Why headline property statistics don’t reveal the whole truth
Perth property has been making headlines in the past few months as low supply of sales stock and a surge in buyer activity help to stimulate median price growth.
Recently, the Real Estate Institute of Western Australia (REIWA) released a list of the top 10 suburbs for median price growth in 2020. For investors reading about this growth, it is easy to get excited by the growth suburbs that are being splashed across major news outlets. However, median prices can often be misleading, and they may not provide a realistic picture of the factors at play in a particular suburb.
Just because a suburb has undergone a recent period of price growth, does not automatically make it an investment-grade location.
Here are three reasons why investors need to look beyond median price growth when researching investment-grade suburbs.
Short-term gain can hide long-term pain
Median price growth figures – the ones commonly reported in the media and via research outlets – usually focus on short-term price movements, often covering year-on-year price or even month-on-month changes. While these figures are accurate for the time periods quoted, they can often hide longer-term trends that are integral in helping property investors make sound decisions.
Short-term price growth isn’t a negative, but it is important to understand why an area is experiencing growth, and the long-term context in which this growth is occurring.
For example, some suburbs that have shown short-term growth may just be recovering off a low base, recouping losses that they have made over the past 5-10 years. While short term growth figures position these suburbs as potentially worth investment, their performance over the longer-term can highlight negative factors that remove their investment-grade potential.
Let’s take a look at an example…
Four of Perth’s top 10 growth suburbs from 2020 fall into this category and would be considered to be recovering off a low base. Despite all recording annual growth in 2020 of between 16-21%, Koondoola, Medina, Mirrabooka and Armadale have recorded median price falls over the past decade. Armadale and Koondoola have suffered contractions of -6.2% and -5.9% respectively in the past five years, while Mirrabooka and Medina have both experienced -4.1% drops in median price. This isn’t to say median price growth can’t be a positive, but in order to accurately understand what this means for the suburb’s overall potential, it’s important to look at these figures in a longer-term context.
Be wary of supply
Growth within any property market is driven by a combination of both supply and demand. Whilst demand factors are often widely discussed in the media, supply is an equally important part of the equation and it has a considerable impact on median price growth.
Suburbs that are showing short-term price increases are likely to attract the eye of investors, however, it is critical to keep supply in mind as it has the potential to slow, or even reverse, short-term growth. Investors should be wary of suburbs that are exposed to oncoming supply in the future, as this will have a considerable impact on median price growth over the longer-term. Despite showing strong short-term growth in 2020, Armadale and the neighbouring suburbs of Mt Nasura and Bedfordale are all exposed to high levels of future supply in the local region, something that is typical of suburbs located towards the suburban fringes. As more new lots and properties are added to the market, buyer competition decreases, and so too does positive price movement.
Another aspect of supply that investors should be conscious of is the level of existing stock on the market within a given suburb. Suburbs with tight levels of sales stock and strong demand drivers attract higher levels of buyer interest, who are forced to compete for the limited stock that is available on the market, resulting in price growth. At the other end of the spectrum are suburbs, that for various reasons, often have a high percentage of stock on the market. Despite 21.4% growth in 2020, Koondoola has 2.8% of total stock on the market – well above the Perth average of 1.07% – another red flag for investors hoping to benefit from sustained median price growth over the longer term.
Don’t be fooled by lagging indicators
Median price growth is a commonly reported metric in the media and many investors and buyers will often use this as their main tool when conducting property research. While median price growth can prove a useful piece of information when looking at how a market has been performing, it is important to understand that it represents historical data of events that have already occurred. For investors, this means that by the time this data is reported, the best opportunities to capture growth may have already passed.
Fortunately, leading indicators can provide investors with a more current understanding of what is going to happen in the market, subsequently providing them with access to opportunities before they have passed, and before many other buyers are aware of them. Low days on market, tight levels of sales stock and the number of building approvals are readily available metrics that investors can access to help focus their property search on areas with significant potential.
Sales composition and volume can skew data
A final limitation of median price figures is that they can he heavily influenced by the composition and volume of sales within a particular market during a nominated timeframe. Because median price change is calculated based on the properties that have been sold in that period, the data can often be skewed – both higher and lower – depending on factors such as the condition, type, and age of these individual properties. For instance, if a suburb has seen a recent surge in the number of properties transacting at the more expensive end of that market, then the median price will rise as a result of this. On the other hand, if more properties transact in the lower price segment (e.g. due to higher levels of first-home buyer activity that month), then the median price will fall. However, these price fluctuations may not be reflective of the direction of that market as a whole.
Another factor that can impact the reliability of this data is the volume of transactions that have occurred during the nominated period. If a suburb has only experienced a handful of transactions, then that sample of sales data may not be statistically significant enough to draw any definitive conclusions about the performance of a given area.
Research plays a crucial role in setting property investors up for long-term success. While short-term price movements can provide investors with a starting point for their property research, it is critical to take a holistic approach to research in order to ensure all factors are considered. While flashy headlines and bold statistics are designed to capture attention, understanding the intrinsic factors at play in a particular market is important in acquiring properties with long-term growth potential. To speak to our team in more detail about where we are seeing opportunities in the current market, please request a consultation via the following form.