Property cold spots: the areas investors should avoid
These areas may look alluring to property investors but are high risk or have already passed their prime buying opportunity.
Much of the analysis of residential property focuses on which locations are poised to perform well.
And that’s what prospective investors ask us every day – where will values increase the most? What locations have the best yields? Where can I secure a property with positive cash flow?
All are important questions and there are plenty of locations that meet those criteria, but equally as important is a question very few investors ask – where shouldn’t I invest?
There are plenty of locations in Australia that on paper may seem like a great investment with affordable prices and high yields - some as high as 11 per cent or 12 per cent - and often they are featured in news media as attractive places to buy. But high yields alone do constitute a good investment.
It’s essential that investment locations have potential for sustainable capital growth.
Regional towns that rely heavily on resources feature prominently on our list of locations investors should avoid.
The mining town of Kalgoorlie is a pertinent example; it has yields in the 9 per cent to 10 per cent range, with houses available in the $300,000s and sometimes lower, but this is a volatile market solely reliant on the resources sector. The same can be said for Karratha in Western Australia, which typically offers yields above 10 per cent for houses but has similar risks.
Remote towns such as Bourke in NSW and Charleville in Queensland have 11 per cent or 12 per cent yields but are not worth the risk. The median house price for Bourke is $132,000, while Charleville is $210,000 - and they’re cheap for a reason.
Sometimes the issue is the property type, for example, high-rise unit markets like Docklands and Southbank in Melbourne. We believe investors should consider units in good locations as an affordable high-yielding alternative to houses, but not these two locations and others like them.
There were more than 1,000 unit sales in Southbank in the past 12 months and the median rental yield is 7.3 per cent, but the median sale price has dropped 12 per cent during the same period, including 5.5 per cent in the latest quarter, at a time when the Melbourne market generally is rising strongly. And the five-year capital growth average for Southbank is -3.2 per cent per year.
One of the key things to keep in mind when investing in property is that markets can shift and change, so it’s important to stay informed and constantly evaluate the changing environment.
Property markets that have already bolted
There are locations that Hotspotting would have happily recommended three or four years ago, and if investors had bought there then, they would be reaping the benefits now.
But if you didn’t buy then, it’s too late now.
Rockingham LGA in Perth: a few years ago, houses could be bought for around $400,000 at yields above 6 per cent; now, no Rockingham suburbs have a median price below $600,000 and rental yields are below 4.8 per cent. Sales activity is declining, quarter by quarter, providing further evidence that the boom has passed its peak.
Rockhampton LGA in Central Queensland has been targeted by investors for several years for cheap prices and high rental yields. The suburb of Berserker was popular in the past, with median house prices in the $300,000s and yields around 8 per cent but now the median is $470,000 and the yield is 5.6 per cent. There are no longer any Rockhampton suburbs with yields for houses above 5.7 per cent.
Townsville LGA has been a national leader on price growth, with cheap prices and high yields attracting frenzied competition among buyers in recent years. Now, among the 33 residential suburbs in the LGA, 30 have house yields below 5 per cent. Those seeking returns above 6 per cent in Townsville need to consider units.
Bunbury LGA in regional WA was a target in the recent past, thanks to cheap suburbs such as Withers and Carey Park - but with median prices now around $575,000 for Carey Park and $542,000 for Withers, the yields have dropped to around 5 per cent.
Playford LGA: Three years ago, you could buy houses in the $300,000s with yields of around 7 per cent. Now the bottom end of that market is above $500,000 and the highest median yield for houses is 4.9 per cent in Davoren Park (median price $570,000).
Property investment is about doing the research, making sure the numbers add up and confirming that a targeted location provides the fundamentals for future price growth - including a strong and diverse local economy, infrastructure investment, affordability and growing buyer demand.
