“What are going to be the property hotspots in 2015?”
I was recently rung by a journalist from one of the major daily news sites asking me for my thoughts on this topic and to update my comments in an article in which I was quoted earlier this year.
Apparently the article that he wrote last January on the property hotspots for this year, 2014, was one of the most popular on their website, and now coming to the tail end of the year it seemed opportune for an update.
While I love giving my opinions to the media, I hate being asked for hotspots because that’s not how I work.
Rather than looking for the next hotspot or the next big growth area, which a few months later will be proven wrong, I prefer to use a strategic approach to finding investments that will outperform the averages over the medium to long-term.
Interestingly, before I replied to the journalist, I had a look at the original article online and was fascinated to see some of the predictions others had made and how those suburbs, the so-called next hotspots, have actually performed over the last 10 months.
Interesting is a good choice of word, in fact, a generous choice of word for how some of those suburbs have underperformed.
Just like most of the regional and mining town hotspots that were the flavour of the month a few years ago but have left the landscape littered with investors who lost money. Places like Port Hedland, Moranbah, Mandurah, Cairns and Gladstone
So what will drive our property markets next year?
The impacts of wild volatility in the Australian dollar, overseas financial crises, a flood of foreign buyers, superannuation funds and the long period of low and stable interest rates may all appear obvious in the rear view mirror, but what lies ahead is inherently difficult to judge, perhaps impossible.
However, likely positive factors for our property markets next year include:
1. The momentum of the markets, especially in Sydney and Melbourne, creating a ‘wealth effect’. Many of us are feeling wealthier as the value of our homes go up and will want to invest again, while others feel they are missing out and will want to get into property.
2. Interest rates are likely to remain low for most of next year.
3. Population growth will continue, albeit at a lower rate, and head for our four big capital cities.
4. The Australian economy will perform better than many other western countries, but a little less robustly than this year.
5. Job growth and steady unemployment rates will lead to increasing consumer confidence.
This combination of factors is likely to cause continued property price growth in the inner and middle ring suburbs of Sydney, Melbourne and Brisbane next year.
However, our other capital cities are likely to languish next year. Perth is catching its breath after a few strong years and the other capitals just don’t have the economic strength to attract strong population growth.
Similarly I can’t really see a reason for regional or mining town real estate to have much capital growth. There is no influx of new people moving to these regions, little to strengthen their economies, and investors are no longer buying up big in these regions.
As always, demographics will drive our markets.
Let me explain. As Australia’s economy bumbles along I can see little wages growth over the next year or two, but I do see interest rates rising in early 2016 and both these factors will affect some suburbs more than others.
What I mean by this is that rising rates are likely to affect suburbs that are more interest-rate sensitive like blue-collar areas, regional locations and first-time buyer locations.
On the other hand, property values are likely to increase in the more affluent, gentrifying middle ring suburbs of our major capital cities where the locals’ income is less dependent on CPI rises in wages and where rising interest rates are less likely to have an impact on disposable incomes.
So my top picks for suburbs that will outperform would include suburbs where people have higher disposable incomes and are able to, and prepared to, pay a premium to live there because of the amenities in the area.
Next year will be a good time to clean up your house.
While I still see some good opportunities in the property markets, I recognise that strategic property selection will be critical as capital growth will not be as strong next year as it was this year.
I also see 2015 as a window of opportunity for those with underperforming properties in their portfolio to divest themselves of their lemons, because the odds are they will continue to disappoint.
The best way to uncover an underperforming asset before it eats too far into your bottom line is to annually review your portfolio and ask yourself some hard questions:
- Is this property performing like I expected it to?
- Is this property outperforming the market?
- If this property were on the market today, would I buy it again?
- Is there anything I could do to improve my property, so that it generates a more attractive return on my investment?
- Is this property likely to outperform the market averages for the next decade or more?
Sure property is a long-term investment, but occasionally the right thing to do is to cut your losses and sell up so you can buy a better property.
And don’t wait for your local market to get better, because the gap between the value of the property you own and the top performers will only get wider.
However, if your property is tenanted, consider selling it at or near the end of its lease term to widen the appeal of your property by making it attractive to both owner-occupiers and investors.
The bottom line is don’t look for property hotspots in 2015, instead look to invest in stable affluent suburbs in our capital cities where employment prospects are strong, incomes are rising and locals (who will upgrade) and those who want to live in the suburb have high disposable incomes.
Michael Yardney is a director of Metropole Property Strategists, a company which creates wealth for its clients through independent, unbiased property advice and advocacy.