When a location enters a slump, an investor may find themselves reaching for the closest exit. But while the market can be unpredictable at large, and volatile in character, there’s also its constantly changing tune to consider.
The transience of the market cycle has proven on countless occasions that when an area dips, it will eventually make its way up again, and visa-versa.
For those who want to sow their wealth in a high-growth market – and enter it at just the right moment in time before values take that anticipated hike – what can signify that a location is about to “boom” in value?
Understand how a “boom” behaves
Property Investment Professionals of Australia (PIPA) chairman and lecturer in property at UniSA Business School, Peter Koulizos, says that he has never known in modern history for a property “boom” to last longer than three years.
“You will see in recent times that Sydneys and Melbournes didn’t go for more than three years, and Hobarts went for about less than that,” Koulizos says.
“So sooner or later the steam comes out of the demand and supply catches up, and sometimes it will go the opposite. Instead of having a “boom”, you will have property prices going backwards, as what happened 12 months ago.”
Considering the high speed at which property values can rise during a “boom” phase, it can be a hazardous time for those who wish to quickly take a slice of the opportunity before it dwindles.
“Prices start to get away, so it’s a bit of a dangerous time because people have that fear of missing out and they really want to try and jump on the bandwagon, and also getting there a bit too late,” shares director at Metropole Property Strategists, Brett Warren.
Warren advises investors to minimise their risks when tracking “boom” periods by not losing sight of the bigger picture. “Don’t make long term decisions based on short term outcomes,” he says.
“There are a number of things that we look at to make sure that we get the right property or the right location for the longer term rather than just focusing on the shorter term.”
Keep track of larger movements
Heightened demand for housing boils down to there being a magnet that will continue to draw people into a specific location – and this pull mainly takes the form of new job opportunities.
“Unemployment is dropping, underemployment is dropping, it’s easier to borrow money which is reflected in an increase number of loans, and the borrowing amount increases as well,” Koulizos shares of the larger shifts that can indicate that a “boom” is on the horizons.
Jobs growth is one of the leading indicators of a healthy market that is most likely to be geared toward sustained future growth, Warren says.
“We want to buy where there is employment – big large-scale employment hubs – an airport upgrade or a CBD upgrade that could give 10,000 or 20,000 jobs because that’s where people are going to flock to,” he says.
While the nature of employment is changing, and remote working arrangements are allowing certain locations to gain traction, Warren says “that trend will continue to happen but it’s still going to be the capital cities that produce the bulk of the jobs”.
Be aware of available land
A surge in demand can also be propelled by new Government initiatives that assist buyers and investors to enter the market.
Koulizos says: “Almost overnight there is an increase in demand for property, but the problem is you can’t increase the supply of property overnight because it takes months or years to build houses or units or apartments.”
If there are plans for a substantial number of new apartments to be built in a specific area, once these are built, increased interest will eventually be met and prices will consequently start to pull back. In saying this, it’s worth finding out about any future developments that could overly remedy demand.
To ensure that values continue to increase over a longer timeframe, there has to be a strong land to asset ratio, Warren says.
“We want to buy in areas where there is a lack of land. So, if there is still five to ten years of land supply still to be released, steer well clear, whereas finding an area with no available land other than parks and reserves is ideal. You can usually tell this by taking an aerial shot and zooming out,” Warren explains.
Warren also recommends that investors buy in a higher owner-occupied market because if owner-occupiers comprise, say, 60% to 80% of dwellings, then that indicates a shortage in rental properties.
“If you are buying in areas where incomes are rising, where there are jobs growth, mostly your tenants are going to be people who are professionals who work in nearby larger employment hubs and have superior incomes and can much more easily absorb a rental increase,” he says.
Take a look over the fence
If a certain location or capital city is already riding a “boom”, it’s a known strategy to buy in close proximity to it; also known as “the ripple effect”.
“People who want to live in the expensive suburb but can’t afford to, they discover that the neighbouring suburb is very similar in streetscape and housing style and then that benefits,” Koulizos shares.
However, such a trickle of growth shouldn’t be taken for granted. It also largely depends on what the nearby suburb has to offer residents.
Koulizos warns that “you can’t just go and buy into a cheap suburb thinking one day it’s going to go up, because one day it may never go up because the cheap suburb may be cheap because it’s full of factories and warehouses”.
Good school catchments, lifestyle precincts and walkability are also becoming more important, shares Warren, so if a location holds these attributes then it’s more likely to attract buyers and tenants.
Reach into past records
When headlines start to whirl in the leadup to a speculated “boom”, property data can offer more transparency where it lacks. But how should you be absorbing a market analysis report?
“Rental yields should be a secondary consideration. Cash flow is beneficial but it’s not going to change your life, it will be the capital growth that will change your life,” Warren says.
“People like to go back five or ten years to work out how a suburb has performed but we are looking for historic growth, so what we can do by going back twenty years, is we can see how it has performed over the last twenty years and get that consistency for capital growth.”
Although knowing for certain what the future will bring is out of reach, Warren says that “looking at history can give us a really good indication of how suburbs have performed in good times and bad times”.
According to Koulizos, a few property growth indicators includes; properties are on the market for a shorter amount of time, the vendor discount amount decreases, auction clearance rates increase, and “property prices start to increase over a relatively short period of time”.
However, Koulizos also says that investors should be aware of a variety of shaping factors when reading market reports.
“Don’t just hone in on one thing and think just because auction rates are increasing in the suburb, this is going to be a great suburb,” he says. “You have to look at a number of different things.”
Don’t lose sight of future goals
Rather than seeking out “the next hot spot”, Warren says that investors should be “focusing on the long term and where they want to be”.
“Work backwards and put a strategy in place to get there, and most of that is going to be about picking the right location because 80% of the capital growth of a property really comes from the location,” he says.
Warren recommends investors meet with a property strategist who has had more than a decade of experience investing in the market.
“They should look for a specialist, not a generalist. If I am buying in Brisbane, I would want [a property strategist] who has had 10 or 15 years experience in Brisbane, rather than 10 or 15 years buying in the whole of Australia,” Warren says.