Do hotspot predictions really outperform the market?
Recent research on hotspot predictions and their five-year results suggests that only 35 per cent of 2011 property hotspots, and 43 per cent of 2012, performed as well as the research benchmark and significantly lower than the predictions.
Even in NSW, the best performing state, only 51 per cent and 57 per cent of 2011 and 2012 hotspots actually achieved returns in line with the benchmark and once again were lower than predicted.
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So why did the hotspots perform poorly despite a panel of property experts predicting growth?
One of the key factors in the poor performance is that a future view requires a comprehensive risk-return analysis on region, location, suburb growth, property type and features. In the absence of that analysis it is harder to properly identify and accurately assess the risks and the projected returns.
The second factor is that other macro factors were not taken into consideration. For example, in 2012 BHP Billiton shelved $US30 billion of major projects as part of a significant cost reduction exercise, indicating a slowdown in the mining boom, and the future impact on land and property prices and demand in regional mining areas.
Can the hot-spotting approach to making property investment decisions really predict the best property returns? Sadly, we found that when you apply a combined and in-depth risk-return approach with a macro overview, and review this over five years, many hotspot suburbs have significantly underperformed, possibly resulted in many investors losing money, particularly in regional and mining areas.
The research was undertaken by RiskWise Property Review using standard statistical methods that are typically used to assess investment performance in equities and other classes. The aim being to set a standard risk-return investment benchmark performance to compare hotspots investments with other returns, using commonplace investment valuation methods. It evaluated over 200 of the best suburbs in the country and assessed whether the strong capital growth predictions had been realised five years later.
Each suburb was reviewed against two benchmark components:
- Five-year national capital growth for each property type: house/unit etc.
- Five-year capital growth for the capital city of each suburb.
Many of the HotSpots suburbs significantly underperformed against the expectation.
In a volatile market, where even the Reserve Bank has raised concerns and is advocating action to protect against a downturn in property returns, what can we learn from this research?
1. Look for independent, balanced and informed advice from different sources.
2. Take a risk-return view based on many factors including: property type, property details and demand in that suburb, location, future building factors, and larger macro factors that may affect that suburb. When comparing two areas or properties that are projected to deliver a similar capital growth, invest in the area/property that carries a lower level of risk.
3. Ensure these factors are based on specific properties in specific suburbs, so you assess the individual property and not just the suburb or area that has been predicted as a hotspot.
4. Use these factors to take a future view of the investment risk versus the return. For example, if you are purchasing a unit in an area where 1,000s of units have already been approved by the local council, you need to consider how these units will impact the future price and demand for units in the area. Re-consider your investment and avoid paying over inflated prices if you can see that the market may become flooded in the future. Always take oversupply advice from an independent party and not from a biased source, such as the developer.
All of this research requires considerable knowledge, time and effort in a very busy world. This is why RiskWise have introduced their Property Expert report. Using a sophisticated algorithm it combines all these types of factors to provide a future view of capital growth and rental return to help you make better informed property decisions.
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