Property investors should be aware about the various factors that can affect property values.
Understanding these factors, or drivers of property growth, can help you negotiate better deals and make your investment strategy a success.
What do the property investment experts think?
Due to the lack of research in the area of property investment, Blue Wealth Property took up the task of finding out more about the property market. After years of study and analysis, they decided that the market is driven by four fundamental factors.
Tony Hayek, the CEO of Blue Wealth Property, describes these as:
- Economics and employment
- Population and demographics
- Infrastructure and government spending
- Supply and demand
Additionally, Property Professor, Peter Kouzilos feels that there are two equally important factors that investors should know of:
- Location of the property
- Land component of the property
How does economics and employment affect the market?
Economics here refers to the level of economic activity in that suburb, which is basically the exchange, flow or transaction of money or monetary values. It can include the spending habits of the local people, the turnover of a popular shopping centre or even the amount of profit the banks make.
With more economic activity, it is more likely that there will be more people buying and selling or renting houses which can drive the market positively. Similarly, the employment level of that area can play a big role. If an area has a high rate of unemployment, it means that there are fewer people there who are earning and therefore fewer people looking to buy houses.
What this means for investors is that an area which has a lot of job growth opportunities can potentially have more customers.
Will population and demographic shifts make a difference?
Population and demographics includes the size and structure of the local population. A larger population can mean more potential buyers, however if it is mostly retirees, then you will need to think about their needs and invest in an appropriate property.
The growth of the population is also important since people are always moving, more in some areas and less in others. Australia itself sees a lot of new immigrants every year, and in areas where there is a larger inflow of people, investors can find a steady supply of potential tenants or home buyers.
Are suburbs with infrastructure spending a better choice?
Infrastructure and government spending refers to the building of public facilities such as schools, hospitals, train stations, bus stations, roads, etc. by both private and public bodies. Areas with more access to these resources will have positive growth in terms of value.
“Enormous infrastructure spending typically drives some sort of stimulation in a property market,” Hayek explains, which can cause the balance between supply and demand to tip and prices to fluctuate.
What is the role of supply and demand in the market?
Supply and demand, or more accurately the balance between the two, is also a major driver in the property market. Simply put, it takes into account the amount of housing being built and the amount of housing required by the people living in that area.
A larger number of people moving into a particular area can cause more demand for housing resulting in an imbalance, which could cause prices to rise. This not only includes the number of people wanting to buy housing properties, but also those who want to rent.
Some areas can have more housing developments than what is needed by the people, which can cause prices to fall. Properties such as inner city units face this problem often and banks are now more conservative about accepting them as securities.
Why should I think about the location of the property?
Kouzilos explains that a good location such as close to the city or the sea is a “big capital growth driver.”
Therefore properties in a “good” location will usually have better growth potential in the property market, after all, a view of the sea is not something that you can buy or add on later.
Does the land component matter that much?
The land component of your property purchase is important – when you buy a property, you are paying for the land and the building, out of which the building value depreciates. That means that from the total cost of the property, the more you are spending on the land, the better the investment is.
The Property Professor himself explains, “If 65 to 75% of what you’ve paid for goes into the land component, then most of what you’ve paid for has gone into the appreciating asset.” Therefore as investors, you should be aware of the long term implications of the land component of your investment property.
What can I do to make my investment strategy a success?
As both of our property experts emphasize, research is the key step in making your investment pan out. With all these factors affecting the property market and subsequently your investment strategy, it is all the more important that you look at each potential property and assess them before rushing into a purchase.
Making sure that you spend enough time on research and keeping emotions out of the picture when making decisions can help you launch a successful investment career.