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Identify Investment Hot-Spots Before a Suburb Gets Hot

How do you find a hidden gem?
The trick is to identify the suburb before it becomes hot.
The best time to buy into a suburb is before it becomes popular and prices start to take-off.
If you arrive late, prices will be driven by increased demand so you will end up paying too much.
Further, the opportunity for short–term capital growth may diminish significantly because of the accelerated increase in property median values, and medium-term growth will flatten as prices start to stabilise once the heat is taken out of the market.
The best investment locations are those that are identified before the suburb becomes ‘hot’ – ‘hot areas experiences a dynamic and upward shift in demand that puts them on par with the better established and popular areas.
Below are my top tips on identifying the signs that indicated that a suburb is about to get ‘hot’, to help you find your next hidden gem.

Look for the ripple effect
Affordability and availability can limit property buyers buying in the area they want, so they’ll often look to buy in an adjacent suburb as an alternative.
This causes demand to increase in these suburbs, which in turn pushes up prices and the price-ripple effect occurs.
This is especially the case in capital city and major regional areas.
So, keep an eye out for strong performing suburbs and consider the capital growth potential of the surrounding areas.

Listen out for investment in infrastructure
Listen out for announcements about major infrastructure investments on things like roads, transport and schools.
Developments in these areas are signs of a growing population and therefore a growing demand for services such as housing.
Infrastructure developments can take years to complete, so the sooner you buy the more you’ll benefit when the wave of housing demand hits.

Keep track of announcements from business and government
When a large business or government entity announces it’s about to set up a major operation in a particular area, this is a sign that jobs and population growth may soon follow.
However, there are two important points to remember in these situations:
Never buy on the strength of a single initiative because if that business or government entity decides not to invest or pulls out early, property values are likely to head south very quickly as employment opportunities disappear with the organisation.
If the announcement is part of a regeneration plan for the area, there’s probably an existing workforce and housing stock available.
Therefore capital growth may not be as good as what would otherwise be the case.
Make sure you do your research on any planned or developing major projects, and on the current and forecast economic and employment situation within a suburb/region before you buy.

Look for changing demographics
A major shift in the social or demographic make-up of a suburb can have a big impact on property values.
For instance, if a suburb moves from being predominantly single occupancy to more family orientated, this will drive demand for multi-bedroom homes and prices will rise accordingly.
The key is to understand what’s driving the demographic change and to make sure it is a long-lasting one.
It may be things such as immigration, population shift and/or employment opportunities.

Monitor property rental data

Look for changes in property rental data
Listed below are three key ratios that every property investor should keep an eye on.
Changes in these ratios can indicate positive or negative movements in the value of an investment.

Vacancy trends
Low vacancy rates (under 3%) indicates a property shortage and strong rental demand, which is good for capital growth.
However, if vacancy rates start increasing it means that more stock is on the market, there are fewer tenants and there is less demand in the suburb, which could be a sign that the suburb is no longer desirable.

Yield trends

Suburbs with yield trends that are flat or rising could mean property prices are stagnant or even falling.
Other things being equal, it makes sense to stay clear of these suburbs until market conditions show signs of sustained improvement.

Owner/renter trends
Ideally, you should look for areas where the owner-to-renter ratio is at least 2:1.
This is because owners tend to take better care of their properties, which helps enhance and increase the desirability for an area.
An ongoing deterioration in this ratio could mean owner-occupiers are leaving, which may not be good news for property values.
Note changes in Sales data Analysing recent sales data could reveal early indications of changing underlying demand in a suburb.

The key measures to consider are:

Days on market
This shows how long it is taking vendors to sell their properties.
If the measure is going down, it indicates that either demand is high and/or the pricing is right.
A downward trend may be a sign that the suburb is hotting up.

Discounts offered
If discount levels are flat and falling this is a good sign.
Generally speaking, the lower the discount the easier it is to sell the property – meaning demand is good.
Just be mindful that the level of discount might reflect the reasonableness of the asking price.

Auction clearance rates
If auction clearance rates are holding or increasing, it is a sign that demand is strong.
Again, be careful as it could also reflect competitive vendor price setting and the skill of the auctioneer.
However, when this is compared with the prices achieved, it will give a clear indication of whether prices are on the up.

Consider street hot spots
There will be occasions where you can focus on a street within a suburb.
This is especially the case when a suburb might already be popular, but the street is not.
As more and more people enter the market, supply and demand factors may cause buyers to look in streets that are less popular in the suburb.
Keep a look out for streets where property values are lower than the suburb’s median value.
What next? Now that you know what you’re looking for, you can start doing some in-depth research.
The more research you do, the more experienced and better educated you become.
A good starting point is reading up on the latest data and commentary in the State Market Reports.
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