To be a successful property investor doesn’t require a PhD. What you do need to know is how to look at certain key indicators and from there, create a big picture view that recognises not all housing markets are one and the same.
Residential property is a unique commodity and behaves in a unique way here in Australia, because we have a very emotional response to real estate. We love being homeowners almost more than any other collective nation of people.
We love it so much that our relationship with housing is a key factor in the ebbs and flows of our economic tidings, supporting other industries in its wake of consistent reliability, like retail, transport and infrastructure development.
Just think about the resource boom in some of our outback towns, where the existing housing supply was too prohibitive to establish a mining operation.
Suddenly a flurry of development started and new infrastructure was built to support the community that grew overnight, driven largely by a swell of investor demand that spurred new housing construction activity.
Now, almost as quickly, we’re seeing some of these resource boomtowns become shadows of their former selves. And landlords, who were enjoying double-digit returns, are at risk of going down with a sinking ship.
Property investment has its fair share of victim statistics; people who harboured visions of grandeur when it came to making millions, buying and selling houses.
Many start dabbling without understanding what keeps our perpetual property clock ticking away.
So following on from last month’s reality check around ‘big picture’ market fundamentals, here are seven statistical indicators that smart property investors keep a close eye on when reviewing, assessing and growing their portfolio.
I sometimes wonder if you need to be a little bit of a ‘voyeur’ to be a great property investor. I don’t mean you have to get all up in other people’s business, but chances are you find people interesting to observe.
Understanding how and why the general population does what it does at any given time should be part of your asset selection process, because ‘behavioural bias’ tells a story about our changing lifestyle and accommodation preferences.
An example that comes to mind is more of us choosing to marry later in life, in favour of climbing the corporate ladder. The flow on effect has been city-centric employment growth and in turn, above average long-term value growth within select inner city property markets.
2. Vendor activity
Are sellers confident in the potential to move their home or investment property? Or are lots of vendors being forced to reduce their expectations and prices to accommodate a slower moving market?
This type of vendor activity is always a good one to test the current property waters, so to speak. You can usually tell if temperatures are boiling, tepid or cold by vendor behaviour.
Of course not all lulls are indicative of a changing market. Some are just reminders that a footy final or major holiday event is approaching, or that it’s getting colder outside.
But if you can spot any reliable signs of vendors adjusting prices down, it could represent an opportunity to secure your next investment at below market value.
3. Stock levels
Because house prices tend to fluctuate according to supply and demand, the ratio of available accommodation to purchasers in any given area can tell you a lot about the property market.
Logically, the more housing you have that people don’t seem to want anymore – think mining ‘ghost towns’ – the more likely it is that prices will stagnate indefinitely.
On the flipside, in areas where new stock is difficult to come by (think tightly held land across inner city regions) and resident demand is high due to amenity and employment opportunities, you’ll usually see steady price growth.
4. Time on market
Lots of houses for sale, vendors taking time to adjust their lofty expectations in line with prevailing market conditions and diminished buyer demand, all equate to properties languishing on the market for months at a time.
The longer motivated vendors have to wait for a potential buyer to bite – those who have a compelling reason to offload their house – the more likely they’ll be to accept a lower offer as the weeks roll by.
5. Vacancy rates
High vacancy rates can be indicative of a number of things, so when you see them, it’s worth digging a little deeper.
Generally you’ll find a glut of new stock or a slowdown in tenant demand, or perhaps both happening simultaneously.
Vacancy rates often shoot up in places like Melbourne when hundreds of new OTP apartments come on line all at once. As always though, seasonal influences can impact this type of data.
6. Rental yields
If median house prices are steady, but yields start to decline, it’s safe to assume that tenants are not paying as much for rental properties. Are there too many investors buying into the area, creating an accommodation oversupply?
What if the rental yield suddenly increases? Could this mean more owner-occupiers are snapping up stock, leaving little for potential landlords?
Noting what rental yields have done over time in any given area can provide a valuable insight into what kind of market make-up you’re buying into.
7. Median prices
While they might be confusing at times, and not always consistent across different agencies, median prices can provide valuable insight into market changes.
But they’re not to be taken at face value. A suburb’s median price might suddenly shoot up overnight. So should you assume that every property in that postcode has suddenly enjoyed a 26 per cent price rise in the last 12 months?
Generally these extremes are more likely to signal perhaps two or three high-end homes being sold within the same month. While rapid price dips could be caused by a surge of lower priced stock flooding the market and dragging the local median down with it for that particular period.
For this reason, it’s best to rely on more long-term median statistics when researching an investment location. The short term ones can be very misleading indeed!