How do you find the best areas for property price growth?

How do you find the best locations for future property price growth?

That’s a question I asked John Lindeman, Director of Property Power Partners on a recent Real Estate Talk show.

Here’s a transcript of the interview:

Kevin:  John, I know that it’s only one element of the research cycle that we should be doing, but probably it’s one of the most requested, and that is how do I find the best growth areas?

John:  That is indeed the most commonly asked question I have, as well.John-Lindeman_avatar

I’ve studied the performance of the housing market and the major indicators and dynamics for about 15 years.

What I discovered was that there are three key dynamics to the performance of the housing market.

I call them the three Ps, which are people, purchasing power, and properties.

If you can measure those accurately, then you can indeed work out what’s going to happen.

But just to explain what I mean by those three Ps:

People is really just population growth and a movement of people from one suburb or city to another.

The problem with that is that we only measure these every five years in the census.

At other times, the quarterly stats produced by the ABS are really just estimates, and they don’t do them at suburb level, so we really don’t know where people are moving to and from.

We’re not a police state, we don’t have ID cards, and we simply don’t track these things.

In any case, these people could be potential renters or owner-occupiers, so we don’t really know.

Even though we know changes in demand or if we could know that, we wouldn’t know what they were going to do when they moved.

The other one is purchasing power, which is then looking more at how many of these people do actually get financed to buy a property.

You can get finance figures. They’re updated every month, but they, again, don’t go down to small areas.

The problem there is that some people, like retirees, don’t actually need finance.

You have a huge number of people out there who are overseas investors who are borrowing money overseas, so they don’t appear in our finance stats, either. There are huge hidden numbers of potential buyers out there, which we’re not tracking.

I then looked at the third one, which is properties, and I realized that, yes, we can measure the changes in supply and demand, and we can do that quite accurately with data that’s available readily for all investors.

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It took me a number of years to work out exactly what the relationship of these were and how investors could use the information.

Kevin:  Without oversimplifying something, how important is supply and demand to a growth area?

John:  Well, it’s important because, as I indicated, it’s the only indicator that we can obtain fairly accurately and easily.

The other ones, you can’t really measure, but you can measure supply and demand.

When I looked at the relationship of supply and demand, I found out that it was over 90% accurate in terms of working out where the prices were likely to be rising or falling in a particular suburb.

Kevin:  So supply really is number of houses on the market and demand is number of sales?

John:  In a nutshell, that’s how it works. Yes.

You’ll be looking on a listing site such as Domain, and you might go in there and look in a suburb and see how many houses are currently for sale. That tells you the supply of houses in that area.

Then you go to the Australian Property Investor magazine.

At the back, in the market watch section, look up the same suburb and look up the number of houses that have been sold in the last year. It’s the first figure that appears after the suburbs, so it’s very easy to find.

Those two figures are all you really need, but the important thing is the relationship between them.

Kevin:  I’m fascinated by this topic because I think there are some interesting stats that come out of this.

If you look at supply and demand and you look at the number of sales, you get a factor of turnover. Is there a tipping point there with turnover when we can actually see it move from a buyers’ market to a sellers’ market?

John:  There is, and again, it took me quite a few years to work out what it was.

But as with all these fundamental statistics, it’s really quite simple once you know what it is.

The relationship is when the number of houses currently for sale in a market is about the same as the number that was sold in the last year – that is, the number in the magazine – you have what I call a neutral market, and that means that prices aren’t moving up or down.

If the number of sales is higher, then it’s a seller or a boom market, and if it’s lower, it’s a buyer or a stressed market. It was that easy.

Kevin:  It is interesting. In other words, if no more houses came on the market in a particular suburb or area and there was enough there for sales for a year, that’s about the tipping point.

That’s the balancing point. Has that changed much do you think, John?

John:  It hasn’t.

That relationship has been studied by a number of academics around the world, and they’ve looked at the American housing market and the British market.

Other academics have studied the Australian market. All come to the same conclusion.

The amazing thing is that, as I said, it’s over 90% accurate in terms of forecasting the direction.

To get the direction of change, what you need to do is to study the figures every month.

It doesn’t take you very long – a few minutes – and of course, you have the API magazine, and you can look up the number of listings, so you can get these figures very easily, and they are a really excellent indicator of which way prices are likely to go.

Kevin:  Yes, because if you go around Australia, there are some markets where there has been enough supply to last for two years, and that’s a good indicator that there’s a lot of downward pressure on prices.

John:  That’s right. You can very quickly do little tests.

Look at places like Moranbah and compare the number of properties sold in the last year to the number that are for sale right now, and you’ll find there’s about five years’ stock sitting there, so it’s a stressed market.

It’s very accurate and easy to do this, and it warns you off markets.

If you’re not sure, if you have somebody saying, “Look, these are selling faster than hotcakes; get in quick or you’ll miss out,” you do this little analysis, and you say, “Hang on. No, this is not right.

There are way too many properties on the market, and the prices can’t possibly be going up.


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