When it comes to capital growth, understanding market value is essential. But unlike the share market, where prices are transparent and constantly updated, the market value of a property is a more nuanced concept than a fixed figure.
Ask any experienced real estate professional, and they’ll tell you that everyone has their own “recipe” for working out market value. That said, there are three core ingredients consistently used by agents and savvy buyers alike:
Land + Building plus Emotion!
Let’s break down the first and most straightforward component of the land.
For strategic investors, land is the most valuable piece of the puzzle. In fact, when working with $1M+ buyers, we always pay close attention to the land value-to-building ratio. This can be a strong indicator of potential capital growth.
Here’s an example:
Imagine three identical 1,000 sqm blocks side by side:
- Two vacant blocks recently sold for $2,000,000 each.
- You purchase the third block – which already has a home on it – for $2,500,000.
Your land-to-price ratio is 80% (i.e., $2M land ÷ $2.5M total price) a strong ratio that’s often seen in established blue-chip suburbs with period homes.
Let’s say a neighbour builds a new luxury home on one of the vacant blocks, spending $2M on the build. Their total investment becomes $4M. In this case, their land-to-price ratio drops to 50%.
That’s still reasonable – especially compared to townhouses or apartments, where land content might be as low as 10% for apartments and 40% or less for townhouses.
The takeaway? Buying a home on a full-sized block with substantial land value offers long-term growth potential and more security than many newly built dwellings.
Working Out Land Value
If we assess the land component at $2,000 per square metre (based on recent sales of 1,000 sqm blocks), then:
- A nearby 700 sqm block would be valued at 700 x $2,000 = $1,400,000.
- A 1,000 sqm block would equate to $2,000,000 in land value alone.
This approach is a simple way to break down land value versus total property price, and it highlights the importance of understanding underlying land content when buying in premium Melbourne suburbs.
Simple, right? Not always. In established areas like inner Melbourne, vacant land is rare and comparable sales can vary wildly. Some blocks are compromised on main roads, others have water views, planning restrictions, or development potential.
That’s why determining land value requires diligent market research, studying recent comparable sales of similar size in similar locations with similar conditions. Ideally, you’re looking for sales within the last few months because the property market cycles and shifts happen more frequently today than in the past.
From that data, you can establish a fair value range – say, $1,900–$2,100 per sqm – and apply it to a property you’re trying to negotiate.
Why Accurate Land Valuation Matters
Getting this number right is critical. If your data’s off and you assume the land value is $1,600 per sqm, you may walk away from a property thinking it’s overpriced. On the flip side, if the land is worth $2,500 per sqm, you might overpay and risk underperforming long-term growth.
That’s why many buyers turn to professionals like Industry Insider Property to handle this kind of analysis. We do it every day, armed with the tools, data, and experience to make informed assessments, especially when market value is anything but obvious!
Industry Insider Property is independent and committed to helping buyers and sellers achieve their desired outcomes. Our experienced buyer agents and advisors will guide, execute, and deliver the best possible results to our clients. That’s why we have over 288 5-star Reviews on Google!
Our team will help you save time and share over 40 years of industry knowledge and expertise to ensure you make a wise, well-informed decision.
Contact us at +613 8374 7652 or email us at admin@industryinsider.com.au to discover how we can assist you in your real estate journey.
Industry Insider Property
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+613 8374 7652
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