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Many investors search for properties offering capital gains in the long term, but finding a suburb that’s just about to take off can see hundreds of thousands of extra dollars lining your pockets.
Blogger: Damian Collins, managing director, Momentum Wealth
Finding a property that is set to outperform others is all about selection and timing.
First, you need to find the right city or region. If the city you are looking to invest in is set to take off, then you are off to a great start because a rising market will help lift the values of most suburbs, albeit at quite different rates of growth.
Choosing the right city involves an analysis of the long-term population trends, economic activity, comparative advantages in the key industries that employ people and the future supply prospects of land and buildings to meet the demand.
Once you have selected the city, the next step is to choose a suburb or location within that city that is set to outperform the average growth rate. Some of the key factors to look for include infrastructure, proximity to water and the central business district, the long-term available supply of similar properties in the area and the availability of public transport.
This is a detailed process that investors need to go through in their property selection. The differences in capital growth between suburbs in the same city can be as much as 3 per cent per annum over the longer term. This can add up to hundreds of thousands of dollars in capital growth over 10 years.
Of course, within Australia’s larger cities there may be 10 to 20 per cent of suburbs that meet your investment criteria and rank as ‘high-performing’ suburbs.
If there are several suburbs poised for longer-term growth within a city or region and you can’t narrow it down any further, it may be worth looking at short-term growth as well. If you can find a suburb that is set to outperform the others in the short term, it can give you a growth advantage over the next 12 months to two years.
Here are six signs that could indicate a suburb is ready to grow in the short term.
1. Days on market
The average time it takes to sell a property in a suburb will tell you a lot about the state of the market in that suburb. When the figure is smaller than the overall city average, it means that demand for property is relatively strong in that area and properties are selling quickly – the lower the number, the hotter the market.
For instance, if the overall city has an average of 80 days, a suburb with a 30-day average is clearly in high demand with buyers. Bear in mind, however, that a short average days on market doesn’t necessarily make a suburb a good area to invest in, as the market may have peaked already. Similarly, a suburb with long average days on market could still offer great options for long-term investment. In general, if ‘days on market’ is trending down, that is a sign demand is increasing.
2. Vendor discounting
Knowing by how much vendors are discounting their properties can be very revealing and indicate whether a suburb is picking up. This discount refers to the difference between the asking price and the final sale price and it is typically provided as an average across all sales in a given timeframe.
If the discount is quite large (say above 8 per cent), then it’s safe to assume buyers hold the power, given that sellers are willing to accept a lower price in order to secure a sale. This might sound like a positive situation for buyers, but it could indicate the market is falling.
A small discount (less than 4 per cent), indicates there could be strong demand for properties and that it’s essentially a seller’s market, which could signal that prices could be on the way up.
3. Percentage of stock on the market
Looking at the number of properties for sale in a suburb as a percentage of the total number can offer some important clues on the state of the market. A low figure – less than 2 per cent – could indicate property is tightly held in that suburb and supply is generally low, which can easily lead to price increases if demand outweighs supply. A figure of more than 3 per cent could indicate supply is plentiful in the suburb and price rises are unlikely in the immediate future.
Don't miss my next blog where I reveal three more signs that a suburb is set to boom.