As I mentioned earlier, the property market is diverse being made up of thousands of micro-markets (30,000+ to be exact), each with its own unique set of price drivers. Right now across Australia there are markets that are booming while many others are in decline. In other words, there is no SINGLE (Australian) property market as such... there are not even six (a.k.a. the Australian States)... there are 30,000+ which is exactly where the opportunity for property investors becomes apparent. And opportunity presents itself when you know how to read the capital growth signs and the trends in this data.
The big question is what are the key capital growth signs that identify the imminent rise of the next hotspot locations?
Which micro-markets, suburbs, locations...(whatever you would like to call it)... should the property investor monitor and what should they look for?
Which of these micro locations are the NEXT hotspot locations? Obviously we want to invest in them BEFORE prices increase so we can ride the capital growth train.
Similarly, if we own a property in an area that is on the decline - maybe there is a lot of supply coming online from developments or something else has taken the gloss or desirability from the area - then we need to know before this happens so we can sell and get out and lock in our equity.
But how? What are the key capital growth signs we need to monitor to know if a location is about to boom or bust?
There is no single property market as such which is exactly where the opportunity for property investors becomes apparent.
It is vital we find markets in which demand exceeds supply as these may be our next hotspot locations to invest in. But how is this done? Here is a list of some of the key capital growth signs used to quantify supply and demand for property... and which we need to take note of, analyse and monitor.
DAYS ON MARKET
Days on Market is the average number of days a property takes to sell. That’s the number of days from when it is listed for sale until the time it is recorded as sold.
If property is selling fast in a particular suburb, then this is a good indication that there is a high demand for properties in that area. The lower the Days on Market figure (i.e. the quicker property sells), the higher the demand for property. And the higher the Days on Market figure (i.e. the longer it takes to sell), the lower the demand for property.
If properties are selling quickly, then buyers are keen to buy in the area and sellers may be able to achieve higher sales prices and this pushes property prices up. In some cases you can see a correlation between Days on Market and another capital growth sign called Vendor Discounting (the difference between the initial listing/asking price and final sale price).
AUCTION CLEARANCE RATE
Auction Clearance Rate is the percentage of auctioned properties that actually sell by auction in a particular suburb. For example, if 20 properties were up for auction in a suburb and 15 sold at auction and 5 were passed in, then the Auction Clearance Rate would be 15 / 20 x 100 = 75%.
Real estate agents will often sell properties by auction when the demand for properties is strong, as auctions allow potential buyers to outbid each other and push prices up. But not every property that goes to auction sells. The higher the Auction Clearance Rate percentage, the higher the demand for properties. Be sure to look further into the trends over time of the Auction Clearance Rate as an increase in the percentage of properties that sell at auction may indicate increasing demand to supply.
Remember that properties can be passed in if the seller isn’t happy with the top price offered at auction or if the seller accepts an offer before auction or if the seller pulls the property off the market prior to auction.
STOCK ON MARKET PERCENTAGE
Stock on Market Percentage is the percentage of properties for sale in a particular area as a proportion of the total number of properties in that area. For example, if there are 900 properties in a particular suburb and 10 properties are listed for sale then the Stock on Market Percentage is represented as 10 / 900 X 100 = 1.1%.
The lower this percentage figure for a suburb, the less properties are for sale in that suburb as a proportion of the number of properties in the area. A low Stock on Market Percentage means that properties are tightly held by owners and snapped up by buyers when they do come on the market. This relatively higher demand may push property prices up and of course that is good news if you have bought into the area before the growth.
Vendor Discounting is the percentage difference between the original listed asking price of a property and the eventual sale price of that same property.
For example, if a property is listed for $650,000 and it eventually sells for $600,000, then the Vendor Discount is $50,000. Expressed as a percentage, this is the Vendor Discount of $50,000 divided by the asking price of $650,000 x 100 = 7.69%.
The Vendor Discounting is important as it indicates how hard the sellers in a particular area need to negotiate to sell. If sellers are struggling to sell they will lower the asking price, offering a discount… and this generally lowers property prices in the area. If the area is popular and prices are increasing then sellers won’t need to discount and buyers will need to complete, often raising asking prices, to get the property they want.
ONLINE SEARCH INTEREST
Online Search Interest is the number of people searching online for property in a particular area versus the number of properties for sale in that area. For example, if there are 20 properties listed online for sale in a suburb and there were 250 people searching for property in that area, then the Online Search Interest is 300 divided by 20 = 15.
The higher this figure, the greater the demand compared to supply, and the more likely it is that property prices will go up in that area.
Vacancy Rate is the percentage of rental properties that are currently vacant in a suburb. For example, if there are 250 rental properties in a suburb and 5 of them are vacant, then the Vacancy Rate is 5/250 X 100 = 2%.
A low Vacancy Rate is an indicator of demand in an area and this is attractive to property investors. The area is either popular with tenants, who ensure that rental accommodation is never left empty, or there aren’t enough rental options in the area and renters have to compete so they don’t miss out. Either way, this popularity with tenants gives the property investor the promise of strong rental cash flow and, as owner occupiers usually also flock to an area which is popular with tenants, it is also a strong capital growth sign.
Don’t forget to use the Vacancy Rate to estimate cash flow (i.e. rental income) when assessing any potential rental investments, as many investors miss this trick!
GROSS RENTAL YIELD
Gross Rental Yield is the rental income as a percentage of the property’s value. For example, if a tenant paid $600 a week for a year, the annual rental income for the owner would be $600 x 52 = $31,200. Say the property is worth $950,000 then the Gross Rental Yield would be $31,200 / $950,000 x 100 = 3.2%. The Gross Rental Yield is calculated before expenses such as council, management and strata fees are deducted.
The higher this figure, the more demand there is from renters, and soon investors, as a result… so a high Gross Rental Yield is an imminent capital growth sign.
When a suburb becomes popular, tenants will be the first to move there; as it’s easier to get a lease than it is to get a mortgage. The investors wade into the market attracted by higher rental yields… and then owner-occupiers finally get their act together. By this stage, some of the renters may decide to buy in the area. All this buying activity places pressure on property prices pushing them… (you guessed it)... UP!
Ideally an investor wants to find a location which offers both excellent rental yields and capital growth potential. A high Gross Rental Yield means better returns for investors and this means better cash flow which in turn can mean an investor has the cashflow to purchase more property or to borrow against the mortgage to increase their property portfolio.
PROPORTION OF RENTERS
Proportion of Renters is the percentage of renters (tenants) compared to owner-occupiers living in a suburb. For example, if a suburb has a population of 2,000 and 600 are tenants and 1,400 are owner-occupiers, then the Proportion of Renters would be 600 divided by 2,000 x 100 = 30%.
The lower this percentage figure, the less supply of property for rent. Why is this important? Well, owner-occupiers tend to take better care of their property than tenants or landlords… so a high proportion of owner-occupiers in an area (and a low Proportion of Renters) can positively influence property prices. Let’s face it, owner-occupiers are more likely to invest in structural or cosmetic improvements in their home, which ultimately raises the standard of the area.
Landlords will not want to spend vast sums of money adding value to a rental property as it is purely a commercial venture, and tenants haggle over rent rates and tend to come and go.
These statistics are readily available - you just need to know where to look and how to analyse them. In our upcoming Property Market Research Course we will cover what data is available and where to find it, how to trust data quality, what to consider and watch out for, and how to interpret the data in order to find your best investment locations for the best returns (capital growth).
CAUTION: It is important that you DO NOT view these stats, the capital growth signs, in isolation. They need to be viewed side by side for all 15,000 Australian suburbs (by unit and house markets) in order to rank order and rate all locations so you can cherry pick the next hotspot locations for your property investment needs. That’s where the power of our Boomscore research ‘app’ is revealed.
We’ll show you how to use it and more...
In the meantime, why not read all about the 8 statistics in the Property Market Research section of our Blog, if you haven't already.
Article by Michael Fuller