What are going to be the property “hotspots” in 2015?
I was recently rung by a journalist from one of the major daily news sites asking me for my thoughts on this topic and to update my comments inn an article in which I was quoted earlier this year.
Apparently the article that he wrote last January on the property hotspots for this year – 2014 was one of the most popular on their website, and now coming to the tail end of the year it seemed opportune for an update.
While I love giving my opinions to the media, I hate being asked for “hotspots” because that’s not how I work.
Rather than looking for the next hotspot or the next big growth area, which a few months later will be proven wrong, I prefer to use a strategic approach to finding investments that will outperform the averages over the medium to long-term.
Interestingly before I replied to the journalist I had a look at the original article online and was fascinated to see some of the predictions others had made and how those suburbs – the so-called next “hotspots” – have actually performed over the last ten months.
“Interesting” is a good choice of word, in fact a generous choice of word for how some of those suburbs have underperformed.
Just like most of the regional and mining town “hotspots” that were the flavor of the month a few years ago but have left the landscape littered with investors who lost money. Places like Port Headland, Moranbah, Mandurah, Cairns and Gladstone
So what will drive our property markets next year?
The impacts of wild volatility in the Australian Dollar, overseas financial crises, a flood of foreign buyers, superannuation funds and the long period of low and stable interest rates may all appear obvious in the rear view mirror, but what lies ahead is inherently difficult to judge…perhaps impossible.
However likely positive factors for our property markets next year include:
- The momentum of the markets, especially in Sydney and Melbourne, creating a “wealth effect.” Many of us are feeling wealthier as the value of our homes go up and will want to invest again, while others feel they are missing out and will want to get into property.
- Interest rates are likely to remain low for most of next year.
- Population growth will continue albeit at a lower rate, and head for our 4 big capital cities.
- The Australian economy will perform better than many other western countries, but a little less robustly than this year.
- Job growth and steady unemployment rates will lead to increasing consumer confidence .
This combination of factors is likely to cause continued property price growth in the inner and middle ring suburbs of Sydney, Melbourne and Brisbane next year.
However, our other capital cities are likely to languish next year. Perth is catching it’s breath after a few strong years and the other capitals just don’t have the economic strength to attract strong population growth.
Similarly I can’t really see a reason for regional or mining town real estate to have much capital growth. There is no influx of new people moving to these regions little to strengthen their economies and investors are no longer buying up big in these regions.
As always demographics will drive our markets
Let me explain…
As Australia’s economy bumbles along I can see little wages growth over the next year or two, but I do see interest rates rising in early 2016 and both these factors will affect some suburbs more than others.
What I mean by this is that rising rates are likely to affect suburbs that are more interest-rate sensitive like blue-collar areas, regional locations and first-time buyer locations.
On the other hand property values are likely to increase in the more affluent, gentrifying middle ring suburbs of our major capital cities where the locals’ income is less dependent on CPI rises in wages and where rising interest rates are less likely to have an impact on disposable incomes.
So my top picks for suburbs that will outperform would include suburbs where people have higher disposable incomes and are able to, and prepared to, pay a premium to live there the because of the amenities in the area.
2015 will be good time to clean up your house
While I still see some good opportunities in the property markets, I recognise that strategic property selection will be critical as capital growth will not be as strong next year as it was this year.
I also see 2015 as a window of opportunity for those with underperforming properties in their portfolio to divest themselves of their lemons, because the odds are they will continue to disappoint.
The best way to uncover an underperforming asset before it eats too far into your bottom line is to annually review your portfolio and ask yourself some hard questions:
- Is this property performing like I expected it to?
- Is this property outperforming the market?
- If this property were on the market today, would I buy it again?
- Is there anything I could do to improve my property, so that it generates a more attractive return on my investment?
- Is this property likely to outperform the market averages for the next decade or more?
Sure property is a long-term investment, but occasionally the right thing to do is to cut your losses and sell up so you can buy a better property.
And don’t wait for your local market to get better, because the gap between the value of the property you own and the top performers will only get wider.
However if your property is tenanted, consider selling it at or near the end of its lease term to widen the appeal of your property by making it attractive to both owner-occupiers and investors.
So how do you find the top performing areas?
Well… I use a top down approach, which is the system that has helped me build a very substantial property portfolio.
- It starts with buying at the right stage of the property cycle. I look at the big picture – how the economy is performing and where we are in the property cycle.
- Then I look for the right state in which to invest – one that is in the right stage of its own property cycle.
Each state in Australia has its own property cycle – select one that is heading towards the upturn stage of its cycle, not one that is near its peak.
- Then within that state, I look for the right suburb.
I look for an area that has a long history of outperforming the averages, and one that is likely to continue to do so because of the demographics of the people who live there.
Demographics is one of the biggest factors determining capital growth and I’ll explain a lot more about this in another rule.
I’ve found some suburbs have 50 to 100% more capital growth than others over a 10-year period. Obviously those are the suburbs I target.
This is different to the speculative approach some investors adopt looking for the next “hot spot”. They say things like, “Oh, this suburb hasn’t had much capital growth – maybe its time has come,” or, “That’s a brand-new suburb. They’re getting a train line down there so it must grow in value.”
- Once my research shows me the suburb to explore, I then look for the right location within that suburb.
Some liveable streets will always outperform others and in those streets, some properties will always be more desirable than others and outperform as investments by increasing in value.
Think about the suburb where you live – there would be areas you’d happily live in and areas you would avoid, like on main roads or too close to shops, schools or commercial areas.
- Then within that location I look for the right property, using the 4 Stranded Strategic Approach outlined below. And finally I look for …
- The right price. I’m not looking for a “cheap” property (there will always be cheap properties around in secondary locations). I’m looking for the right property at a good price.
I choose my properties in that order – a top down approach – which leads many people to ask why price is at the bottom of the list. I guess this is because they’ve heard you make your money when you buy your property.
While that is correct, it’s not because you pay a cheap price or because you get a bargain. You make your money when you buy because you buy the right property – one that will be in continual strong demand by both owner-occupiers (who push up property values) and tenants (who help you pay off your mortgage).
To ensure I buy an investment property that outperforms the market I use…
My Four-Stranded Strategic Approach
- I buy a property below its intrinsic value – that’s why I avoid new and off the plan properties which come at a premium price.
- In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area. This will be an area where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live.
- I look for a property with a twist – something unique, or special, or different or scarce about the property, and finally
- A property where I can manufacture capital growth through refurbishment, renovations or redevelopment.
By following this 4 Stranded Approach I minimise my risks and maximise my upside, as each strand represents a way of making money from property so that when all four are combined, I end up with a very powerful tool that puts the odds firmly in my favour.
If one strand lets me down, I have two or three others supporting my property’s performance.
What will you do in 2015?
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