While the recent gains in prices paint a generally vibrant housing market, several must-know indicators can further help property investors determine specific locations primed for growth.
Atlas Property Group director Lachlan Vidler said property investors must be also knowledgeable about “micro-factors” that can help foretell the performance of suburbs and regions.
“There are other micro factors that exist and can be equally important depending on the location, which is why it’s imperative that property buyers complete significant due diligence before deciding to purchase anywhere,” Mr Vidler said.
Five market indicators investors should know
Mr Vidler said understanding these “micro-factors” can help investors make sense of “macro-factors” such as the interest rates and overall price movements.
“There is no single micro factor that can determine a suburb’s future performance, which is why an understanding and correct interpretation of macro and micro factors is pivotal in reducing risk and increasing investment performance,” he said.
The number of available properties listed on the market reflects the level of demand a location is currently witnessing under current conditions. In turn, these two things indicate where prices are likely to go.
Mr Vidler said inventory is often expressed in months and takes into consideration the average monthly demand for property. Here’s an example: three months of inventory.
“While there is no magic number, it’s generally accepted that six months of inventory translates to a balanced market, so, if there is less than six months’ supply on the market, you should experience upward price pressure,” he said.
“If there is more than six months, you will likely experience downward price pressure.”
Days-on-market is another measure of supply and demand. As its name says, this measures how long it takes for a property to sell.
This, combined with inventory level, could be a powerful tool to evaluate the activity in a particular suburb.
“If a suburb has days on market of 60, this is usually considered a balanced market, but below 60 there can be additional competition in the market, and above 60 it’s expected that there is less competition,” Mr Vidler said.
Vacancy rate refers to the share of rental properties that remain empty for a given period.
For property investors, vacancy rates provide telling signs of the overall health of a rental market.
A 3% vacancy rate is often considered a balanced market. Anything less means there is a shortage of rental homes available. This means that rents are on an upward pressure.
On the other hand, vacancy rates above 3% should be a warning as new investors might end up finding their rental properties sitting empty for a long time.
For investors looking to have their properties rented, it is crucial to know the average rental yields of a certain location.
Rental yield is a measure that expresses annual rent as a percentage of the property’s purchase price.
For instance, if a $500,000 property rents for $500 a week, it would earn $26,000 yearly. This means that the rental yield of the property is 5.2%.
“Rental yields are typically at their lowest when an area is at the top of the property cycle, and yields are often at their highest just prior to an area moving back into its peaking market.”
Past capital gains
While relying on current median prices of a location would not say much about the future of a specific market, historical data would be able to help investors predict where things would go.
“If an established area has data available for the past 30 years and it shows an average annual growth rate of two per cent, why would we suddenly expect it to perform at 10%?” Mr Vidler said.
“It certainly could, but given the very large dataset, and the fact that the area is established, with no meaningful changes, there’s probably no logical or statistical reason for such a large increase in returns.”
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