- Micro factors useful when determining risk of investing in a location
- Top 5 factors not exhaustive, says Lachlan Vidler
- Inventory, days on market, and vacancy rate among most important
With national house prices increasing by over 20% in the last year, buyers are looking to jump on the band-wagon in areas that are likely to see sustained capital growth in the future.
Atlas Property Group Director Lachlan Vidler said while macro factors can have impact property prices at a national level, analysing micro factors is much more useful in determining if a particular area is to see continual growth.
“Micro factors are often the most-analysed factors, particularly at suburb level, and
are typically seen as the factors that can indicate future capital growth and rental
growth,” he said.
Mr Vidler, who previously co-authored A Military Guide to Property Investing, said no single micro factor can indicate the future performance of an area, but some can be beneficial in gaining an insight.
“An understanding and correct interpretation of macro and micro factors is pivotal in reducing risk and increasing investment performance.”
Lachlan Vidler, Atlas Property Group Director
According to Mr Vidler, there are five data points that are of special interest in determining the potential of an investment location.
While these five micro-factors are important, Mr Vidler acknowledged that the list is not fixed nor exhaustive.
“There are other micro factors that exist and can be equally important
depending on the location, which is why it’s imperative that property buyers complete
significant due diligence before deciding to purchase anywhere,” he said.
Areas with high demand and low supply of properties, will result in prices being pushed up due to high levels of competition.
According to Mr Vidler, the inventory of stock on the market is generally expressed via a measure of months.
“While there is no magic number, it’s generally accepted that six months of inventory
translates to a balanced market, so, if there is less than six months’ supply on the
market, you should experience upward price pressure, and if there is more than six
months, you will likely experience downward price pressure,” he said.
2. Days on market
The average number of days properties are on the market is another important indicator of the suburb’s supply and demand characteristics.
“If a suburb has days on market of 60, this is usually considered a balanced market,
but below 60 there can be additional competition in the market, and above 60 it’s
expected that there is less competition,” said Mr Vidler.
3. Vacancy rate
The suburb’s vacancy rate, expressed in the percentage of properties that are currently available to rent but are vacant, is important in determining the risk associated with investing in the area.
“It’s commonly accepted that a vacancy rate of three per cent represents a balanced
rental market, with a percentage below that figure a sign of more demand than
supply, and above three per cent indicating a market where there is potentially an
oversupply of rental properties available,” Mr Vidler said.
4. Past capital growth
According to Mr Vidler, using the past capital growth of an area to determine it’s likely future performance is a divisive topic between property investors. However, Mr Vidler feels that at times, past performance can tell a story.
“If an established area has data available for the past 30 years and it shows
an average annual growth rate of two per cent, why would we suddenly expect it to
perform at 10 per cent plus?
“It certainly could, but given the very large dataset, and the fact that the area is
established, with no meaningful changes, there’s probably no logical or statistical
reason for such a large increase in returns,” he said.
5. Rental yield
Rental yield is the final micro-factor, which is calculated by expressing the annual rent of a property as a percentage of the initial purchase price.
“Rental yields are typically at their lowest when an area is at the top of the property
cycle, and yields are often at their highest just prior to an area moving back into its
peaking market,” Mr Vidler concluded.