Finding a scarce product

Back in 2019, I blogged about a lovely couple who were struggling to find a well-located, nicely renovated, four-bedroom home in Yarraville. They said they’d been searching for many months and the right house just hadn’t come along.

I explained to them, “Many inner-ring suburbs in Melbourne, particularly in the inner-north and inner-west are problematic for people who are searching for a perfectly renovated, four-bedroom home. Firstly, we usually find that families who command four bedrooms also want a second living area, an ensuite and a yard. That translates to a big block.”

“These suburbs were poor back when they were subdivided.”

We just didn’t make the blocks that big back at the turn of the century in these locations. They were working class suburbs back then, and most of the local families in 1900 lived in little single-fronted, Victorian or Edwardian cottages, most of which only had two bedrooms on offer. These areas were not a bustling coffee-precinct boasting strong household incomes back then.

Winding the clock forward to 2020, this problem has been amplified.

Firstly, a quest for a four bedroom home today is more common than it was pre-COVID. The pandemic changed the way we worked completely. A few years on, we have no embraced and adopted some type of working from home arrangement, whether it be full-time, hybrid or occasional. Employers have scaled back workplace floor plans or declined lease renewals. And employees have created study spaces with deliberation and planning. A four bedroom family home is no longer the basic wish-list of a large family. Couples and small families are circling this bedroom count now, particularly if two work from home. In fact, a five bedroom criterion is not unusual.

Taking a village in an inner-ring location that was once a working-class suburb, and then asking it to offer Camberwell-style family homes is asking a lot.

This has made the search in the inner-ring, working class areas even more challenging for buyers. They are now scrambling over these large dwellings and competing harder with others who are looking for the same product.

The second reason why the issue has been amplified relates to builder surcharges, building delays and materials costs.

Renovators previously had the challenge of not only dealing with a tighter internal space and limited land size, but so many also have to work around heritage overlays and controls. The little cottages that were once working-class terraces and weatherboard single-fronts are now cherished gems that often adorn streets in a neat row as shown below.

Now that labour and materials is so much more expensive, renovation projects are not popular. In fact, buyers actively avoid them and have been doing so since things started to bite back in 2020. To compound the problem, our current rental market and tight vacancy rates almost make a significant renovation project untenable. If an owner can’t easily find a rental while they conduct their build, or if the ballooned rental cost is too high, the feasibility just won’t stack up.

Back then, parents with two children held a four bedroom house with a yard as the ideal. And now it’s a more commonly desired product.

The market impact of such a deficit in a popular product is interesting.

The scarcity of three bedroom homes with generous yard is notable, but once the fourth and fifth bedroom is added to the wish-list, it becomes abundantly clear that the incremental cost of bedrooms is hefty.

For those who are factoring in a guest room, I often ask the question;

How often do you have guests staying?

How much would it cost you to put them up in a hotel in town? Or join them in town?

The positive side of the coin is the resale value. People’s ideals aren’t changing and these beautiful, big homes in old, gentrified pockets continue to fare well when it comes to capital growth. But the entry costs have to be weighed up.

Could today’s four bedroom buyers trade down to a three-bedroom home and target a more optimal location within their preferred suburb, where amenity is improved, or orientation is optimised? Maybe, but it depends on the key needs of every household.

It’s all about compromise, but it’s important to remember that the fourth and fifth bedrooms are often the most expensive rooms in the house in these suburbs.