If you think location is everything when it comes to property investment, think again. As Sam Saggers explains, there is an even more important consideration to take into account.
When it comes to predicting the next growth areas, many forecasters rely on the various statistics and fundamentals to analyse the growth prospects. One of these key statistics is demographics. It is an important real estate market driver and investors need to understand people’s opinions and desired lifestyles have a direct impact on property prices.
In fact, the study of demographics plays a huge part for investors in getting investing right. What happens next in the property market place is dictated by where people live and what they consume. The mining and commodities boom is slowing down and world market forces are becoming a heavier influence on Australia’s regional centres. The property market is ever changing, and current drivers are preluding massive growth in city areas.
The demographic shift
To understand demographics, you must understand the different subgroups of society, and the distinctive social behaviour of each subgroup. Generationally speaking, we have the Baby-Boomer Generation and Generations X and Y. Each generation is having an impact on the property market right now. They shop in different areas and have different wants. To understand what areas are attracting residents, and the type of residents each area attracts, you must examine demographic shifts. By doing this you can potentially discover an emerging hotspot.
A short history lesson
In the 1900s, there were approximately five people to each Australian home. Today, the average is two people per household. Social behaviour affects housing preferences. Take divorce, for instance. Nowadays, one-third of couples get divorced (this was unheard of in the early ’50s) which might explain the rise in single person households. These changes in household structure mean Australians are reshaping the property market. Some lifestyle choices put more pressure on the property market than others.
Income growth, the underrated boom driver?
The average family unit buys their most expensive property between the ages of 40 and 44. This is due to expanding family numbers and higher incomes. Does that mean finding the next aspirational suburb is by finding where people in their 40s want to live? Hold the phone – let’s examine a few other elements first.
I believe it’s not property that doubles every 10 years, rather income doubles every 10 years. I think those of us old enough to remember our wage 10 or 20 years ago, can attest to the fact that wages have increased, on the whole. While people may argue the cost of living has increased excessively, experts say it is on-par with (if not, behind) the wage growth. If we earn more and things cost less, more is available to spend on property.
Today a pair of Reebok shoes that cost $400 only 20 years ago now retails for $80. However, a house bought for $80,000 in the same year is now likely to be $400,000. Goods are getting cheaper due to ease of manufacture and we are earning more. Incomes are being propelled into property.
Darwin has just gone through six years of spectacular property growth and demographics have surely played their part. Darwin has lots of aspirational, high-income male workers. Compared to the national average, they are earning spectacular wages, and this wage influence has seen the property market grow rapidly since 2007. Darwin is an upward trending income market. More young people are earning well and have the lifestyle to match.
Darwin is Australia’s youngest capital city and has the highest proportion of males, according to the Australian Bureau of Statistics(ABS). Darwin’s median age was 33 years, as of June 2011, which was over a year younger than Canberra, its closest rival. Darwin was also the only capital city with more males than females, with a ratio of 109 males per 100 females. Of the other capital cities, females outnumbered males (the greatest difference seen in Adelaide
In contrast, the oldest median ages in Australia were scattered along the coast. Tuncurry, on the mid-north coast of New South Wales, was the oldest area in the country with a median age of 59 years. In Queensland, Bribie Island was the oldest (57) and in South Australia, it was Victor Harbor (56). These property market places won’t do as well, as the income in these area would not be growing, rather it will be stagnant or declining.
Socio-economics is key
To fuel growth, a market needs to be bearable but also equitable. If the average house price in an area is $100,000 and the wage in an area is $500 a week, then this wage can afford the property price, just barely. There is not much room for growth. This is known as a bearable market. In other words, the income can bear the house price.
Now assume a wealthy income demographic move into that suburb or town. Let’s say the wage bracket jumps to $1,000 per week. Not only can the market afford the house price of $100,000, but also there is room for equity growth. This is known as an equitable market. In this market, the property price could double to $200,000. Double the wage, and you will see a direct correlation in house prices.
According to the 2006 Census, the average family income in Darwin was $1,524 per week but as of 2013 it sits at a healthy $2,024 per week. This is a 32.8% increase. During this time of wage growth, the Darwin property market has risen in value as a direct result. In some areas even better results have occurred.
How to predict an area on the verge of change
One method is known as the ripple effect. The real estate ripple effect behaves like a drop of water splashing into a still pond; the associated ripple flows on and creates movement in the pond, impacting all that surrounds the initial droplet.
In order to understand the potential of the area you’re interested in investing in, you need to research its surrounding areas as well. For example, if the average home price of Suburb A is $300,000 and 2km away Suburb B homes are averaging $200,000 – there is an instant variation evident – in this example the ripple variation is $50,000 per 1km.
By researching carefully what attributes Suburb A has compared to Suburb B, you will often find the suburbs are comparable; one is simply closer to the city or has a more significant symbolic reference than the other. Buyers soon respond to affordability (value) over proximity.
What creates the ripple effect
Neighbourhood change is inevitable. Developments are often designed to improve the quality of existing residents by improving services and enhancing opportunities.
Developments also create the ripple effect, producing economic, social, political and cultural change. In turn, this speeds up demographic change, driven by economics of jobs and infrastructure upgrades, positively impacting house prices and perceptions of these areas. This also results in gentrification of such areas.
Investors need to keep in mind the big picture, as this will make it easier to anticipate the ripple effects of incomes and where people will live. For example, if there is an employment development strategy pursued by the local or national government, what impact does this have on small businesses, real estate and the environment?
We saw the impacts with the mining boom. Jobs were rapidly created; house prices rose; and when the mining jobs disappeared; house prices fell. The ripple effect occurs as a consequence of any decision. Investors need a ripple effects management strategy and, more importantly, one that works in metropolitan areas.
Getting help from councils
Councils are a great source of information. Working with councils can be a great asset to property investors when trying to indentify where to invest their hard- earned cash.
Councils are particularly useful when trying to discover whether an area is in mid-transformation. Ask councils about economic growth expectations, forecasts on employment trends and commitments to education. They have great information on retail and office space allowances, knowledge on zoning and industrial land information. Councils can give you further information on specialised local services such as: finance and insurance services; professional, scientific and technical services; healthcare; social assistance; and manufacturing. Investors can get information on where university, TAFE and education land has been set aside for future development and what roadworks the council has planned, both locally and statewide. This information will help you assess the area’s future. For a property investor, this is a must.
Councils have an economic development manager. They are usually the best source, and the second best is the town planner. Some are very helpful, and if you explain what you are looking to achieve, they will guide you in the right direction. People in council are passionate about the area, and can give you great historical input on industries, services and land values.
I would recommend you phone, go to the website or email first rather than visiting the council. If you want to get into more detail, the economic development manager is your best bet for market information and the duty town planner for zoning information.
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