Five key pillars to identify growth suburbs

With property prices across the country increasing at a rapid rate, one property expert has urged buyers to look beyond the headlines and focus on “micro factors” that impact capital gain.

Former naval officer turned buyers’ agent, Lachlan Vidler, believes that while record low interest rates have had a significant impact on prices across the country in the past 18 months, it’s important to hone in on the suburb level to identify growth opportunities.

Mr Vidler, the Director of Atlas Property Group, said interpreting data on a local level helps reduce risk and can lead to strong capital growth.

“Micro factors are often the most-analysed factors, particularly at suburb level, and are typically seen as the factors that can indicate future capital growth and rental growth,” Mr Vidler said.

“But 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.”

Mr Vidler said supply is one of the first considerations a homebuyer should assess in any suburb.

“This idea of supply and demand is best expressed through the inventory measurement which is, quite simply, the amount of stock on market, and is generally expressed in the number of months – for example, ‘there is three months of inventory on the market’,” he said.

“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, and if there is more than six months, you will likely experience downward price pressure.”

According to Mr Vidler, the days on market figure can give an indication of how much demand for property there is in a certain 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,” he said.

Mr Vidler noted vacancy rate can be an important tool for understanding the risk of investing in property in a particular location.

“A vacancy rate is expressed as a percentage and is a measure of how many properties in a suburb are currently vacant – that is, available for rent but not currently rented,” he said.

“It’s commonly accepted that a vacancy rate of 3 per cent represents a balanced rental market, with a percentage below that figure a sign of more demand than supply, and above 3 per cent indicating a market where there is potentially an oversupply of rental properties available.”

Property investors commonly look at data on capital growth, however, Mr Vidler said this can be controversial.

He noted past capital growth, such as median dwelling prices, can be an extremely divisive concept for property investors because it is not necessarily an indicator of future performance.

“On the other hand, past performance can still tell us a story about an area,” he said.

“That is, if an established area has data available for the past 30 years and it shows an average annual growth rate of 2 per cent, why would we suddenly expect it to perform at 10 per cent plus?

“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.”

Mr Vidler said the final micro factor for property buyers to consider is rental yield, which can suggest where the local property cycle is sitting.

“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,” he said.

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.