Five things you need to know about finding a hotspot

16 Apr 2014
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The word ‘hotspot’ is heavily used by property investors when discussing the next capital growth area. While expectations vary in terms of performance, there are usually some pretty straightforward mechanisms that dictate price and price growth. Here are five of those items and some important pointers to know about these hot areas.

It’s all about supply and demand

You’ve no doubt heard this before, but it remains as true as ever. It’s all about supply and demand – the two basic premises of economics. Lower supply, or restrict it, and increase demand – and you’re on your way to success. When you’re undertaking your due diligence on an area it makes sense to look at how these two elements work in concert with each other and ensure you’re looking at possible injections of supply, land opening up, or downturns in demand or desirability. There are many different combinations that can ensure these two elements do, or do not, work favourably together and it is your job as an investor to seek them out. Remember, supply of apartments may not necessarily affect houses – you will need to ensure that you think through the effect any new developments may have on your next purchase.

Infrastructure, infrastructure, infrastructure

This is a favourite of observer Terry Ryder. Infrastructure is an absolutely critical part of any area’s growth.

“Transport infrastructure makes remote locations more accessible; medical infrastructure generates modern health services and long-term employment; and resources infrastructure can spread economic benefits and jobs over vast distances,” Ryder explains. Infrastructure comes in many different forms, and each has the potential to create employment, or make an area more desirable.

“The more I chart the events in real estate around Australia the more I am convinced that the greatest creator of capital growth is infrastructure,” he explains.

Keeping an eye out for upcoming projects, particularly in areas you have already identified as being of interest to you, can be another boost.

It doesn’t matter how hot the area is, if you can’t afford it

Regardless of how many good indicators an area has, no matter how much growth it is expecting, if you are pushing yourself to the financial limit to secure a property – you might just want to forget it and look somewhere else a little more within reach. No area comes without risk, and it doesn’t make good financial sense to risk it all on the potential of capital growth. If you are still adamant about purchasing in a particular area, see if there’s a lower-risk way in, such as a joint venture with someone you know well, a smaller dwelling or a suburb that’s cheaper but nearby.

Historical performance is no indication of future growth

Regardless of how well an area has done in the past, of how far the prices have been ticking up, you will want to assess it on its current and future merits. Markets can go down and you may have already missed the boat. While consistent upwards movement in the median value can be reassuring – never assume that this will continue. Similarly, downwards movement can be telling you that the market has further to sink, however further research can provide the reasons for any downturn. You’ll also want to be pretty clear on what the median price is tracking before using it as any sort of a judge of a market’s capital growth movements… it might not actually be recording what you think it is.

If you want to have a look at your area of interest’s median price, then here’s some free suburb data (including charts on past growth) for you to begin with.

Employment is one part of the equation

Lastly, employment is critical for multiple reasons. Property Observer was previously told by Empower Wealth’s Ben Kingsley that income growth is one of the indicators he looks at to determine capital growth. Without strong employment, this income growth is unlikely. Similarly, strong and diverse employment hubs ensure a steady stream of tenants and a steady stream of future home buyers who will bid against each other for your property. Decreases in employment, such as major companies shutting down, can have the reverse effect. Remember, if there are no jobs – no one can afford the properties.

Source: Property Observer

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