While the recent price hikes outline a generally vibrant housing market, several indicators you should know can further help real estate investors determine specific locations that are poised for growth.
Atlas Property Group director Lachlan Vidler said real estate investors should also have knowledge of “microfactors” that can help predict the performance of suburbs and regions.
“There are other micro factors that can be equally important depending on location, which is why it is imperative that property buyers conduct thorough due diligence before deciding to buy anywhere,” said Mr. Vidler.
Five Market Indicators Investors Should Know
Mr. Vidler said understanding these “microfactors” can help investors understand “macrofactors” such as interest rates and general price movements.
“There is no single microfactor that can determine the future performance of a suburb, so understanding and correctly interpreting macro and micro factors is critical in reducing risk and increasing investment performance,” he said.
The number of available homes listed on the market reflects the level of demand a location is currently experiencing under the current conditions. These two things, in turn, reflect where prices are likely to go.
Mr. Vidler said inventory is often expressed in months and takes into account the average monthly demand for real estate. Here’s an example: three months of stock.
“While there is no magic number, it is widely believed that six months of supply translates into a balanced market, so if there is less than six months of supply in the market, you should be experiencing upward price pressures,” he said.
“If there are more than six months, you will probably experience downward price pressure.”
2. Days on the market
Days-on-market is another measure of supply and demand. As the name implies, this measures how long it takes for a home to sell.
This, coupled with the inventory level, can be a powerful tool to evaluate activity in a particular suburb.
“If a suburb has 60 days on the market, it is usually considered a balanced market, but below 60 there may be additional competition in the market, and above 60 there is expected to be less competition,” said Mr. Vidler .
3. Vacancy rate
Vacancy refers to the proportion of rental properties that are vacant during a certain period.
For real estate investors, vacancy rates are clear signs of the overall health of a rental market.
A vacancy rate of 3% is often regarded as a balanced market. Anything less means there is a shortage of rental housing. This means that rents are under upward pressure.
On the other hand, vacancy rates above 3% should be a warning, as new investors may see their rental properties vacant for a long time.
4. Rental income
For investors looking to rent out their property, it is crucial to know the average rental yields of a particular location.
Rental yield is a measure that expresses annual rent as a percentage of the property’s purchase price.
For example, if a $500,000 property rents at $500 a week, it would make $26,000 a year. This means that the rental yield of the house is 5.2%.
“Rental yields are typically lowest when an area is at the top of the real estate cycle, and yields are often highest just before an area returns to its peak market.”
5. Past Capital Gains
While relying on a location’s current median prices wouldn’t say much about the future of a specific market, historical data could help investors predict where business would go.
“If an established area has data from the last 30 years available and it shows an average annual growth rate of two percent, why would we suddenly expect it to perform at 10%?” said Mr. Vidler.
“It certainly could, but given the very large data set and the fact that the area has been established with no meaningful changes, there is probably no logical or statistical reason for such a large increase in yield.”
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