Purchasing in the right area can help ensure capital gains in the future.

How do you find a suburb before it booms?

Saying that the residential property markets in Sydney and Melbourne have been heated in recent times is perhaps the perfect example of the word 'understatement'.

The CoreLogic RP Data Hedonic Home Value Index stated that property prices in Sydney grew 18.4 per cent in the year to July 2015 – the largest annual rate of capital gains for more than 13 years.

To put that into perspective (despite sounding like the stuff of fairy tales), had you purchased a dwelling in Sydney for $600,000 in July 2014, you could have made around $110,000 in capital gains in just 12 months. This is almost double the average Aussie salary, which according to the Australian Bureau of Statistics is about $57,000.

The September spring market has brought a surge of homes onto the market

However, the September spring market has brought a surge of homes onto the market, and with it, some signs that the incredible growth spurt that almost guaranteed success for any Australian investor in Sydney and Melbourne might have reached its peak.

"The slower month-on-month reading across the Sydney market comes at a time when auction clearance rates have slipped to the low 70 per cent range from week-to-week and the number of advertised properties has risen," said CoreLogic RP Data Head of Research Tim Lawless.

He affirmed that the conditions are still very much suited to sellers, but the tides may be turning for buyers. In light of this, how do you find a suburb before it booms?

How do you know a hot spot from a dud?How do you know a hot spot from a dud?

Research the numbers

Given that the markets have experienced a slight slow down, it's going to be even more crucial to ensure you purchase in the right area. It takes extensive research into the numerous intricacies of local markets to gain a proper understanding and make an informed decision.

If you've found an area you like, the Australian Securities and Investments Commission (ASIC) advises studying a number of statistics, including:

  • Recent and current sales: The most up-to-date information can be garnered by looking at homes that are on the market or have just been sold.
  • The median price: Looking into how this figure has changed over the preceding 12 months can give you an idea of how the area has grown. You should also compare the number to the neighbouring suburbs, as a location that is significantly cheaper than the surrounding suburbs can indicate impending growth in the future.
  • Vacancy rates: You don't want to be buying a rental property but then find yourself unable to find tenants! A high vacancy rate can be evidence of a less desirable suburb.
  • Council plans: It's a good idea to know about any proposed developments for the area, as you don't want to be surprised by a rezoning or commercial construction down the line. Conversely, new schools or amenities could play to your advantage.
  • Authority views: On the internet you can find a number of specialists that provide information on 'hot' suburbs via market reports and blogs. However, it's vital that you're conscious of any bias they may have, as they might not have your best interests at heart.
The old adage "knowledge is power" is very true in property investment.The old adage "knowledge is power" is very true in property investment.

See it in the flesh

Obviously you can do all this due diligence from the comfort of your home, but ASIC recommends you think twice before making any financial commitments to an area you're unfamiliar with.

Fortunately, this issue is easily resolved. Take a walk through the area, determine the proximity to amenities (like shops, schools and public transport), speak with the locals and attend a few open homes to get an idea of the people who live there and the kinds of property available.

Use a buyers' agent

If this all sounds like hard work or you'd like a second opinion, you should seek the services of a buyers' agent. A competent property agent will know the local markets like the back of their hand, not to mention being able to provide you access to exclusive private house sales.

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