Redwerk's Jeremy Sheppard explains why large discounts can be wolves in sheep’s clothing, how renters sap the value from a suburb’s price growth prospects and why some of the properties you think are lemons could be engines of capital growth
Real estate agents might sell properties on the views, what the neighbours are like and whether there are bay windows or picture windows, but take heed. As property investors it’s the potential for prices growth that’s most important and there are really only two factors affecting price change: demand and supply.
Prices will rise if demand is high relative to supply. With high demand for property from buyers they’ll push prices higher as they compete with each other in order to get what they want so dearly. With limited supply, the fight to get what they want is made all the more intense because there is less available.
As property investors, we want to find markets to buy into that have a high demand to supply ratio at the point in time when we’re ready to buy. We want to see some capital growth immediately to create the equity we need to buy again.
These locations with a high demand to supply ratio will not last forever. As prices rise for property in a suburb, demand will subdue. And over time, developers who have realised the high demand will complete projects adding to the supply. Over time the market will re-balance the demand to supply ratio. Good investing has a lot to do with recognising and capitalising on imbalances.
But what indicators do we have to determine when demand is exceeding supply and by how much so we can compare suburbs accurately?
Here are eight trends you should be keeping an eye on:
1. If demand exceeds supply, buyers will quickly snap up available property so the amount of time a property spends on the market decreases resulting in low DOM.
2. Sellers will drop prices to attract buyers if demand is weak. So a low discount means demand is actually strong.
3. A high auction clearance rate means demand from buyers is strong.
4. A low vacancy rate means that there is a shortage of rental accommodation for the number of tenants in the market.
5. Owner-occupiers generally take better care of their properties than tenants and landlords. Renters are also often in a lower socio-economic demographic than owner-occupiers. A lower number of renters in a market means there is less competition among landlords to find a tenant, so a low proportion of renters is a good thing. This figure is effectively a reflection of the supply of rental accommodation.
6. Rent increase in a market is a pre-cursor to capital growth. Tenants are more agile than owner-occupiers. Not only is it a big decision to buy a property, but it’s also easier to get a lease than it is to get a mortgage. So when a location becomes popular, tenants will be the first to move there. This places stronger demand on rents initially pushing them up. Then investors wade into the market attracted by the higher yields. And then the owner-occupiers finally get their act together. Some of the renters by this stage may decide to buy. All this buying activity now places pressure on property prices.
7. A low amount of stock on the market as a proportion of total properties in an area means that properties are tightly held by owners and snapped up by buyers when they do come on market.
8. If there are a large number of people searching for property in a location where there is not much property for sale, then the demand exceeds the supply and the interest will be high.
Jeremy Shepherd is the director of research at Redwerks. For more information grab visit: www.dsrscore.com.au