“House prices in Sydney and Melbourne ‘could halve’ in worst crash since 1890s”.
That was the mainstream media headline in February 2019 right before we had one of the greatest property booms in history!
So how did the media get things so wrong?
The media has a strong tendency to sensationalise. Their goal is to attract readers in any way they can. It doesn’t really matter whether the stories they put out end up being right or wrong, they simply need people to read them.
If you’re a property investor and getting your insights from the media, then you’re going to be putting yourself at a massive disadvantage. In fact, it’s likely that you’re virtually always going to get things wrong.
Fortunately, it’s possible to significantly outperform the broader market by focusing on areas that are likely to see capital growth because of their fundamentals.
The Australian property market isn’t one huge market, rather it’s made up of thousands and thousands of smaller markets. Regardless of what might be going on in the news, or with the RBA or APRA there’s always a market that is getting set for growth.
While the media is making it sound like you’ve missed the boat, or that markets are about to crash, that’s not really the case at all for savvy investors. There are still opportunities to locate suburbs that will outperform the broader market, however, you will need to cast your net wide to find them.
Here are five key factors to look for when assessing whether a suburb is likely to see capital growth in the short term.
It’s critical that you understand the basic concept of supply and demand statistics in a region. Ultimately, a tight supply of inventory and strong sales numbers put upward pressure on prices. What we want to see are good sales volume over the course of six and 12 months along with low listings. This will put upward pressure on house prices as buyers clearly have a high level of demand, yet there is little by way of supply.
It’s important to understand how much supply is potentially coming into any given market. We can assess that by looking at the last 24 months of building approvals in an area, to make sure there is no oversupply risk. Scarcity is a big part of driving capital growth.
The DOM figure effectively tells you how fast properties in a suburb are selling. The lower figure the better and it’s ideal to see that number trending lower and at what pace (we consider percentage rate of change to identify whether markets are heating up or cooling down).
If it’s hard to get a rental property that leads would-be renters to buy which can push prices even higher. Low vacancy rates also make it far easier to attract tenants which is a bonus.
The rental yield is the percentage return the property is returning from its rental income. A higher rental yield can mean the cash-flow is covering the expense and outgoings. Ideally, you want to see the rental yield trending higher as well, which suggests there is very strong demand for rental properties.
These factors represent the macro side of property investment. Once you’ve identified an area that is likely to see capital growth based on these fundamental factors, it’s then important to take a deep dive into the suburb and locate the best streets and other nuances so you can focus on the most in-demand areas of the suburb.
To really get the most out of your investment, the property should have a value add potential to manufacture equity at a time where there is no growth. This is done through things like renovations and subdivisions.
Even when the broader property market is running hot and you feel like you’re missing the boat, it’s important to remember that there are always opportunities, if you’re prepared to look for them.