Cheapest suburbs with best capital growth potential

LocationScore, a property-research platform that interprets big data to analyse and score every suburb in Australia, has just released a list of Australia’s cheapest property markets with the best capital growth potential.

The platform restricted its search to only include suburbs within the top 20 “Significant Urban Areas” (i.e. the top 20 cities and regions by population, from Sydney to Launceston).

“This means there is likely to be sufficient economic diversity to find work. It also means the city is unlikely to turn into a ghost town and should have decent value growth long term,” LocationScore said.

LocationScore also omitted suburbs that have challenges regarding their immediate future values, as well as suburbs that have good potential for growth in values right now. To do this, the platform used a proprietary algorithm known as “Location Score”.  

What is Location Score?

This score denotes a suburb’s future growth potential. As capital growth occurs when demand exceeds supply, Location Score can predict future price growth by measuring current supply and demand using these key indicators:

• Auction clearance rates
• Percentage of stock on market
• Average vendor discount
• Percentage of renters to owner-occupiers
• Days on market
• Online search interest
• Vacancy rates
• Rental yields

The Location Score is a number between 0 and 100, with a score of 50 being the theoretical balance point between supply and demand. The higher the Location Score is above 50, the better the growth potential, since demand exceeds supply.

Tracking down cheap suburbs with pent-up demand

Jeremy Sheppard, director of research at Empower Wealth and co-developer of LocationScore, explained what drove the platform to list the country’s cheapest property markets with the best capital growth potential.

“There has been a lot of media coverage around housing affordability this year, especially in our two biggest cities of Sydney and Melbourne, given their strong price growth over the past couple of years,” Sheppard told Your Investment Property. “Also for the investor out there, it’s not easy to find cheaper locations that might be offering positive cash flow opportunities while still showing potential for growth.

“So with this in mind we set off on a research journey using the eight variables in the LocationScore algorithm to track down some of the cheapest locations showing pent-up demand, yet limited supply. This puts pressure on prices to rise sooner rather than later.

“However, we didn’t want to highlight locations that are in the middle of nowhere with poor economic fundamentals. So we kept our search focused in Australia’s top 20 significant urban areas.”

Melbourne and Sydney are possibly the only cities in Australia that can be declared immune from serious economic downturn, but looking at cheaper cities may expose the investor to more long-term risk. “Even Perth, our fourth largest real estate market, suffered significantly when resources tanked,” Sheppard said.

“Economic research is really quite tricky to get right. Jobs is the key, more so than population even. But supply and demand for property should reflect the economic state of a market anyway – all research for price growth should focus on supply and demand.

“All the markets we’ve picked are in a state where demand exceeds supply. So there must be something good going on, economically speaking anyway.”

Sheppard made it clear that investors shouldn’t buy in these locations without adequate research. “The data is a great overall indicator. It highlights markets worthy of further research,” he said. “You still have to do the ground research. Speak to local council about future plans, speak to agents, and ask the locals about how confident they feel about the area – the good, the bad and the ugly. This will help you filter the shortlist even further.”

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