They're one of the mainstays of property magazines and websites - Property Hotspot predictions by a property expert.
And I get it. Researching a number of areas looking for the needle in the haystack takes time and effort. There's a certain logic in looking at a list of hotspots and jumping on the bandwagon.
But before you buy a ticket for that ride, here's some things to think about.
First up, let me say that the information I'm about to share in no way is intended to reflect negatively on the experts being used to predict hotspots. Most of them are highly experienced and do a lot of research before producing their recommendations.
My goal is to look at how the experts come to their conclusions, and whether the lists are really of benefit to budding Developers, especially compared to a ‘buy and hold’ investment strategy.
Drivers vs Indicators
There are two different types of data available to assess the property market - drivers and indicators. I went into more depth about these in an earlier article, Do You Need a Crystal Ball to be a Property Developer? But here's the short version.
Drivers are the types of things that influence growth or decline in the market. An example is infrastructure. When the government announces a big new project, what happens to the areas around that project?
Now, sometimes the resulting change in property growth may be negative, because people want to get away from the new infrastructure. For instance, who wants to live under the flight path of planes taking off from a new runway at the airport?
But often the result of new infrastructure is growth in all the areas close by. An example is an extension to a train line. You might not want to live right beside it, but if you are close enough to use it and it will mean faster access to the places you need to go, it might be worth paying a little extra to live there.
In the real world, the infrastructure driver could be seen in Melbourne when Eastlink was first announced. Areas such as Ringwood, which benefited enormously from the new road, saw high levels of growth soon afterwards. A similar effect is unfolding around Sydney’s new airport.
Indicators, on the other hand, look at things that have already happened, and the resulting data is used to identify trends and so predict what will happen in the future if the trend continues.
So indicators look at things like sales volume, price points, auction clearance rates and so on.
In essence, drivers look forward and foresee which way the market is likely to move, and indicators look back and tell you if it did.
A large number of Property Hotspot lists work on indicators. They see an area has had a big growth in prices over the last 12 months, for example, and then designate it to be a hotspot. The assumption is that the current trend will continue.
Long-term ‘Buy & Hold’
Another thing to keep in mind when you're looking at a list of Property Hotspots is the target audience. Most of them are likely to be interested in negatively geared, long-term buy and hold properties. Because that's what their accountant told them to buy so they could save tax.
In this respect, the Property Hotspots become something of a self-fulfilling prophecy. People see the list, go and buy their investment property there, and because so many of them do it for the same reason, chances are there will be a level of artificial growth as a result.
But beware! If the drivers aren't there to support continued growth, then at some point the market in that area will run out of puff. If prices continue to rise at such a fast pace, inevitably people searching for a buy and hold property will start to look to neighbouring suburbs in order to get a better bang for their buck. You know these suburbs - the ones that feature on the "hidden treasure" type lists in the same magazines.
As a result, chances are that in the long run the Property Hotspot will drop back to normal levels of long-term growth (if any), and the areas around it will catch up. It's just a question of how long it takes for that to happen.
Investors vs Developers
Still, if the plan is to keep the property for long enough, over time there will likely still be capital growth.
And this is where a big split opens up between Investors and Developers. An Investor is much more likely to be using the long-term buy and hold strategy. And while Property Hotspots might not be ideal, given the property expert is most likely using indicators highlighting growth that has already happened, for the long haul they can still have some merit.
Developers, however, want to see short-term growth, rather than relying on a long-term strategy. If prices rise during the time they're developing the site, then it improves their bottom line.
Developers also need to look at the market drivers in the area, because if they want to sell their stock, they need to be confident people are going to move into the area and buy it. More demand means quicker sales to go with the higher price.
Hand-in-hand with that goes a need for Developers to understand what type of people are moving to the area, so they can develop the type of property most likely to appeal to them. So studying the demographics, both existing and future, is important to the success of their project.
Is new infrastructure planned that will provide jobs for people moving to the area? Is there transport, shopping, recreation? These are only a few examples - there are plenty more drivers that help shape the direction of the market (check out the article I linked to earlier for more details).
Bottom line, Property Hotspots are okay for Investors, but although looking at what's happened in the past is an important part of Suburb Analysis, you need to be looking for future potential. That's why you need to look at the drivers behind the market, so you can find the best areas to purchase your next site. Are you going to have to get educated about how to find and interpret market drivers? Yes. Will you need to put in some work? Yes.
But if you do both those things, you'll have a metal detector in your hands and can start searching for the needle in the haystack, rather than watching in horror as the haystack goes up in flames.
And I get it. Researching a number of areas looking for the needle in the haystack takes time and effort. There's a certain logic in looking at a list of hotspots and jumping on the bandwagon.
But before you buy a ticket for that ride, here's some things to think about.
First up, let me say that the information I'm about to share in no way is intended to reflect negatively on the experts being used to predict hotspots. Most of them are highly experienced and do a lot of research before producing their recommendations.
My goal is to look at how the experts come to their conclusions, and whether the lists are really of benefit to budding Developers, especially compared to a ‘buy and hold’ investment strategy.
Drivers vs Indicators
There are two different types of data available to assess the property market - drivers and indicators. I went into more depth about these in an earlier article, Do You Need a Crystal Ball to be a Property Developer? But here's the short version.
Drivers are the types of things that influence growth or decline in the market. An example is infrastructure. When the government announces a big new project, what happens to the areas around that project?
Now, sometimes the resulting change in property growth may be negative, because people want to get away from the new infrastructure. For instance, who wants to live under the flight path of planes taking off from a new runway at the airport?But often the result of new infrastructure is growth in all the areas close by. An example is an extension to a train line. You might not want to live right beside it, but if you are close enough to use it and it will mean faster access to the places you need to go, it might be worth paying a little extra to live there.
In the real world, the infrastructure driver could be seen in Melbourne when Eastlink was first announced. Areas such as Ringwood, which benefited enormously from the new road, saw high levels of growth soon afterwards. A similar effect is unfolding around Sydney’s new airport.
Indicators, on the other hand, look at things that have already happened, and the resulting data is used to identify trends and so predict what will happen in the future if the trend continues.
So indicators look at things like sales volume, price points, auction clearance rates and so on.
In essence, drivers look forward and foresee which way the market is likely to move, and indicators look back and tell you if it did.
A large number of Property Hotspot lists work on indicators. They see an area has had a big growth in prices over the last 12 months, for example, and then designate it to be a hotspot. The assumption is that the current trend will continue.
Long-term ‘Buy & Hold’
Another thing to keep in mind when you're looking at a list of Property Hotspots is the target audience. Most of them are likely to be interested in negatively geared, long-term buy and hold properties. Because that's what their accountant told them to buy so they could save tax.
In this respect, the Property Hotspots become something of a self-fulfilling prophecy. People see the list, go and buy their investment property there, and because so many of them do it for the same reason, chances are there will be a level of artificial growth as a result.
But beware! If the drivers aren't there to support continued growth, then at some point the market in that area will run out of puff. If prices continue to rise at such a fast pace, inevitably people searching for a buy and hold property will start to look to neighbouring suburbs in order to get a better bang for their buck. You know these suburbs - the ones that feature on the "hidden treasure" type lists in the same magazines.
As a result, chances are that in the long run the Property Hotspot will drop back to normal levels of long-term growth (if any), and the areas around it will catch up. It's just a question of how long it takes for that to happen.
Investors vs Developers
Still, if the plan is to keep the property for long enough, over time there will likely still be capital growth.
And this is where a big split opens up between Investors and Developers. An Investor is much more likely to be using the long-term buy and hold strategy. And while Property Hotspots might not be ideal, given the property expert is most likely using indicators highlighting growth that has already happened, for the long haul they can still have some merit.
Developers, however, want to see short-term growth, rather than relying on a long-term strategy. If prices rise during the time they're developing the site, then it improves their bottom line.
Developers also need to look at the market drivers in the area, because if they want to sell their stock, they need to be confident people are going to move into the area and buy it. More demand means quicker sales to go with the higher price.Hand-in-hand with that goes a need for Developers to understand what type of people are moving to the area, so they can develop the type of property most likely to appeal to them. So studying the demographics, both existing and future, is important to the success of their project.
Is new infrastructure planned that will provide jobs for people moving to the area? Is there transport, shopping, recreation? These are only a few examples - there are plenty more drivers that help shape the direction of the market (check out the article I linked to earlier for more details).
Bottom line, Property Hotspots are okay for Investors, but although looking at what's happened in the past is an important part of Suburb Analysis, you need to be looking for future potential. That's why you need to look at the drivers behind the market, so you can find the best areas to purchase your next site. Are you going to have to get educated about how to find and interpret market drivers? Yes. Will you need to put in some work? Yes.
But if you do both those things, you'll have a metal detector in your hands and can start searching for the needle in the haystack, rather than watching in horror as the haystack goes up in flames.
