Understanding Gentrification and How it Affects Property Purchase Prices

  • Posted 17 Aug

Understanding Gentrification and How it Affects Property Purchase Prices

Gentrification has a mixed reputation depending on whom you talk to. The gentrification process can really improve the quality of a neighbourhood and lead to much needed improvements. But it can also drive up housing prices and property taxes, making a neighbourhood unaffordable for long-time residents.

Let’s look at how gentrification can affect your home purchase.

Understanding the gentrification process

Gentrification represents urban renewal and an increased interest in a particular neighbourhood. Often property investors are at the forefront of gentrification, as wealthy investors in search of cheap property begin buying up commercial and residential properties in run down areas.

Areas that are close to more upscale areas but have not yet been renovated are prime targets for gentrification. Investors are aware that the population will spread out as prices rise in the nicer areas, increasing demand in the gentrifying area.

As rents and home prices increase and an influx of newcomers move in, the culture of the neighbourhood will begin to change. Lower income families may decide they can no longer afford to live there, or may decide to sell their property at a profit and move elsewhere. This causes further changes in the neighbourhood. Thus, the gentrification process tends to occur in waves, with property values rising in an upward cycle as long as the process continues moving forward.

Pros and cons of gentrification

Critics of the gentrification process argue that the charms that made a neighbourhood attractive in the first place are lost as property values increase and people are forced out. Redevelopment and commercialisation changes the core character, making it more homogenised and less interesting.

Investors, however, are always searching for the next gentrification opportunity. They see it as a way to make a substantial profit in a relatively short few years, especially if they spot the trend in its early stage.

Gentrification also benefits first home buyers who are looking for reasonable home loans and are not able to afford the high rates of more established neighbourhoods.

As an area is gentrified, public services such as transportation and schools will see a boost over time, and increased property values mean home owners see a profit when they decide to sell. Owners also benefit when new restaurants and cafes, pubs and nightlife venues move in.

How gentrification can affect your home purchase

Purchase price is an important factor for nearly all home buyers, but long-term capital appreciation is also important, even if your property is your primary residence and not a rental investment.

So should you look for an area with gentrification potential when purchasing your next home?

The benefits are an improved quality of life over time and an increased selling price. Of course predicting real estate trends is always tricky, and the downside is that while you are waiting for your new neighbourhood to become the next hot spot, you are stuck living in an area that is less than ideal. So it’s really a personal decision that depends on the long-term goals and comfort levels of individual buyers.

If you are planning a home refinance or looking for your next property, let Australian Credit and Finance’s home loan experts find the best rates to meet your needs. Contact us today to start the loan process.

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