Real Estate Myth: Avoid The Most Expensive House In The Neighbourhood
How many times have you been reminded of this adage? Presumably, the cheaper homes will somehow drag down the higher priced home. Or, cheaper homes have more room to catch up. When you think about it, expensive homes are expensive with good reasons. Perhaps they are situated on more desirable lots or constructed with marble stones. Maybe they have more square footages, more bedrooms, tiled roofs or double garages. Since homeowners relish these extra features, shouldn’t these homes command a premium price over the inferior ones?
Let’s go ahead and test this myth with a numeric example. Suppose we have two houses. The smaller one is worth $350k, while the bigger one is $400k, and they appreciate 6% and 3% per year respectively for the next five years.
| Small Home |
Big Home |
|
| Initial Worth |
$350k |
$400k |
| Rate of Growth |
6% |
3% |
| Number of Years |
5 |
5 |
| Appreciated Value |
$468 |
$463 |
As you can clearly see, this isn’t an optimal pricing between these two houses, because the smaller home now costs more than the bigger home. The market will soon realize the mispricing, and new buyers will automatically re-adjust the market value accordingly.
Another myth is to buy the least expensive home in the best neighbourhood rather than the most expensive home in a lesser neighbourhood. It is incredibly difficult to judge which neighbourhood will appreciate faster, unless you have a crystal ball. Both homes are already priced in relation to the net of all collective features. To assume that one will appreciate faster is a form of double counting. We can also create another table as above, and it’ll demonstrate that a consistent higher appreciation of one neighbourhood over a long period will put the price ratio out of whack between the two houses.
I believe individual buyers must decide based on personal tradeoffs instead of following these real estate myths. If you like a home for your own reasons, the impact is felt right away, but nobody knows which neighbourhood will appreciate faster comparatively.
I agree that analyzing the house is more important than analyzing other variables, but with respect to neighbourhood I wouldn’t disregard a qualitative assessment, especially in cities where surrounding land is cheap and the city can continue to build out with relative ease.
For instance, many cities have a well known ‘donught effect’, with the hollowing out of value in its core as the original neighbourhoods age while the improvements to lifestyle are brought to the outlying areas with the newer homes. Eventually there is regrowth in the core and this effect continues in ripples away from the centre. This is something somewhat predictable in some cities that meet the ‘unlimited’ build out criteria.
Somewhat related to that is the age of neighbourhoods and the overall valuation of homes in that neighbourhood. In my city at least, places that are 30-50 years old and are more affordable are more likely to have higher rates of petty crime, thus increasing the chance of damage to your property (both homes and other). This can also be somewhat forecasted based on the relative age of housing and the current makeup of individuals in that area (including rental vs. owner units in the area).
When we recently bought, we passed up a home that was about the same price but bigger and more nicely finished, but it was in a bad area of town that I wouldn’t want my family to live in.
I also wouldn’t necessarily judge a home on the monetary value of the other homes in the neighbourhood, but I believe the above qualitative factors should come into consideration.