I am often asked about the latest hotspot. Last week I gave several presentations – and after every one – someone asked for my list of ‘hot suburbs or areas’.
I generally reply, “I really don’t care about so-called hotspots.”
And then I ask two important questions.
Firstly, “Are you a property speculator?” Followed by, “What measure, do you think, is being used to judge an area’s heat?”
Everyone – well almost everyone – replies they are an ‘investor’ not a ‘speculator’ & they understand the need to hold property for considerable time to maximise their investment return.
As for my second question, few really have an answer. Many are actually baffled by my premise.
Some even think it is irrelevant. But I don’t. It is, in fact, at the heart of the matter.
From my 25 years as a property market analyst, I know one thing is for certain – it is the easy things that get measured the most. The things that should be measured rarely are.
And the easy things – and especially median or average prices on a small area/suburban basis – can be extremely misleading.
More often than not, they misrepresent what’s really going on, as they illustrate what sold during a reporting period, not – I repeat, not – a change in actual value.
Yet this is what most ‘hot spotting’ commentary – and all those silly lists – are judged on. This unit of measurement is deeply flawed. It is why hardly any of the suburban-based hot spotting forecasts actually come true.
What we do
We use ten factors to help determine a location’s base investment value & where that place might be in the property cycle.
A change in median or even average price doesn’t feature. It isn’t even investigated.
Please note that we are not ‘hot spotting’ – we don’t do that – our approach is to try to determine the long-term investment potential of a place.
All locations – regardless of whether they are rated by someone as ‘hot’ or not – will experience every stage of the property cycle.
Over time they will see a downturn; a trough; a recovery; an upturn & a market peak. This pattern will also repeat over time.
Advice should be given depending on a place’s stage in the cycle. Not just cherry-picking – and blindly – those areas on the up.
No area is immune. No area is ‘bulletproof’.
You cannot discover locations where prices never go down. They don’t exist.
We do use two factors to help determine price direction. Understanding price direction is very important.
It forms one of five key measures as to where a place sits in the property cycle.
The first factor is ‘asking prices’, which is something SQM Research do very well & secondly, but importantly, we look at actual resales i.e. the same property reselling over time.
We exclude, as best we can, those properties that have had a major renovation.
Likewise, we remove out-of-line sales such as those involving divorce; partial transactions & once-off events like flooding, for example.
It takes considerable time & effort to undertake our ten point locational analysis work. It cannot be summed up in a spider map; thermometer or simple pendulum. It is much more complicated than that.
What really amazes me is how most property-related magazines pedal this stuff like it is candy.
It must work, as they would only do it if it helped sell copy. It is little wonder that few Australians actually buy an investment property & fewer still buy a second or third one.
Many novice investors are being misled by all this glitter – a false promise that selecting an investment property is as easy as downloading a free app or buying the current copy of a $10 magazine.
Another truism that I have learned about real estate is that if it sounds too good to be true, then it most probably is
Maybe I shouldn’t really be surprised by this – but when an area is being declared ‘hot’ & has apparently experienced unbelievably high ‘price’ growth over a short period of time, and that result flies in the face of common sense & overall market experience – why doesn’t the reporter question the result?
Why don’t they ask exactly what is being measured here?
Surely they should want to see the raw data?
The lack of scrutiny regarding the republishing of property information is a real concern to me. It is getting worse. But obviously not to some, as we recently found out.
To repeat, the information used to determine a place’s ‘heat’ is the problem.
To illustrate this point, we recently analysed in some detail all the Queensland markets selected in a recent article promoted as ‘bulletproof’.
Did you know that nearly every resale (importantly resale, and to repeat, means the same dwelling reselling, and not a change in median price) in the Qld unit suburbs nominated in this article actually made a capital loss.
Consistent new development, often by the same developer, artificially lifted the median values, whilst many buyers who have resold actually made a loss.
The same dynamic doesn’t apply to houses in those Queensland areas being paraded around as ‘bulletproof’, but as far as we can tell, many houses in these bulletproof suburbs underwent refurbishment (sometimes substantial ones) between sales, so looking at resale results here isn’t as good a barometer.
But I will wager that many owners spent more money fixing up these investment homes than they recouped on resale (after they paid all the fees/commissions), in these apparent bulletproof areas.
We weren’t even going to bother covering this in a Matusik Missive, despite the day’s work we put into getting the proper results.
I thought that most investors were over such lists, but recent debates & the number of times we have been asked about such in recent weeks, has forced our hand.
Please remember, all locations experience the machinations of the property cycle. Buying a property isn’t just about its general location. I do think that is the secondary consideration; an important one, true, but not the most vital thing.
Foremost, it is the property you buy; its price; quality; design; opportunity to value add; suitability to target market & depth of market. These, for mine, are far more important.
And understanding such stuff is more complicated than making a list of ‘hot’ suburbs