The location of your investment property is often the deciding factor of whether your investment performs well or not. Because of this, there is often a lot of pressure when it comes to deciding where to purchase.
For new and even established property investors, choosing the right location to buy an investment property can be the toughest part of the process.
Fortunately, there are some quick and easy ways to identify suburbs that are ripe for short term growth that will help propel your property portfolio forward.
Supply and demand are the ultimate deciding factors which dictate how fast a property and a location appreciate in value. When you know the key metrics to look out for, it’s possible to identify suburbs and properties that will far outperform the broader market.
The first thing you will need to identify in a suburb, is that there are people who want to live in that area. That’s the demand side of the equation.
In order to establish demand, we look at annual sales data to see how many properties are selling in a particular area. Ideally, we want to see a combination of high sales with tight supply as this indicates high demand and competition in the area.
More importantly, we want to see the number of total sales trending higher after each month. This suggests properties are transacting and there is growing demand, rather than a decline or stagnation. Given that properties are a long-term investment, it's important to consider trends and what the future may bring for a particular area.
While demand is vital, we can’t truly assess the suburb as one that will grow until we compare it to the overall level of supply.
In simple terms, if a suburb is seeing very high demand and the number of listings is falling, this will put upward pressure on prices as buyers are forced to compete in order to secure a property in what is a tightly held location.
In many growth areas, there are suburbs with very few listings and hundreds of sales on a yearly basis. This is a classic example of what a hotspot suburb would look like.
It’s the ratio between sales and listings that is important, and it’s a ratio than you will benefit from keeping an eye on as an investor.
When looking at supply and demand, that changing dynamic that occurs as listings fall and sales rise will lead to price growth. This translates into the price growth that you see occurring.
Price growth can happen quickly when areas quickly gentrify, or they see new infrastructure or businesses entering an area. However, there are also suburbs that see constant demand over long periods of time. Often suburbs with long-term high demand are able to maintain such high demand due to location, for example, suburbs within close proximity to beautiful beaches, lakes, etc.
Supply and demand changes will be the first indicator that growth or decline is about to occur, so it’s vital to monitor that data.
The days on market, which is the time it takes to sell a property, will also begin to fall when a suburb is seeing strong demand.
Again looking at the basics of supply and demand, if there are low relative listings, when buyers compete they will typically end up fighting over listings and make early offers.
This is another lagging indicator but one to watch for a potential hotspot suburb.
Locations that have high rental yields can become attractive to both investors and owner-occupiers if they meet the above supply and demand criteria.
High yields are attractive as an investment alone, however, it also suggests that rents are high in that area. This incentivises owner-occupiers to buy rather than rent, which puts upward pressure on prices.
If the rental market is very tight, then this has a similar impact as it pushes up prices as people choose to buy rather than rent.
Low vacancy rates push yields higher which is normally an indication of price growth to come.
By watching the data you can get a good overview of what is happening in any given suburb around the country and you can spot a potential hotspot in the making.