How to choose the right locality or suburb in Australia

Locality is a major factor in determining the success of your property investment. But how do you know what’s going to make a locality work for you without the help of a magic 8 ball? At Eda Property we are very passionate about research and think that solid research combined with expert advice and instinct is a great starting point for any property investor.

Our method splits the research process into three key categories:

  1. Locality
  2. Vendor
  3. Building

They are all equally weighted, which means getting the balance between 1, 2 and 3 right is absolutely crucial to your long-term success as an investor. We’ve tested this method time and time again with a broad range of investors with different goals and budgets. Our results show that this research approach delivers. Diligent research and a strict screening and selection approach is paying off for our clients who are now seeing gains beyond the rest of the market, and in under 12 months.

Now, let’s say could only to pick one of these three categories to focus on, which one would it be? My advice to investors is that locality is the most important factor. Even if you chose the best house (and price) in the best street, if the entire suburb is going down for the next 10 years, it’s unlikely you will achieve any gains let alone outperform the rest of market.

We screen over 2400 suburbs to select under 200 that meet our initial locality criteria. This leaves a sizeable selection of opportunities in the marketplace for us to tailor investments for individual clients. However, it leaves over 2200 suburbs, which we don’t believe will outperform over 10 years.

We deliver our locality screen by:

  • 5 quantitative measures initially applied to a suburb, our ‘negative filters’. If a suburb doesn’t have what we require then we will not recommend it.
  • We then apply our ‘positive filters’, these are qualitative and require further research and access to current information beyond just screening numbers. However, the initial screen is possibly the most important step at this critical point.

One of the key indicators we focus on is called family income growth (FIG). It is the rate at which households, or the local population are becoming wealthier. Over the last 30 years, the suburbs that have had a local population growing in wealth (at or over a certain rate), are more likely to experience an increase in property values and rental demand. Linked to what some commentators term ‘re-gentrification’, this is one measure that accurately highlights a suburb undergoing this type of positive change.

An increase in wealth affects many aspects of the local community. As people become wealthier they demand better quality facilities, they will create more income for the local government to pay for improvements, and build better quality homes and increase the general desirability of the area. They will also bring trade – because where there are people who can spend money, there are people willing to take it!

Where the increase in local wealth is too slow, the local market will be unlikely to demand an improvement in facilities. They will probably not improve the local aesthetic and are unlikely to affect in increase in rates. This generally indicates areas of lower demand, with few facilities and local infrastructure, i.e. not many reasons someone would want to live there.

However, some suburbs that have experienced strong growth (and will do in the future), can go through a period of slow FIG. This can be a result of high house prices stagnating future growth, restrictions to development due lack of available land or other economic or industrial changes. The hurdle rate that Eda applies is the figure that has historically indicated a suburb will perform for the next 10 years. Some suburbs that display lower figures may perform but it could take 15 to 20 years.

FIG can also be too high. Where the rate of growth appears too fast, it often indicates lack of depth in the market – which means that there isn’t enough activity to provide meaningful analysis or to give investors an estimate of what might happen to their property investment.

An example of lack of depth could be a small population. In this instance, one very wealthy new resident may greatly affect the total wealth of the area and skew the results.

This measure has been a very accurate measure of growth for Eda Property and has delivered strong performance results, even in the short-term. However, we are aiming for strong performance over 10 years. In order to achieve this and sustain the price growth of a local property market, we need to consider a number of other factors, particularly, the risks that an investor is taking. In short, property investment, like any investment, requires skill and a methodical approach that includes expert locality research.

By | 2017-11-17T09:38:10+00:00 March 6th, 2017|Advice, Investment, Property, Wealth|