Ever watched a show like Sunrise and heard a property expert talk about the latest ‘property hotspots’ around the country for investors?
STOP! This is not a safe or sustainable property investment strategy.
Let us tell you why….
What makes something a ‘property hotspot’?
Great question! And the answer is: It depends.
The Housing Industry Association (HIA) identifies ‘property hotspots’ as areas where at least $150 million worth of residential building was approved during the year, and if the population in that area grew by more than the national average of 1.4%.
Real estate agents will often determine an area is a ‘property hotspot’ based upon things such as high levels of clearance rates, a shortening in time that properties are on the market, and an increase in property prices.
So why is investing in ‘property hotspots’ risky?
There are no official measures or guidelines in place to determine whether an area is a ‘property hotspot’, so this immediately gives us reason to proceed with caution.
But the other reason that areas appear on this list is because they’ve already grown by a large percentage, that’s why they’re showing up in these reports. Investing into these areas could see you buying something that is now overpriced, as the demand for properties in the area will be high.
You could also be investing into a ‘rental ghetto’. If lots of investors have already bought into the area, the proportion of owner occupiers versus renters is off kilter, based upon the sorts of areas that Equidel clients invest in.
Give me an example
Pimpama, an area in south-east Queensland was considered a ‘property hotspot’ for quite some time. Below an article from the Courier Mail from 2011:
Market updates were showing a ‘staggering’ 385% growth:
But statistics can be misleading! If there’s 200 people living in an area and it grows to have 770 people – that’s 385% growth. The original percentage sure sounds impressive, but not so much when you look at the real data.
According to RealEstateInvester.com.au, the vacancy rates in Pimpama today are an astonishing 8.24%. To give you something to compare that to, the vacancy rate equilibrium is 2.5% according to CoreLogic.
Pimpama also has a very high proportion of renters in the area, versus owner-occupiers. 59.41% of Pimpama properties are held by renters.
The average capital growth in Pimpama has also been just 1.54% over the last 10 years.
As you can see, this particular ‘property hotspot’ isn’t so hot after all.
What’s my alternative?
The idea is to find the NEXT up and coming area to invest in, before it is deemed a ‘property hotspot’.
At Equidel we do this for our clients by doing our research. We apply the Equidel Property Analysis Matrix in order to find these locations around the country, and test them to ensure that they’re not going to be ‘flash in the pan’ areas like Pimpama.
Our Matrix has a minimum market segment size before we will even consider analysing a market.
We also spend time to look behind the numbers. What is it that’s supporting the growth in an area? And is the growth in an area sustainable over time?
Hopefully we’ve helped to explain the need to be cautious when looking at ‘property hotspots’.