Buyers should keep a number of things in mind as they search for an area that's set for growth. Here's what to look for and what to beware of. 

1. Be open to searching interstate

Chances are that the most appropriate suburb to invest in for growth potential is not within a 10km radius of your home. In fact, looking outside your local area and buying sight unseen can actually be an advantage, because it forces you to look more at the growth drivers and statistics as opposed to trivial and emotional things, like whether or not you like the look of a bathroom. If you are still nervous about venturing into the unknown, the services of a buyer’s agent might be your best bet.

2. Look for the visible warning signs

Look closely and you may realise that a working-class suburb is starting to show signs of accommodating a wealthier demographic. Cate Bakos of Cate Bakos Property reveals some of the telltale signs that gentrification is underway and that property prices should adjust in a positive manner accordingly:

  • New cafes starting up in the high street
  • Low-density development activity, such as developers purchasing house blocks and building two to three townhouses on a site
  • Renovation projects underway on old houses
  • Introduction of ‘disposable income’ shops
  • ‘Phasing out’ of lower-rent service provider shops (such as local accounting firms, dry cleaners, etc.) to make way for galleries, boutiques, cafes and bars
  • Increased numbers of prep children in an annual school intake
Growth killers: Buyer beware of...
  • buying in an area only because its neighbour is performing well
  • buying somewhere that has recently had its growth spurt
  • the main growth driver potentially leaving the suburb (such as loss of a manufacturing industry)
  • buying where supply is likely to outpace demand
  • choosing a suburb where the population is
  • decreasing and/or the median age is increasing
  • choosing an area that does not provide renovation opportunities
  • choosing an area without a progressive council
  • being lured into new house and land estates with speculative growth rates

3. Study supply and demand

It’s very important to look for a low vacancy rate so that you are more likely to find a tenant for the property. In addition to reading Your Investment Property, speaking to multiple local real estate agents for up-to-the-minute vacancy rates is a wise move. Other stats that indicate supply and demand include the typical number of days a property is on the market before it is sold, the amount of stock on the market, the auction clearance rate, the renter-to-homeowner ratio, and the internet search score. Read How To Find The Best Property Using Available Data for more information.

4. Research future infrastructure growth

New or improved roads, rail or bus links are all examples of transport infrastructure that can add tremendous value to a suburb. Moreover, if a government is planning this kind of development, it is a good sign they are anticipating a strong population increase in the area, which is a giveaway that property prices will rise too. It is also an indication that medical and education facilities, shopping precincts and employment hubs will also have to grow accordingly.

“All of the proposed future spends are available online, through the appropriate council websites,” says Prue Muirhead, of Muirhead Property Management.

It’s also a good idea to watch out for planning alerts, local community news, streetscape changes and new development starts, says Bakos.

And aside from upgrades and additions, it’s important to consider intangible drivers that add value, such as scenic views of water, trees or a city.

5. Consider the demographic

If the population’s median age is decreasing, while the population itself and the average household income are increasing, this is a solid indication that growth is on the way. For the most recent reliable stats, check out ABS.gov.au. 

Another giveaway that numbers of young professionals are on the up is if local bars, cafes and restaurants are becoming more upmarket.

6. Monitor median prices and growth rates

This is where the ripple effect comes in. The best way to go about identifying this is, firstly, to find an expensive suburb that has experienced a surge in growth in the last 12 months. This often happens within 10km from a CBD or towards the coastline, and can occur due to new transport infrastructure or perhaps the emergence of a cafe culture.

The next step is to find its cheaper immediate neighbours that have not yet had their growth spurt. Monitor the next group of neighbours as well, because the ripple can often go further than the adjoining suburbs.

Then compare the growth and prices of the premium suburb to those of its neighbours. Put simply, the greater the difference, the greater the potential. A good rule is that if there’s more than a 10% difference in prices, the cheaper suburb should have some ground to gain.

Just keep in mind that the neighbours with the most similarities to the source of growth are the ones most likely to get a higher share of the ripple. Also, check that whatever it is that’s fuelling the price rise would also suit the demographic of the cheaper suburb.

Therefore, identifying the chief growth driver(s) is crucial to your success in riding the ripple effect.

On the other hand…

The fact that the neighbouring area is performing well is not a good enough reason in itself to buy in a marketed ‘undervalued’ suburb, says Bakos. “There are some stigmatised areas which will either take much longer to gentrify or could struggle completely to gentrify,” she says.

In addition, be aware that the ripple may not always go beyond the premium suburb, and a general slowdown in the market could always put the growth rate to bed.

Aside from monitoring the values of neighbouring suburbs, investors are taking big risks if they don’t take into account the stability of the local economy and future infrastructure plans.

Investors can also come unstuck if they choose areas that have suddenly experienced population growth but have no obvious reasons for high-income earners to flood into those markets, says Bakos. Markets like this could include new estates in fringe areas.

“If an area is buoyed by a population surge based on it being ‘affordable’, this does not mean that it will grow rapidly,” she says. “In fact, if houses and land options in the surrounding areas are boundless, the growth could be severely constrained for many years.”

Moreover, investors need to be cautious when investing in speculative areas that are ‘predicted’ to have an increase, says Zoran Solano of Hot Property Specialist Buyers Agency.

“It is when investors are lured to new house and land estates or developments with speculative growth rates and rates of return which is really concerning.”

This feature is from Your Investment Property Issue #88. Buy the copy to read more!