5 signs that a suburb is hot
Everyone wants to know which suburbs will be the next hotspots. But would you be able to recognise one if you saw it? How can you tell when a suburb is booming or, more importantly, ready to boom? Here are 5 signs to look out for.
Wise property investors know that regardless of how the overall capital city market is performing at any given time, there will always be some suburbs that will be performing better than others.
When deciding to make an investment purchase, it’s important to have an understanding of what is happening at a suburb level. It’s especially important to be able to identify which suburbs are booming or ready to boom – those with a high level of sales activity, strong competition amongst buyers, and a high likelihood of price increases.
Here are 5 signs that could indicate a suburb is red hot.
1. Days on market (DOM)
The average time it takes to sell a property in a suburb will tell you a lot about the state of the market in that suburb. When the figure is smaller than the overall city average it means that demand for property is relatively strong in that area and properties are selling quickly.
The lower the number, the hotter the market is. For instance, if the overall city has an average of, say, 80 days, then a suburb with a 30 day average is clearly in high demand from buyers. Bear in mind however that a short average days on market doesn’t necessarily make a suburb a good area to invest in as the market may have already peaked. Similarly, a suburb with long average days on market could still offer great options for long term investment.
Investors should note that average days on market figures can be misleading as some suburbs contain sub-markets in them that may be performing quite differently.
2. Vendor discounting
Knowing how much vendors are discounting their properties can be very revealing and indicate whether a suburb is booming. This discount refers to the difference between the asking price and the final sale price and it is typically provided as an average across all sales in a given time-frame.
If the discount is quite large, say above 8%, than it’s safe to assume that buyers hold the majority of power, given that sellers are willing to accept a lower price in order to secure a sale. This might sound like a positive situation for buyers but it could indicate that the market is falling.
A small discount, say less than 4%, indicates that there could be strong demand for properties and that it’s essentially a seller’s market, which could indicate that prices could be on the way up.
3. Percentage of stock on the market
Looking at the number of properties currently for sale in a suburb as a percentage of the total number can offer some important clues as to the state of the market. A low figure, say less than 2%, could indicate that property is tightly held in that suburb and that supply is generally low, which can easily lead to price increases if demand outweighs supply. A high figure of more than 3% could indicate that supply is plentiful in the suburb and price rises are unlikely in the immediate future.
4. Tightening rental market
Investigating the rental market of a particular suburb can offer some important insights into determining what’s happening in the market.
As renters are often more mobile than buyers they tend to respond more quickly to changes in the dynamics of the market. As an area becomes more desirable, renters will move into the area before buyers catch on and start pushing up prices.
A low rental vacancy rate means that there is high demand for rental properties relative to supply and is a sign the suburb may be hot or heating up. Bear in mind though that a low vacancy rate could mean that people would rather rent than buy in a suburb as is the case with some mining towns.
5. Expert opinion
The people working in the industry every day, such as buyers agents and sales agents, can provide great information about what’s happening in specific suburbs and identifying hotspots. So, it’s worthwhile listening to what they have to say.
These industry professionals often have access to more up-to-date information than what is published in the media and will often have first hand evidence that a market is hot before others find out.
When talking to experts however, it’s important to consider any potential bias with the opinions you receive. For instance, it is in a sales agent’s best interest to tell buyers that the market is hot and prices look set to rise.
While it’s important to be able to evaluate the current state of a market within a particular suburb, you should remember that investing for capital growth is about identifying future prospects. If a suburb is already red hot it may be too late to invest. On the other hand, a hot market may indicate that a suburb has fundamental advantages and is ripe for consistent price growth.
Before investing in any suburb you need to understand what that suburb has to offer compared to others, and what’s likely to change in the market to make it more desirable in the future. It’s also important to know exactly where within a particular suburb you should invest as this can make an enormous difference to your capital growth.