To maximise your returns on a property investment, you need to be able to identify a suburb before it becomes popular and prices start to take-off.
Finding a suburb before it becomes hot is key (a hot suburb experiences a dynamic and upward shift in demand, putting it on par with the better established and popular areas).
If you buy into a suburb late, increased demand will have pushed up prices – meaning you’ll end up paying more for a property, and you could also lose the short-term opportunity for capital growth due to the accelerated increase in property values.
Medium-term growth will also flatten as prices start to stabilise once the heat is taken out of the market.
To help you find your next hidden gem, below are my top tips that will help you identify the signs that a suburb’s property prices are about to take off.
Look for the price ripple effect
Affordability and availability can limit property buyers buying in the area they want, so people with often look to buy in an adjacent suburb as an alternative.
This causes demand to increase in these suburbs, which in turn pushes up prices and the price-ripple effect occurs.
This is especially the case in capital city and major regional areas.
So, keep an eye out for strong performing suburbs and consider the capital growth potential of the surrounding areas.
Find areas that have investment in infrastructure
Investment in and development of major infrastructure projects on things such as roads, transport and schools are signs of a growing population.
This therefore indicates a growing demand for services such as housing, which could be a sign that an area’s property market may start to increase in value.
Infrastructure developments can take years to complete, so the sooner you buy into the locations that are investing in the growth and development of the area, the more you’ll benefit when the wave of housing demand hits.
Keep track of announcements from business and government
When a large business or government entity announces it’s about to set up a major operation in a particular area, this is a sign that jobs and population growth may soon follow.
However, there are two important points to remember in these situations:
- Never buy on the strength of a single initiative because if that business or government entity decides not to invest or pulls out early, property values are likely to head south very quickly as employment opportunities disappear with the organisation.
- If the announcement is part of a regeneration plan for the area, there’s probably an existing workforce and housing stock available. Therefore capital growth may not be as good as what would otherwise be the case.
Make sure you do your research on any planned or developing major projects, and on the current and forecast economic and employment situation within a suburb/region before you buy.
Take note of changing demographics
A major shift in the social or demographic make-up of a suburb can have a big impact on property values.
For instance, if a suburb moves from being predominantly single occupancy to more family orientated, this will drive demand for multi-bedroom homes and prices will rise accordingly.
The key is to understand what’s driving the demographic change and to make sure it is a long-lasting one.
It may be things such as immigration, population shift and/or employment opportunities.
Monitor property rental data
Look for changes in property rental data.
Listed below are three key ratios that every property investor should keep an eye on.
Changes in these ratios can indicate positive or negative movements in the value of an investment.
- Vacancy trends
Low vacancy rates (under 3%) indicates a property shortage and strong rental demand, which is good for capital growth.
However, if vacancy rates start increasing it means that more stock is on the market, there are fewer tenants and there is less demand in the suburb, which could be a sign that the suburb is no longer desirable.
- Yield trends
Suburbs with yield trends that are flat or rising could mean property prices are stagnant or even falling. Other things being equal, it makes sense to stay clear of these suburbs until market conditions show signs of sustained improvement.
- Owner/renter trends
Ideally, you should look for areas where the owner-to-renter ratio is at least 2:1. This is because owners tend to take better care of their properties, which helps enhance and increase the desirability for an area.
An ongoing deterioration in this ratio could mean owner-occupiers are leaving, which may not be good news for property values.
Note changes in Sales data
Analysing recent sales data could reveal early indications of changing underlying demand in a suburb.
The key measures to consider are:
- Days on market
This shows how long it is taking vendors to sell their properties. If the measure is going down, it indicates that either demand is high and/or the pricing is right. A downward trend may be a sign that the suburb is hotting up.
- Discounts offered
If discount levels are flat and falling this is a good sign. Generally speaking, the lower the discount the easier it is to sell the property – meaning demand is good. Just be mindful that the level of discount might reflect the reasonableness of the asking price.
- Auction clearance rates
If auction clearance rates are holding or increasing, it is a sign that demand is strong. Again, be careful as it could also reflect competitive vendor price setting and the skill of the auctioneer. However, when this is compared with the prices achieved, it will give a clear indication of whether prices are on the up.
Consider street hot spots
When a suburb has already become popular, there may be the opportunity to focus on a less popular street within the suburb.
As the market gets increasingly popular, and more people enter the market, supply and demand may cause buyers to look in the less favoured streets in the suburb.
The key is to find the streets where the property values are below the suburb’s median value.
Subscribe & don’t miss a single episode of Michael Yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to Michael Yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.