Ripple Effect
Wouldn't it be great to know the exact postcodes that will grow more than the average property market right after your purchase?
This is something you need to research and it does take sometime to do. There are various factors you can look out for while doing your research. In this post I will talk about the Ripple Effect and how we can use it to our advantage.
Background
In the long term, property prices usually tend to go up. This is true for most asset classes. A healthy annualised rate of increase over the long run is around 6 - 7%. Anything more is always good. However when you see this data its usually the entire market. You may hear a lot of phrases such as "Australian median house price increased by 15% over the last year". This is a high level view of the nationalised market. Did each individual house really increase by 15% exactly? The answer is No. There are markets, then there are sub markets and there are even smaller markets within. For example, Australia can be one market, then you have our capital cities as one market, regional cities and then we can dig into each suburb or postcode.
The Australian market is heavily dependent on Sydney and Melbourne house prices as they tend to be the most expensive. If you zoom in to Sydney or Melbourne, there are suburbs which may be decreasing in value and some even outperforming the market. So if you look at a suburb where the median price is $2 million, and this particular suburb has decreased by 4% in the last 12 months - this doesn't mean that all houses in the suburb have decreased by 4%. Maybe there was a recent sale of a house which was sold for $10 million last year and was sold for $9 million this week. A statistical outlier. After a few house sales like these, the data may show that the prices are dropping in the suburb. Due to the high value of this house, it has a greater impact on the data. Similarly, the Australian market is affected by the overall Sydney and Melbourne price. There are plenty of regions throughout the country which may be going through a substantial growth phase.
What is the Ripple Effect?
Picture a stone dropping into water, after the initial splash the water will move outwards and the ripple essentially stops once its too far away. Similarly, the initial splash can be the main CBD and the growth trend is transmitted in neighbouring areas. But remember, there are markets within markets, so we need to identify suburbs and look for other areas where ripples may start.
Ripple effect, as the name suggests is all about targetting the neighbouring suburbs of the potential boom suburbs.
So when looking at markets in cities, we need to look for suburbs which have outperformed the entire city's market. The increased growth may suggest that buyers are looking to move into these areas for whatever the reason may be. You can talk to real estate agents in the area, look at government websites for infrastructure projects and do some research on how the area has performed over the past few years. Check out the post below about transport projects:
Property Brew
When researching, you will notice early trends of property developers starting to sell land, government announcing projects, increased migration, university campuses introduced etc.
The most basic economic concept is of supply and demand. So, initially there will be suburbs where buyers will tend to look first (where the ripple starts). And when these get too expensive buyers will start looking at adjacent suburbs. So if you observe a trend of people buying a property in a particular area, as an investor you can start looking at neighbouring areas so you can purchase even before the ripple gets there. The advantage of targeting the neighbouring suburbs is that you can often buy them for a lot cheaper and then it's just a waiting game. This way you can enjoy the handsome returns on your investment as demand increases.
Note on the stone drop analogy - the ripple in properties wont be as simple as a circular shape. There may be areas which are better than the other and even some areas which are not desirable at all. So it's important to identify other material facts before choosing a property. As always, it's better to do more research before assuming that prices will move up. Ensure that the research is done through credible sources.
Alright, here's the disclaimer - I am not a financial advisor so this isn't professional advice. Properties are a big investment and depend on your circumstances - please seek professional advice before making your decisions. I am just some guy on the internet. You can contact me though. I'm pretty friendly.
