Where is the Next Property Hotspot?
Leon Jacques, Associate –Buyer’s Agent and Property Strategist at Cohen Handler shares his thoughts on ‘hot spotting’ the next boom locations verses the blue chip approach of long-term property investment.
One of the most common questions I get asked by property investors is about where they can buy a property that is going to quickly outperform the averages in terms of capital growth so that they can get the best return on their money.
My honest answer regarding hotspots is … who cares? Unless of course you are a flipper of property who wants to trade in and out of property quickly, and perhaps do some renovation prior to selling. Prudent investors understand that investing in property is a long-term proposition. It’s not about the next year or two; it’s about the next 10, 20 or 30 years depending on your age. It’s also about leveraging off that growth, possibly tapping out equity to use as seed capital and then adding to your portfolio as and when you can.
To hotspot or not?
As we all know, trading in and out of property can be expensive when you take into account stamp duty, agent’s and solicitor’s fees, capital gains tax, advertising and the rest. So, my thoughts are, if you are thinking of investing in property then DON’T HOTSPOT.
Instead look at suburbs that have grown consistently over an extended period and have outperformed most other areas in terms of capital growth. The main thing is to focus on whether the catalysts for that historical growth still exists, i.e. being close to an employment hub, lifestyle precincts, infrastructure, good schools etc. When you find these suburbs then invest there, rather than speculate elsewhere.
A perfect example (and stark warning) of ‘hot spotting on steroids’ was the mining town property boom experienced in Western Australia, South Australia and Queensland across 2009–2011. Many investor or flippers did get in early and made substantial profits selling out at the top of the market. But those who got the timing wrong and bought at the top of the market are now stuck with property that even if they could sell have ended up losing them hundreds and thousands of dollars. Core Logic figures confirm that prices dropped by as much as 78 per cent in some regions due to the closure of mines or winding back of operations as China’s economy slowed and coal and iron-ore prices fell.
The worst example I encountered was a gentleman in his 50’s on a modest income, entered into the property market for the first time. He was advised to buy in a mining town in QLD. He paid $300K for his house on a large block of land and quickly found a tenant. The property was immediately cash flow positive. Not long later the banks valued his property at $310K and the mine was doing well. All looked rosy, so he decided to sub-divide and build another house. He borrowed another $300K from the bank to do the build and now owed the bank around $550K in total. But sadly by the time he had finished building, one of the major mines had closed down, the tenants had moved out and he had to substantially reduce his rent to ensure some form of cash flow. He was now $17K a year cash flow negative and the banks new valuation for the 2 houses combined was $150K.
Put simply he was stuck between a rock and a hard place. He could sell his properties and walk away owing the bank $350K with no asset or he could hold both houses and pay $17K a year in the hope that one day the mine will reopen and his property value will increase by more than 200% just so he can clear his debt.
Always ask yourself if you are an investor or speculator?
This is centred on having only one or two major price drivers in the market place and when circumstances change, such as the mine closing then the market collapses.
Long-term performance vs. short-term speculation put simply, ask yourself if you are an investor in it for long-term capital growth, or are you a speculator – someone who is happy to take a chance on the next big trend?