Thinking of investing in Australia’s suburb market? Read this first before pulling the trigger.
A lot of people are concerned at the moment that we’re entering into a period of economic disruption. So, are we entering the next Great Financial Crisis?
The short answer is no. It’s just that markets aren’t all moving in the same direction.
Now, the last time that the markets generally moved in the same direction was during the GFC. It caused a decline in national median sales and price growth in pretty much all of the 15 regions. On aggregate, all of the markets in all of the 15 regions dropped. So you might think that that means that house prices went down everywhere.
But that wasn’t the case.
The fact of the matter is that 63% of suburbs in Australia went up in value at that same time, which is mad, right?
What’s interesting about that is when we looked at which suburbs went up in value versus which suburbs went down in value versus which suburbs stayed the same… the suburbs that went down were the more expensive ones. On average, they went down by about 7%. And then the lower quartile suburbs or, the lower priced suburbs, went up by an average of 9% over the period of time.
In this article, let’s take a closer look at Australia’s suburb market… and how property investors should leverage the suburb market to gain better profits.
The Reality Of the Property Market
Terry Ryder, a specialist researcher on residential property for over 30 years, recently produced a report called the Price Predictor Index. This is a report where he looks at the data and says which areas around the country he thinks will grow based on some specific metrics.
In a nutshell, what Terry saw in his index is that the property market in most parts of Australia is pretty strong. The only exception to this rule is Sydney.
He explained that suburb property sales in Sydney started to fall in the middle of last year. And now, we’ve got a situation where only 26% of Sydney’s suburbs actually still have a rising momentum.
Unfortunately, most of the media thinks Sydney represents the entire Australian property market. But that’s really not the case. Some even wrongly use the property sentiment in Sydney to “predict” what’s going to happen in other areas like Brisbane.
But here’s the truth: Property markets are local affairs.
Essentially what happens with property markets is dictated by local economic events. So what’s happening in Sydney is not happening elsewhere in the country. But it does drag down the national average.
Now, what does this tell us?
Don’t just believe in what the media is saying.
As a general rule, property performs better in times of uncertainty. And there is a really logical reason why that is the case. And that’s because property as an asset cannot go to zero. Even Sydney, whose performance is currently dropping, cannot go to zero.
Think about it this way: A company can go bust and be worth $0. But property can’t go to zero.
And so, when you’re thinking about what is the best risk-adjusted return that you can get, it’s real estate, right? Because it’s a real asset. And at the end of the day, intelligent property investors are value investors, just like the great Warren Buffett.
Addressing the Rental Supply Problem
In the US, there is a huge trend towards renting. Homeownership is on the decline because most people are just renting. And this is also what’s been going on in Australia.
I’ve talked to some real estate agencies in regional hubs and they told me that there is a critical lack of supply. There are not a lot of rental vacancy rates across the board, which makes it hard for people to get a place. This is especially true in areas with booming economies.
In other words, people have literally nowhere to live… to the point that they are starting to split rooms to make things work.
And so, there’s potentially a trend there where we might actually see more apartment growth as developers start to build more rental spaces in suburbs. More and more people are actually choosing that lifestyle.
We’re seeing older people downsizing to apartments, and that’s a big growing market. At the same time, the young people who want to buy in good areas but can’t afford houses don’t want to go out to the fringes. So, they buy an apartment that suits their needs in the nearby suburbs.
Simply put, people are looking for places to live that are more affordable, such as suburbs. And more and more people are subscribing to the lifestyle that suburbs offer.
The Advantage of Having Data and Insights
What’s important for people to remember as well is that data is good – but it’s not enough. Aside from concrete data, you also need to be aware of credible insights. Information is one thing, but insights are really what’s important.
It’s not enough for you to know if sales are rising or if property prices are hiking. Rather, what you actually need to do is to decide if it’s going to be the right investment opportunity for you. To do that, you need to understand the underlying reasons why that activity is happening.
Insights can also help you look forward to finding out how likely property prices are going to continue to rise or if they will stabilise. In short, it can help you understand if it’s good to invest in an area for the long-term… or if it’s just a good short-term opportunity for your portfolio.
An Opportunity for Growth
If you’re thinking about investing in the suburb market, the best time would probably be two years ago. The second best time is today. After all, suburbs— especially in affordable areas— are doing pretty well.
But keep in mind that markets do move and change all the time.
So, do your own research. Get insights from people you trust and stay away from media hype about the property market. Do not be swayed by the herd if your instincts (and good data) tell you otherwise.
