The property spots that are hot and those which are not

It’s that time of year when the sound of carols fills the air, the streets fill with shoppers and some of us begin to wonder what we will look like in a bathing suit.

For property CEOs, one of the tasks that the silly season brings is compiling a list of so-called hotspots – suburbs and towns set for a growth surge in the next 12 months.

Now, I don’t mind this exercise as it helps clarify what different property experts are thinking.

But any investor who purchases in a location solely on a hotspot recommendation should really think twice.

Beware the real estate data farter

One of the contradictions of our time is a significant rise in the spruiking of property recommendations based on data driven analysis.

Data should play a vital role in any investment decision. But while the volume of property data sets has grown exponentially, I’m not sure we can say the same about the quality of some of the advice that comes with it.

Increasingly, data is cherrypicked for recommendations in much the same way as trading data is used to market ETFs or crypto currencies.

And that is a problem, because while certain strategies may look great backed by 12 months of data, real estate investors should be looking at how a property will perform over a term of seven to 10 years.

Bridesmaid suburbs

I came across a great example of this type of data driven recommendation recently with three different groups touting the merits of properties in Bundaberg South.

Now Bundaberg is an honest, hardworking Queensland town but I was a little surprised to see it highlighted.

So, I looked at the data and it paints a rosy picture. 33 per cent growth in a year is very enticing but investors need to look further.

For one thing, the recent growth spurt follows a flat year and two years of ordinary growth four to five years ago.

So, to see what else was happening, I compared it with neighbouring suburbs to see if they had similar movements.

Bundaberg South’s differences compared to surrounding areas are huge. This is more likely a short term movement than a sign of being a genuine hotspot.

And that short term movement may well be the result of just one or two firms having all their advisers pile clients into an area that typically only processes 60 - 90 sales a year.

When some businesses pick a handful of locations on a relatively thin, arbitrary basis, such as postcodes averaging a yield of 5 per cent or more, that can artificially ‘make a market’.

Worse, many of these recommendations could be coming from advisers whose only experience of Bundaberg comes from Google Earth and who may not be up to date with movements on the ground.

Bridesmaid suburbs, those that are adjacent to suburbs that have performed well, are worth identifying but care must be taken to ensure they have the same infrastructure, school access and advantages enjoyed by the suburb that has thrived.

Regional property volatility

As we saw with API Magazine’s recent article on Victorian regional areas, there have been good price movements in country towns like Shepparton that aren’t traditionally identified as hotspots.

There are a couple of factors at play here. It is noticeable that as interest rates spiked up, regional areas with modest house prices came to the fore.

The second is the rise in investors scouting for high yield properties, with some advisers happy to play into this mentality; and that can be a problem.

While regional areas can see an influx of buyers when interest rates are high and prices are moderate, that equation can alter fast when factors change.

And that’s why many regional centres often see long periods of flatlining interspersed with short term pick-ups.

That leads to plenty of unhappy investors trying to pick when a short-lived boom will arrive and finally allow their investment to catch up with better performing markets so they can sell.

Macro factors drive long term success

If you want it to benefit from real estate, your investment needs to be primed for long term capital growth, not just rental yields. For that, investors need to find areas with multiple drivers of macro demand and a relative scarcity of available properties.

Mostly, these are spread around metro areas, where all manner of buyers – investors, first home buyers, growing families, upgraders, DINKs, downsizers and others – compete for different properties in the same area.

It is this competition for relatively scarce property that drives up the land price over the medium to long term, which is the key for building wealth through property in Australia.

An example of this is Kedron in Brisbane’s mid-north. I nominated this location in July and data shows its median price has since risen by around $60,000 to record 16.8 per cent growth for the year.

Far more importantly, it has the right blend of macro drivers for growth. It’s this sort of analysis that has produced an average of 75 per cent growth over five years for Kedron’s 2019 investors. 

Warmer climates, more real estate profits

For those looking forward, I would be concentrating on warm zones rather than hotspots, in areas featuring family homes roughly around the metro median price.

I especially like three oddly shaped areas in Melbourne. The first is a broad beltway in the south east stretching from Murrumbeena to Moorabbin.

The second is a square shaped area in the outer east, running from Ringwood to Mooroolbark, then down to Kilsyth South and Ferntree Gully.

A third is a triangle-shaped zone in the north west starting in Sunshine, running north to Airport West and then down towards Essendon.

There are other warm zones, for instance around the rapidly gentrifying area spread around Blacktown in Sydney’s west, the family-oriented zones on the Gold Coast and in Adelaide’s eastern suburbs.

Just remember to avoid volatility at all costs.