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School Deciles. Do They Matter?

Updated: Aug 18

Deciles are seen by many as having a direct coloration to the quality of the area and education, when in reality the system is far more complicated with a massive weight placed on a largely skewed figure typically only used for the purpose of funding. The decile rating of a school does not have a direct effect as to the quality of the education as some may expect, with such a large misconception throughout not only the education sector but also the housing sector.

This system in many areas has a direct effect on house prices, houses in sought after school zones are seeing massive premiums, trends such as these are spurring investors to follow suit claiming that these higher decile areas see better returns. However, from analysis of the last 10 years houses in decile 2-4 areas have high capital growth than all other areas.



Analysing the graph above there are a few key points that can be highlighted. Decile 2-4 had the most growth with 101% since 2007, while decile 1 saw the lowest with only 64% growth in the same period. Decile 5-7 is a close second at 96% while decile 8-10 has the lowest growth – 87% over the past 10 years. Below we discuss in further the reasons why each of these brackets preformed the way they did.


Decile 1 the Curse of the Investors

Generally decile one areas the housing stock is typically owned by investors. Typically this means in homes where investment sediment is positive you get cyclical growth. However, when the market is weak there is a low level of demand and actual growth declines as prices go backwards. As a rule we avoid decile one areas unless we believe that within a 20 year period the market will gentrify and become a decile 2-4 area. In Auckland for example the average price of a decile 1 property in July 2017 is $447,109 where the average for decile 2 was $677,025 meaning that all else aside if that area was able to move to a decile 2 ranking you would be able to net a 66% equity gain by far the largest price jump plus the normal market growth.


Decile 2-4 Stability & Growth goes Hand in Hand

As the decile ranking increases from the lowest level we start to see a more balanced in home owners and investors although investors typically still have a significant portion of this market. However in this portion of this market segment there are still a number of home owners that create market stability. When looking for investments these areas are often good investment areas as although a little higher in price compared to decile one areas they have better growth over the long term offering a good balance of yield and capital growth.


Decile 5-7 Second to the Mark with Potential to Grow

These properties although in more attractive and desirable areas have slower growth in relation to the decile 2-4 bracket and are typical of areas that first time investors purchase in as the homes look nice. These areas because of their higher costs are much harder to achieve a good yield like that of the lower priced 2-4 decile areas making them less balanced investments as you generally need to top up the property each week. In addition these areas could gentrify to be decile 8-10 areas.


Decile 8-10 Paying for the Premium of a Comparable Education

With prices on average in these areas at $1.5 million the subject of diversification needs to be raised, those who have a single investment property in such an area may be better suited buying multiple properties in the 2-4 decile areas therefore spreading the risk and improving the performance of the capital. Although rents in these areas are high, they do not make up for the cost of the properties making yields very low. Although attractive to own the reality of such investment properties is that they have lower growth over the next 10 years with lower yields and financial security.


Example

Comparing these two suburbs in Auckland Glenfield and Beach haven we can see as the deciles begin to equal out the price difference between the two areas also begin to decrease. Seeing a difference in total growth between the two areas also shows how a steadily increasing decile yields increased prices. An increase in decile in this example can be linked to the new transport links around that local area.


Beach-haven due to its location was remote for many, but with the addition of transport links to the area direct to the CBD via ferry in 2013 and road access from Glenfield at the end of 1999 has made the location much more attractive allowing professional’s reliable transport to the city. Glenfield in contrast was more central and established earlier due to its proximity to the motorway, the area from even back in 1995 was seen as a wealthier and more expensive area to buy.


Summary

As a summary the lower 2-4 decile bracket is the sweet spot when looking at a balanced investment with good yield and growth, while ensuring that you have a balanced portfolio in place to spread the risk and improve overall income. Because of the already inflated prices from that area the higher decile areas see lower growth overall and lower yields compared to the lower decile areas.

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