Why You Should Ignore The Golden Rule of Real Estate

It was all going terribly wrong.

‘But it’s close to the university and some great schools. You can even walk to the city from here!’, he said.

My client had bought into the age-old adage of location, location, location, only to find out that the danger might lie in what wasn’t being mentioned. I could hear the frustration and confusion building in his voice.

‘It’s a great area’, I replied. ‘And the lifestyle is fantastic if you’re aiming to live there. But you’re overlooking the big picture – the fact that this part of the city is having a real issue with an oversupply of apartments.’

An oversupply is exactly that – the supply of property being built is rising above the level of demand that exists in the market from buyers.

This creates a two-fold problem for investors.

The first is that if you’re looking for a tenant, they have the upper hand.

Imagine 90 people are each looking to rent an apartment and there are 100 apartments available. Some unlucky landlord is going to miss out. Worse yet, the threat of those tenants choosing another property means the landlord often has to reduce the rent in order to attract or keep the tenant.

Suddenly the rental returns across the area starts to suffer and lengthy vacancies become the norm.

‘But that’s not the worst of it’, I said.

‘Prices don’t just suffer on the rental front, You also get hit on the value of the property itself. After all, when there’s too much of something in the market, what happens to the price?’

‘It falls in value as well’, he said. Resigned as he was, he was starting to get it.

‘That’s right’ I replied, ‘although what tends to happen with property here in Australia is that if people aren’t forced to sell for a lower price, they’ll just hold it until it comes good.

Our country has had a great record of prices eventually rising, so for many people they think that it’s only a matter of time. Unfortunately for investors in areas like this, it may well be that they don’t see any capital growth for years to come, or at least until demand catches up and developers stop building so many apartments.

I could see the wheels starting to turn in my clients eyes.

‘So it’s not all about location and convenience. There are other factors at play that can effect rental demand and price growth’, he said, with a bit more confidence.

‘Exactly’, I replied. ‘In fact, in areas of high development where projects may not come out of the ground for another 2 years, you even need to allow for future supply so that you’re not caught out further down the track.

It’s smart to look at infrastructure projects that may or may not be being built in the area, even trends that are effecting jobs and the economy, like a downturn in mining. If things start to slow down like they did in Perth and Darwin recently, even demand for the projects that are due can fall away and leave an oversupply.’

‘So this can happen in other cities too?’ he asked.

‘Absolutely’, I said. ‘In fact, the inner city areas of Melbourne and Brisbane are also suffering from oversupply. Even Adelaide and Canberra are having their own issues with apartment projects that were started some years ago that are only now coming online.’

‘But remember, I added, ‘major cities like this contain many markets. Just because the inner city might not be a great place to invest doesn’t mean there aren’t opportunities in other areas where supply is moderate and demand remains strong.’

One of the key indicators I use is a completely free tool by SQM Research. You can access it online through their site and you can look up vacancy rates in any suburb across Australia.

‘But how does this help me?’, has asked with a quizzical look on his face.

‘Vacancy rates are a good indicator of how the rental market is performing, and when it comes to suburbs within metro areas, they can also confirm whether there is too much supply coming on to the market. If you look at the trend line on the chart and it’s heading upwards, that’s not a good sign.

I also want to see the vacancy rate below 2.5%. Some researchers say that 3% is a balanced market, but I know from experience that when levels are at 3% then it’s probably going to take a few weeks to find a tenant, maybe more if it’s not priced properly.’

‘So look for suburbs that are at or below 2.5% and be careful of areas that are trending upwards above 3%’, my client said. He was starting to get his head around it.

‘That’s it, you’ve got it’, I said, happy that he was now looking at the market through a better lens. ‘It’s smart to look at the amenities in an area and whether it’s close to transport and café culture. The appeal of the property itself is key. But the supply and demand equation is always worth looking at from a big picture perspective

Category: Property Investement, Real Estate