The illusion of hotspotting: a risky bet on uncertain future
A study revealing the consistent failure of highly publicised hotspot lists to deliver results highlights the fact that the reality of property investing is less about lists than it is about thorough research.
Imagine a scenario where your financial future hinges on a single bet - a bet placed on a location that is yet to prove its worth.
This practice, known as hotspotting, involves staking everything on the belief that this particular spot will be “the one” that propels you towards prosperity.
Statistics reveal that a staggering 71 per cent of Australian property investors stop at just one investment property.
With such limited opportunities to get it right, shouldn’t we adopt a more cautious approach that minimises risk?
Proponents of hotspotting rely on data to predict the future, claiming it empowers us to make more informed decisions than we would without it.
Yet, property forecasters find themselves in the wrong ballpark approximately 85 per cent of the time. In an effort to hold them accountable, we have meticulously examined their predictions through our annual Fool or Forecaster Report over the past five years.
We have reviewed numerous 10-year-old hotspotting predictions and have been able to ascertain how successful investors would have been if they had followed these recommendations.
In one review, we put 48 hotspots under the microscope and found that only 15 (31 per cent) experienced a median price growth rate in excess of 75 per cent over the decade. Shockingly, 10 of these “next big things” (21 per cent) actually experienced a loss.
Let's face it - the odds are stacked against you winning with hotspots.
The media thrives on hotspotting tips and lists of the top 5 or top 10 suburbs or regions to watch.
However, if we truly desire to make sound property decisions, we must understand their limitations.
These lists primarily rely on median price movements, frequently dominated by suburbs with unreliable data due to small sales volumes, variations in property types, zoning changes, or an influx of new dwellings. Consequently, the data becomes skewed, painting an inaccurate picture.
Short-term outlook but long-term investment
Driven by a desire to uncover the secrets behind long-term capital growth, I embarked on a quest several years ago. Conversations with numerous property data analysts, some utilising artificial intelligence, led me to believe we were on the cusp of cracking the code.
However, to my disappointment, not a single analyst was willing to commit to predictions beyond a mere two-year horizon. Hotspotting, it seems, is a short-term tactic, while property investment demands a long-term perspective.
We all yearn for a silver bullet, which is why certain property spruikers can make a living by teasing us with the allure of a “secret formula.”
Yet, hotspotting fixates solely on location, disregarding the critical factor of asset selection. Without careful consideration and deliberation when choosing assets, any location, no matter how promising, can fail to deliver the goods.
In truth, the race for investment success favours the slow and steady approach. Though it may lack excitement, the benefit of hindsight reveals that investments made with care and prudence offer a greater sense of comfort than constantly chasing the next big thing.
Property investment more study than speculation
Hotspot lists primarily exist as clickbait, enticing us with their promises but it is crucial to delve into the methodologies that underpin each forecast and truly understand them before placing any reliance on them.
We must evaluate the signs of growth and determine whether they could be an anomaly, temporary, or perhaps part of a spruiker’s sales pitch.
Speculation is inherently risky, and timing plays a pivotal role in its success. The early entrants in a genuine hotspot may indeed thrive, but once a location appears on one of these lists, the window of opportunity rapidly narrows.
As we explore the realm of hotspotting, let us unveil the illusion that lures so many into its grasp.
By critically analysing its limitations and embracing a more calculated approach, we can navigate the intricate landscape of property investment with a greater chance of long-term prosperity.