%20Gippsland%20vs%20Ballarat%20Inventory

Ballarat’s inventory has always been much lower than Gippsland – East’s until 2021. The higher market pressure has led to its faster growth.

Image of 628b248e00394d9e5d0f76a0 5.%20Upper%20Hunter%20vs%20Lower%20Hunter%20Inventory

Although Lower Hunter’s inventory has exceeded Upper Hunter’s in 2019, its consistently high market pressure still helped it grow better than Upper Hunter.

A negative correlation exists between vendor discount and price growth.

The above regions are not isolated cases. Data shows that high vendor discount is more likely to indicate lower market pressure, which would lead to slower price growth.

In the short-term…

In the below scatterplot, each dot stands for an Australian SA3. Their positions show their vendor discount rate in March 2021 and the median house price growth in the following 12 months. We can see a downward trend of price growth rate as the vendor discount rate increases.

Image of 628b24e30f29ef3e0c756e0f 6.%20Vendor%20Discount%20vs%201 Y%20Growth

To further simplify it, we group the SA3s according to their vendor discount rates and calculate the average growth rate of each group. The result is shown in the blow column chart, where the downward trend is demonstrated as well.

Image of 628b2509d19bb33309b0eca6 7.%20Vendor%20Discount%20Group%20vs%201 Y%20Average%20Growth

In the long-term…

Similarly, let’s examine the correlation between vendor discount and price growth over a 5-year period. The below two charts show the price growth distribution of SA3s & SA3 groups of different vendor discount rates.

Image of 628b253a98e71bda4ebad945 8.%20Vendor%20Discount%20vs%205 Y%20Growth

Image of 628b255b4bc69e68c2046049 9.%20Vendor%20Discount%20Group%20vs%205 Y%20Average%20Growth

The negative correlation still exists but not as significant as in the short-term scenario, especially when the initial vendor discount is lower than 7%. This is understandable as we are comparing a snapshot (vendor discount) and a 5-year trend (price growth) which was influenced by many factors along the way.

 At InvestorKit, vendor discount is only one of the indicators we take into account when analysing market trends. As you can see, the overall market pressure is more critical in identifying fast-growing hotspots than merely chasing the best deals and getting bargains.

Chasing deals is a common mistake many property investors get trapped in their journeys. Ultimately, if your focus is long-term (15-20 years+) holding, you may see strong growth somewhere along the journey as the market moves around its growth cycle. However, the opportunity cost would be the 3-5 years of fast growth following your purchase to quickly scale your portfolio.

 Here at InvestorKit buyer’s agency, we focus on identifying markets which display high pressure so that our clients step right into the markets’ fast-growing phase and build their portfolio faster. Interested in our strategy? Click here and request your 45-min FREE no-obligation consultation today!

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