Adopting the scarcity and risk strategy

Adopting the scarcity and risk strategy

The ‘Scarcity’ strategy is an important component of any strategy to create long term wealth. Scarcity is driven by high demand and low supply for properties in highly desirable suburbs with high amenity value. Suburbs such as Point Piper, Bondi, Coogee, Mosman, Manly or Balmain in Sydney for example. 

Supply of property is limited in these areas due to a range of possible factors, for example natural geographical constraints such as proximity to the beach, harbour, lake or views. They are usually established areas with limited new stock and within close proximity of a major city. The areas also have excellent access to transport and amenities, meaning that owning a car is optional.

Houses that fit into this category usually have a land value component that is more valuable than the house itself. They are also usually valued above the median price of the relevant city due to the strong capital growth they have experienced in prior years. While these houses may seem expensive at the time, they will continue to experience strong capital growth in future and today’s price will soon seem cheap!

The Scarcity and Risk strategy has some similarities with the Capital Growth strategy, although the former has a long-term focus and aims to reduce investment risk by holding highly sought-after assets. They are therefore unlikely to have any significant fall in price and be more liquid investments than those in regional areas.

Investors must be careful to distinguish between scarce property near capital cities and lifestyle property that waxes and wanes between high demand in the growth part of the property cycle and low demand in the slump phase. Lifestyle properties typically have fantastic views near the coast or in the mountains and while they can show excellent returns in the boom phase, this is a higher risk strategy as it relies on timing the market.

The major limiting factor to the Scarcity and Risk strategy is the entry price. It is therefore most useful for established households that have already generated some equity in their property portfolio and can use this to leverage into these higher priced areas with scarce supply. They can then hold these properties until their retirement when they may require additional spending money.

The strategy is also useful for households with higher incomes to service the required loan. The expenses on investment properties can also be used to reduce the household’s tax bill via negative gearing as yields are usually quite low due in these areas due to the consistent strong capital growth they have experienced.

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To find the right suburbs for the scarcity strategy – follow the owner-occupiers with high disposable incomes. This will generally lead you on the right track. The scarcity strategy works extremely well in suburbs that have limited scope for redevelopment and strong restrictions on high density. Investors need to looks for properties in these areas that have lots of elements that are unique.  For example:

  • 4 bedroom townhouses with double parking in the Inner West (where parking is so hard)
  • 3 bedroom units with ground floor access (mobility or pet requirements)
  • Units with large balconies, separate study nooks, large storage areas
  • Houses with flat backyards for kids to play
  • Other features that both tenants and owner occupiers desire.

The scarcity strategy is one of the few strategies that fits the rule of “set and forget” – well you can’t totally forget about any investment, but it’s a long term and very rewarding strategy for wealth creation. 

In my next article, I will outline some more of the quantifiable factors that investors can look for implementing this strategy.

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