Expert Advice with Jeremy Sheppard

31/03/2015

Don’t let the catch-cry “These areas will always be in demand” mislead you. We need to understand exactly what demand is and how to gauge it if we’re to pick great growth locations.

Investment experts

Hands up if you’ve ever heard this…

“These areas will always be in demand”

This is quite often in reference to suburbs close to the CBD of a major capital city. You hear it from real estate agents, buyers’ agents and other “experts”. The reasons are often along the lines of:

• Proximity to work and industry

• Good schools in the area

• Entertainment and leisure options

• Shopping and socialising

• Public transport or good proximity to major transport hubs

• Parks and scenery adding to the overall ‘feel’ of an area.

Somebody who has never even bought a property can probably guess a lot of those items. Similarly, the experts who came up with lists like that are usually only guessing too.

New vs old features

There are property markets that have had features like good transport, schools, employment, shopping and so on for decades. But they haven’t had above average capital growth for decades. So obviously this isn’t the key to strong capital growth.

Some property markets will have a surge of growth for a few years and then sluggish growth for several more before surging yet again and repeating the cycle. But did the proximity to transport, schools, parks, shopping diminish for some years and then pick up again for those surge years? Of course not, these features were there the whole time.

Look at a major capital city like Sydney or Melbourne for example. These cities have it all: schools, shops, employment opportunities, transport and entertainment. And they’ve had it for years and it hasn’t changed much over those years either. But the growth has come along in fits and furrows.

The extension of a train line into a suburb will definitely make the suburb more appealing. That extra demand puts pressure on prices to rise. But after 10 years, the benefit of that train station has already been well and truly factored into the new price of properties there.

Supply and demand

We need to focus on supply and demand since prices for just about everything are dictated by these two factors. But not having a clear idea of what demand actually is, we might stumble over how to determine it.

And this is where the phrase “always in demand” can become misleading.

Demand vs desire

We need to distinguish between the demand that is “wishful” thinking and the demand that affects property prices.

A 14 year old boy desires a Ferrari but that doesn’t affect the price of Ferraris. It is pure wishful thinking. Millionaires can affect the price of Ferraris because they have the financial capacity to do so.

One of the fastest killers of demand is a recent period of high price growth. People start to reason, “It’s too much. It’s not worth it now”. They find more affordable options, better value for money elsewhere.

The best areas to live in Australia have been relatively unchanged for a long time. But they have not had the best capital growth for all of that time. This is because a big surge in prices eventually subdues demand.

So you can see that although some locations will always be “desired” they will not always be “in demand”.

These locations have had low supply too, but that still hasn’t given them the great surge in prices you’d expect. That’s because you need both high demand AND low supply.

The demand that property investors need to gauge is the kind that has a direct bearing on prices. There are many indicators affected by buyer demand. To get a truly good understanding of a property market, you should look at a large number of statistics.

DSRdata.com.au publishes more than 20 different statistics for thousands of suburbs Australia-wide. 

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Jeremy Sheppard is the property data nut-job responsible for the DSR at DSRdata.com.au

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Disclaimer: while due care is taken, the viewpoints expressed by contributors  do not necessarily reflect the opinions of Your Investment Property.