When it comes to residential real estate, there are a number of traditional, underlying fundamentals that form the foundation of our various metro, suburban and regional markets.
In times such as the ones we are experiencing now however, it seems many investors either fail to acknowledge these long term micro and macro influencers, or forget about them amidst the frenzy of house sales and portfolio growth.
But if you’re not investing on the basis of historic property drivers, you’re ignoring the very important lessons we have learnt about smart property investment, as opposed to the hit and miss kind most punters practice.
We constantly hear talk about where we are in ‘the property cycle’ and many like to speculate as to when it’s a good time to buy, hold or sell in order to make millions.
But the fact is, you can’t possibly understand the cycles and how they work at all, if you don’t first get your head around the leading indicators of market health.
It’s a bit like driving your car around with a strange sound coming from under the bonnet. You know it doesn’t seem that reliable, but you haven’t bothered looking under the hood to see which part of the engine is misfiring.
So how can you ever hope to know what’s going on?
When it comes to residential real estate, two overarching fundamental ‘buckets’ if you like are at the heart of it all. Everything else falls into one or the other…either supply or demand.
The big picture…
Numerous factors influence how much accommodation is available at any given time, in any given location and of course, how many people want to live there.
All of them interplay at various levels, in what is generally a process influenced largely by consumer sentiment.
By consumers I mean humans and by sentiment, I mean how we feel about things. Are we feeling optimistic about life, or cynical? Do we have faith in our country’s prosperity, or believe the nation is on shaky ground?
Then there are the fundamentals within the fundamentals; the ones pulling our collective heartstrings and swaying our sentiment accordingly.
Now we could pick apart the details, but given this is where the devil lies, I thought it would be timely to remind ourselves of the bigger picture always at play in the background of our property markets.
The ‘bigger picture’ fundamentals that influence consumer sentiment (and spending) and in turn, swing the supply and demand pendulum to and fro, causing highs, lows and everything in between. They include:
Employment – is there sufficient jobs growth to sustain our working population into the future? Are unemployment figures on the rise, or decline? Do we feel a sense of longevity in our workplace, or entirely disposable?
Wages growth – Are we being paid at least in line with inflation year in, year out, or are wages lagging significantly behind? Do we feel fairly compensated for the extra hours many of us spend at work these days?
Industry – The impact of industry became evident during the noughties resources boom. Consumer sentiment was riding high on a wave of China’s love affair with Aussie mined raw materials and we all felt pretty smug about dodging the 2008 GFC bullet.
Can you see the pattern and natural synergy here? A robust industry base lends itself to jobs growth. As consumers we feel good, spend more of our increased wages and the overall economy starts to pick up.
Suddenly retailers are smiling and tills are ringing in shopping centres across the nation. This of course starts to push the inflationary barriers beyond the regulators’ comfort zone, so they respond with an interest rate rise in a bid to slow spending.
Interest rates – another thing that effects consumer sentiment, then start to make us a little apprehensive about entering the property market and suddenly the movement of housing stock slows.
Any type of price correction in our property markets is always met with a media feast of alarmist headlines about bubbles and crashes. And again, this impacts how we feel about spending money, particularly on real estate.
Digging down deeper
Of course when talking major fundamentals and how they work within the entire supply/demand equation, one can’t overlook things like population growth, including overseas immigration.
In Australia, we need to go one step further and recognise that our rapidly ageing population will be a major player in how things go down for our economy as we venture further into this new millennium.
Drilling further down still, into specific investment grade locations and properties, there are even more details to consider, including amenity, infrastructure and new buzzwords like café culture and walkability.
What it all means
Let’s face it, we could write an entire book on the relationship between all of these fundamentals and how they work symbiotically to influence our housing markets.
But the point is; you need to be aware of the fundamentals surrounding long-term property assets that outperform the averages, in order to make sure you’re always investing for maximum return.
When you recognise these underlying influences, you can better perceive how they work within any particular market you might be considering. Take the inner city for instance, as opposed to a regional community.
There will always be less industry and therefore, less likelihood that skilled workers will flock to small outlying communities, compared to in the big smoke where the majority of jobs growth is concentrated.
Hence, you can expect less accommodation demand in rural areas, where there’s an abundance of available land. This is a perfect example of a supply/demand imbalance that wouldn’t favour the investor.
At the other extreme, there are the inner city neighbourhoods with good amenity, public transport links and general lifestyle appeal for the majority of people.
In most instances, these postcodes have a severe shortage of land and values rise consistently over time, demonstrating how this supply/demand imbalance underpins prices.
In markets such as those we are currently experiencing in some parts of the country, with increased competition and expectation, it’s important to stick with these fundamentals when selecting a high growth asset.
Set your standards, limits and strategies ahead of time to ensure the next move you make is the right one, with regard to your real estate portfolio.
About the Author
Since 2008, David Thomas has built a business aimed at servicing the needs of property investors, owner occupiers and small business owners. David is recognised as one of the top 10 independent mortgage brokerages in the country, David and his team have settled almost billions of dollars worth of residential and investment loans over the last decade.
Known for his straightforward, relatable style, David believes by educating people about property funding; they fare better in the market. By sharing his expertise openly, some of the people he educates will likely become his clients. It's a win-win approach.
David Thomas is a credit representative (Representative Number 506153) of BLSSA Pty Ltd, ACN 117 651 760 (Australian Credit Licence 391237).