With auction clearance rates hitting highs of over 2,000 for the year, and clearance rates in excess of 77% how do you know if a suburb is about boom?
Any smart investor will know that you make your money when you buy, not when you sell. In property, the key is to buy into a city or suburb that is about to boom, meaning you get in before prices rise and enjoy the wealth that comes from the growth.
Unfortunately, it’s a lot easier said than done. If it was easy, everyone would be making a fortune from property. It can be very hard to tell when a suburb is about to boom, but there are a couple of key indicators that you should look out for.
- Lower vacancy rates
Low vacancy means that there is either a shortage of rental accommodation on the market or the number of tenants has increased. In general, the market is balanced when the vacancy rate sits at around 3%. When the rate is below 3%, there is a shortage of rental properties for the tenant pool available and above 3% means there is a surplus.
A falling vacancy rate usually causes increases in rent as investors will take advantage of the higher demand relative to the number of properties in that suburb or area. An easy way to find out is using SQM Research’s postcode checker here, you can see the historic vacancy rate figures, the longer term average and what it’s currently sitting at.
- Higher yields
Because renters are flexible and can move more freely than owner-occupiers, they will often be the first to move to popular suburbs. The increase in demand will push rents up which means yield growth.
- In the below example the rental yield is 4.55%
- Property purchase price = $400,000
- Weekly rent = $350
- (350 x 52) / 400,000 x 100 = 4.55%
If you want to determine a more accurate yield, or the net rental yield which is the same yield after costs are taken into consideration you can use this formula.
- Net rental yield = (Annual rental income – Annual expenses) / (Total property costs) x 100
There are lots of tools to give you a broad suburb view on what the average rental yield is, including RealEstate.com.au which gives a fairly broad calculation – this uses the median advertised rental figure, calculated on property sales over the past 12 months so it isn’t going to be accurate to a specific property but can help you narrow down your suburb criteria. You can also look at this great tool at SuburbView to understand the average price broken down by property type, amount of bedrooms and average rental yield.
- Fewer days on market
This one is pretty straight forward. If demand increases, supply decreases or both, buyers will be quick to purchase property because scarcity creates demand. When demand exceeds supply, the average days on market will therefore be lower because there are more prospective buyers per property.
A way of quickly checking this is again using RealEstate.com.au you can look at a metric they call Market Demand, which is calculated by the number of visits to realestate.com.au/buy per listing per month with the assumption being more people viewing the property means there is more demand, compared to when there are less people viewing the property there is therefore less demand.
You can view the Average Days on market using a suburb report from HomeSales.com.au as well, which at the top of the suburb profile shows how many days people own the property, in the case of Brisbane LGA (postcode 4000) units in Brisbane take an average of 77 days to sell meaning they can be on the market much longer than suburbs like Paddington (postcode 4064) which only has an average of 63 days on the market for units, and only 35 days for houses showing higher demand.
- Increasing number of auctions
Auctions historically work better when demand is strong. When there’s lots of demand, buyers will be more willing to outbid each other which results in higher prices for the vendor. Therefore, if there are more auctions than usual in a particular suburb, it could mean that market is getting hot.
It is worth remembering that auction clearance rates are generally more applicable in New South Wales, Victoria, ACT and South Australia as their purchase contracts are less flexible for buyers meaning more properties are sold at auction, compared to private treaty (a non-auction sale). Whereas in Queensland, Western Australia and Tasmania buyers tend to prefer non-auctions as they can sign contracts subject to finance and other conditions.
- Less vendor discounting
Discounting refers to a situation where the final sale price is lower than the asking price of a property. At times when supply exceeds demand, buyers have more bargaining power because there are lots of options on the market for them to choose from, so vendors may have to accept a lower price. On the other hand, when supply is scarce, buyers need to compete on price so vendors are much less likely to drop the price of their property.
Similar to days on market, HomeSales.com.au shows the Average Vendor Discounting meaning how much the list price is reduced from the initial value to the final agreed value. As an example you might be able to get a better deal, or the vendors will be more willing to negotiate in Paddington (postcode 4064) with average vendor discounting of around 5% compared to Albany Creek (postcode 4035) which interestingly has vendor discount of -1.43% meaning they may market properties asking for offers over $400,000 and sell for $410,000 or showing there is higher demand in this type of market.
- Infrastructure growth
An increase in development plans and public transport in a particular location is a sign that the government is expecting a population boost. Check the council website and community news to keep track of any announcements about public amenity and infrastructure. Or some smaller websites you can check out include Brisbane Development, The Urban Developer or Build Sydney to keep up to date with recently submitted plans and works.
- New developments/redevelopment
Let someone else do the research for you. If a suburb has new developments or redevelopments planned, it’s an indication that a developer believes the suburb is likely to boom soon. You can again refer to Brisbane Developer, or The Urban Developer to keep in touch with upcoming projects or if you wanted to get an idea of your local zoning or see if your neighbour was going to build a new development you can check out your local council website – in the case of Brisbane this is called PDOnline and it shows any development approvals, plans that have been submitted or developments that have been approved on specific streets.
- Less stock on the market
If you notice that there are fewer properties on the market in your suburb than usual, this could be because no one is willing to let go of their homes because the area is doing well with good capital growth and/or yields. There are a few ways to investigate this, but they mostly include looking at RealEstate.com.au and understanding the current listings and number of listings in an area, speaking with local agents or again researching specific suburbs here.
But how do I know if a suburb is about to boom?
All of these factors will ultimately influence if a suburb is about to take off, or the opposite if it is about to go into a decline. To find these places you should work with a Buyers Agent who knows the local market and can help you mitigate all of these factors to find the perfect property. Red & Co are Buyers Agents who understand the local market and can help you build a property portfolio, if you would like to talk to our team for a free consultation contact Jayden Vecchio on 0421 874 357, or get in touch here.