When a blue-chip property in Melbourne or Sydney sells, the media swarms. There’s something about people paying lots of money for luxury houses that drives clicks from readers – which is why even publishers like the AFR can’t resist the odd bit of dress-circle coverage.
Of course, it’s not just about the big personalities or grand veneers. Part of the appeal is a suspicion that buyers of luxury properties pay for the prestige and social licence that comes with a trophy house, rather than the investment potential of the asset in question.
And that’s partially right. Exclusivity does drive the price up. But it’s also not the whole story. Like Gucci or Versace, the luxury nature of prime Melbourne and Sydney real estate means that overpaying a little to get in yields long-term dividends. Blue-chip property isn’t an ego buy that drops value when trends swing the other way. It’s a resilient asset that’s ideal for storing and growing wealth over time.
And it’s one that is increasingly hard to acquire.
A History of Buoyancy
Top-end homes in Sydney and Melbourne (the top 5% of each market by value) have a history of being resilient to economic tides – even when industry sources, like CoreLogic, might seem to indicate otherwise. The very top percentiles are so in demand and so rarely on the market that the normal rules simply don’t apply.
It also helps that the buyers of luxury property are typically high-net-worth or ultra-high-net-worth individuals with multiple income streams. Short of a widespread recession, Melbourne and Sydney’s best suburbs won’t be short of buyers.
According to John Sommers, a director of buyer advocacy firm McRae Property, those two traits mean luxury properties hold their value well over time.
“From my 35 years of market experience, I can say with total confidence that ‘blue-chip’, premium-quality properties have historically outperformed the broader market,” said Sommers. “And there is absolutely no evidence of that trend slowing down”.
McRae Property is one of Melbourne’s most established buyer advocacy firms, having been created over 20 years ago and operated by its two directors, John Sommers and David McRae, who (uniquely in this industry) are both qualified valuers. They specialise in high end homes in all inner and bayside suburbs.
Scarcity Matters, Not Interest Rates
At the top end of the Melbourne and Sydney property markets, “interest rates are not even discussed”, says Sommers. “The conversation is centred on ‘where or how do I find the asset that will suit my requirements.’” The reason is the same one we discussed earlier: the level of exclusivity in luxury real estate means that the normal rules of nature don’t apply. It’s about scarcity, not external factors like interest rates.
At the time of writing, that immunity to market forces has been further reinforced by Australia-wide issues with the construction sector: a string of builder collapses, chronic material shortages, and widespread labour constraints. In the vast majority of cases, the replacement costs of luxury homes exceed the cost of new purchases – which means there’s a serious supply issue. It’s why both luxury markets have defied analyst predictions and continued to perform well over the past year.
“In my view, [this] will continue […] unless there is a significant alteration in stock availability. I am not holding my breath,” says Sommers. “Frankly, there is no simple solution. Buying prime real estate for fair market value is quite an achievement in the current environment. So be prepared to step up and pay market value if that will secure the asset. That is a win.”
Don’t expect demand to subside, either. According to Knight Frank’s Melbourne and Sydney Prime Residential Insight (Q2 2023) reports, Melbourne’s ultra-high-net-worth population (people with net worths of $30 million or more) grew by 5.8% YoY, and Sydney’s by 7.8% YoY. The millionaire class of each city grew by 6.4% and 7.7% respectively.
Blue-chip Melbourne and Sydney real estate has never been more desirable, and there’s never been less of it to go around.
When to Invest in Blue-Chip Melbourne and Sydney Properties
The reality is that most high-net-worth individuals can’t afford to purchase a prime Sydney or Melbourne property – and probably shouldn’t even be thinking about it.
It’s not about being able to drum up a deposit or secure a loan. Virtually any mortgage broker can find a lender on their panel who’ll give you approval. But buying a blue-chip property isn’t something to tackle lightly.
For example, when you purchase an asset worth $3 million in Melbourne – which is at the lower end of what could be called ‘blue-chip’ – you can expect to pay around $200,000 in stamp duty. Servicing your home loan can be equally demanding, especially if you choose to live in your new property (as the vast majority of blue-chip buyers do). Rather than ‘stretching’ to acquire a blue-chip property by shouldering an uncomfortably large non-deductible debt, acquisition should feel natural, an extension of years of strategic property investing.
For many investors, that process is simple: buy low, sell high, repeat. Good execution comes down to working with the right buyer’s advocates and brokers – knowing which areas are forecasted to experience high growth, buying at the right time with correctly structured loans, and then divesting assets at their cyclical peaks so that you can reinvest capital into the next batch of high-opportunity properties. Each property might take three to five years to offload, so building up to buying a blue-chip property can seem like a slow journey, but it’s one that will ultimately pay dividends.
And if your net worth is already at a level where inner-city Melbourne and Sydney assets are comfortably within reach?
It’s time to talk to your broker and buyer’s advocate, because acquisition can be gruelling, time-consuming, and deeply difficult. You’ll need a team that understands how to source assets that match your requirements. You’ll need to time your entry correctly, and you’ll need a loan structure that aligns with your current financial situation.
“Sourcing options off-market can and does lessen the competition,” says Sommers. “Last week, we bought a Bayside home for north of $9 million with limited competition. Don’t look online for photos, however, because there aren’t any. [It was] all done very quietly … just the way we like it.”
Of course, it isn’t all doom and gloom.
“If you want a sugar hit, then stick with Gucci or Versace,” Sommers advises. “Buying that [blue-chip] real estate will […] probably cost you more than you expect. Then again, if you do succeed in securing one […], it should outperform the general market and become an asset that is retained to foster long-term wealth growth.”
The lessons here are three-fold: one, you probably can’t afford that Rose Bay villa you’ve been eyeing off – at least, not comfortably. Two, working up to a blue-chip property is a methodical process, not a spur-of-the-moment decision. Three, you can’t just step up and expect to be served. You need the right people, a tolerance for paying more than you expected, and a decent stroke of luck.
But, if you do get into the exclusive blue-chip club, you’ll have a high-performing asset that you can rely on in perpetuity.