While it’s not rocket science, it’s not easy to research our property markets given the array of jargon and information and the many mixed messages that are out there.
So, in today’s podcast, I would like to chat with you about some of the many sources of research data that we look into to ensure we make good investment decisions for ourselves and our clients at Metropole.
You’ll hear me explain the importance of data but also how even more important is the ability to put the plethora of information into perspective, as I share with you several metrics that we look at when deciding where to invest.
And just as importantly, I’m going to share with you one very commonly used data metric that most investors use but at Metropole we almost totally ignore.
And I’ll explain why you should also.
5 Metrics You Should Use and 1 That You Shouldn’t
If you’re looking to assess a property’s investment potential, use these 5 metrics to work as a starting point.
- Past sales history
We look at past capital growth to give us an indication of future growth potential.
While past performance is obviously not a guarantee of future performance, the fundamentals rarely change.
- Days on market
Days on Market is a measure of how long it takes to sell a typical property in a particular suburb.
This statistic helps investors to identify those locations that are strengthening so they can buy before the masses and therefore make the most of the price uplift as the time on the market decreases.
- Depth of Market
What we’re looking for here is an assessment of the supply vs demand balance within a particular market.
This is a measure of how long it will take for the current inventory to be absorbed completely based on the current rate of monthly sales, assuming there are is no more new inventory being added to the market.
- The ratio of owner-occupiers to renters.
While many beginning investors have their prospective tenant top of mind, an important strand of Metropole’s Six Stranded Strategic Approach is to buy a property with an owner-occupier appeal.
This is because owner-occupiers “make the market” and add stability to property values in those suburbs where there is a predominance of established owner-occupiers b who bought their homes many years ago and have significant equity in their properties.
- Above-average wages growth vs state average
Since property investment is a game of finance with some houses thrown in the middle, it’s important to find locations where the local residents have higher disposable income than average and suburbs where wages are growing faster than the state averages; as in these locations people will be able to afford to, and usually be prepared to, pay more to buy new homes or upgrade their homes.
You’ll often find these suburbs are going through gentrification. Here you want to focus on the trend of how the wages growth in a particular suburb is trending against the state average. The faster at which it outpaces the state average, the better.
What we don’t rely on – Median prices
Most beginning investors use median price growth as their guidance for suburb selection
How is the median calculated?
Be careful – observing the change in median property prices may not be as useful as you think.
While median house prices are one of the most cited property market statistics as with any single measure there are some shortcomings that investors need to understand in order not to be misled with what’s really happening to house price values.
How is the median price calculated?
The median house price is essentially the sale price of the middle home in a list of sales where the sales are arranged in order from lowest to highest price.
This is different from the average, which would be the total value of all the house sales, divided by the number of homes sold.
Technically speaking, the median is more accurate than the average because it is less affected by a few unusually high or low sale prices.
- A change in the median price does not necessarily mean a change in your property’s value
While median prices are a useful tool for understanding the price changes of properties that have transacted in a market, a 10% increase does not necessarily mean that your property is worth 10% more.
What it does reflect, however, is an activity in the market.
- Median prices are a more valuable indicator in some areas than in others
Changes in median price statistics are more meaningful in determining property price growth in some areas than others.
For instance, suburbs, where many properties transact on a more regular basis, will be more statistically meaningful than in areas where homes are tightly held, sell infrequently, and are significantly different from another.
- Different data providers measure different statistics
Ever wondered why different data providers’ median prices are different?
That’s because there are three key differences between all the providers.
- The data they collect,
- The time frames they report on – daily, monthly or quarterly
- The accuracy/complexity of the index methodology they rely on.
One way around this shortfall in median property value changes is to use data sets like the Corelogic Hedonic Index which seeks to overcome some of these issues by measuring the attributes of properties that are transacting as part of the analysis.
- Statistics are more reliable if looked at over the long term.
Be careful relying too heavily on the data.
You’re probably aware that property investment is part science and part art.
The art component is the market intelligence that comes from decades of experience in buying and investing on the ground.
And this is crucial because relying solely on the scientific approach isn’t enough.
What I’m getting at is that while you need the data in the research phase of your investment journey, to be a successful property investor you need much more – you need on-the-ground experience and perspective.
Data will only get you part of the way, you must complement data with local area knowledge and expertise.
That’s why our buyer’s agents at Metropole are ex-selling agents who understand the local market drivers.
They understand why one side of the road is more valuable than another or why one part of the suburb is more in demand than another.
This is the type of perspective that money can’t buy.
Property investors who only do their research on the Internet but don’t have the on-the-ground expertise or context have the “science” part of the investment equation covered but miss out on the “art” part of investment smarts.
Don’t get me wrong, doing your research is a critical step in getting ready to invest, but it is only one of the many important steps.
There is no substitute for practical, on-the-ground experience.
Get a range of my ebooks here: www.PodcastBonus.com.au
Some of our favorite quotes from the show:
“Once this property boom ends and the impetus of low interest rates has worked its way through the system, we’re going to end up at a time where affordability will be stretched for many people.” –Michael Yardney
“If there’s minimal market depth, there’s going to be more volatility.” – Michael Yardney
“Let’s be frank, you can make the data say almost anything you like.” – Michael Yardney
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