With increased speculation that property prices across many of the country’s markets may plateau or even fall, how can you find depressed markets which will buck the trend?
Speaking to The Smart Property Investment Show podcast, director of wHeregroup Todd Hunter said investors in Sydney and Melbourne were going to struggle with yields as new land releases and house and land packages become attractive alternatives to tenants and prices across the cities begin to fall.
He said many other markets will present attractive opportunities over the next few years, but cautioned that most investors don’t know how to identify areas “on the rebound”.
“I’m looking for a dead market,” Mr Hunter said. “So completely different to what everyone else does – who are looking for these hotspots – I’m actually looking for locations that are really good locations that have been dead for between three and five years.
“[I look for locations which have] dropped in value dramatically – so they’ve gone back in value since their last boom and the market’s been really quiet and there’s very little or zero activity happening in buying.”
Mr Hunter said this strategy gives investors the chance to negotiate really big discounts off the price of the property and exposes them to greater capital growth potential without having to do renovations or value-add projects.
Another locational variable Mr Hunter advised investors to look out when identifying where to buy is debt-to-income ratio.
“And if I give you one tip… where I’m buying… the income-to-debt ratio is running at around 20 per cent. And to put that into a numbers term for everybody, if you had $1,000 in your hand as a weekly income, you’re only spending $200 towards either your rent or your mortgage.
“That means we have great capacity there to increase rents, because it’s easily affordable, we have great capacity for property price growth, because they can afford it on a mortgage as well.”
Mr Hunter said when an area’s debt-to-income ratio gets up between 33 per cent and 40 per cent, residents start to feel it and need to start tightening the belt. Anywhere around 45 per cent to 50 per cent and above is bankruptcy territory – something he believes many Sydney and Melbourne investors and homeowners are hurtling towards.
The hotspot process that Mr Hunter subscribes to may lead investors to areas they hadn’t previously considered, but he said investors had to look at the bigger picture.
“I look for the complete opposite [of what most investors search for]. I don’t have that sheep mentality. I look at places where nobody else does. So for me […] making money in property is actually buying it cheap [and] you can’t buy property cheap on recovering, a good or a rising market. You need to go to great places that are just completely dead as part of their property cycle and buy and hold and work from there.”
To hear the full conversation with Mr Hunter, listen to episode 7 of The Smart Property Investment Show.