Expert Bust #25 - Props suitable to local demogs

Here's a great example of how to misinterpret data like an expert...

Let's say 80% of the properties in a suburb are houses. Some experts would recommend investors buy a house not a unit, since that's what tenants in the suburb obviously demand.

But the properties in the suburb are those that have been supplied to that suburb - not demanded by tenants. Imagine getting supply and demand round the wrong way.

What if the vacancy rate for houses is much higher than for units? That would mean there is insufficient demand to match the supply. This is the complete opposite of how the expert interpreted the demographic.

And what about the household make-up, maybe the vast majority of residents are families. Does that mean accommodation for singles isn't demanded? No, it means it isn't supplied. There could be a queue of lone occupants waiting for a 1-bedder to become available.

What we really need to know is what properties are in demand but not supplied. There's nothing in this demographic data that is a lead indicator of future growth.

 

Another ordinary bust…..

All you are talking about is swimming against the tide. ‘Sometimes’ that works and you are holding the ugly ducking that most people don’t want.

But if there is a suburb with 80% 3 bedders - that’s cos 80% of people want them.

if you look at macro demographics at a moment of time, then you are right. But that’s the exception, not the rule

 

Until very recently, the NSW Dept of Education used stats like the above ie only considered that families occupied houses & disregarded units (families don't live in units).

This assumption was wrong on so many levels

• no consideration of single parent families
• Larger units, penthouses/sub-penthouses are not occupied by families with kids
• No shared bedrooms
• Shrinking number of houses in areas undergoing redevelopment to units
• Units/townhouses are a lifestyle choice & affordability issue

So @datageek is on the right track - gap analysis, look for what is hiding in plain sight.

 

I agree, this is what most people miss, people should focus on specific properties more than which specific town or city. If you are observant you would notice how the types of houses have changed as development expanded further from CBD. The predominant smaller 3 bed 1`bath large yard that families used 80 or 50 years ago in tightly held areas are not desired now. Different services and buisinesses surrounding those area 's , have different younger, more transient, culturally different workers. The experts poo pooing units in Mildura were wrong Units have doubled in 6 years and trippled in 10 years and giving 10% plus yield, and some are worth as much and more than the traditional houses that may have had 30% gain and 7% yield.. 4 bedders have also given much better growth and yeilds, as well as 2 bed townhouse.

 

JetstreamVic, you've misinterpreted the data like an expert.

Imagine this crazy scenario to make things abundantly clear...

1000 houses in a suburb: 800 houses; 200 units = 80% houses (the demog metric under review).

All houses currently vacant = 100% vacancy

All houses for sale = 100% stock on market

0 units vacant = 0% vacancy

1 unit for sale = 0.5% stock on market

What type of property would you buy? What metrics helped you decide? What metrics indicated supply or demand?

80% houses means exactly that - 80% of the dwellings are houses. Interpreting it as "demand" is investing folly. The demog under review would mislead you to buy houses in the above example.

BTW the demographic is not "macro", not even at the local government area level. This is at the suburb level, therefore "micro".

However, you're right, the demog is at a point in time - census night. It's possible significant changes occurred since. That's another good reason to disregard the demographic and instead consider percentage stock on market and vacancy rate that are published monthly.

 

Ok, so there won’t be a place with 1000 places vacant, so let’s not pretend in the never never.

However, one situation that could mimic your thoughts.

You buy a Ferrari, and for some reason you don’t get the red, yellow or black one - that everyone else gets. You get a pink one.

When it comes time to sell it, you have the only pink Ferrari - Awesome!

Now if someone happens to be looking for a pink Ferrari, you will be the only guy in the world with one, so you hold all the cards and set the market

Except…..

They are the only person wanting to buy one, so if you don’t sell it to them, who else would want to buy it?

Only in a moment of time are you holding something really good

 

Leanne Edelsten will sell them one if your deal falls over.

 

I chose an extreme case to highlight the metrics of importance and the metric of uselessness.

Change the values to more realistic ones and it's still the same story - the % of properties in the suburb doesn't indicate demand or supply. It doesn't help investors make a better decision.

I missed the point behind the pink Ferraris analogy.

 

Scarcity alone is not a measure of demand or value. It becomes a niche market with a very small/fastidious pool of buyers.

If it needs an analogy, then it's the penthouse unit with all the whistles & bells in a bog standard location or any other overcapitalised property - the vendor wants top dollar for it's uniqueness/emotional attachment but the market won't see it unless blinded by FOMO.

 

The unit stats are always a bit tricky as an investor because as far as the statistics are concerned anything with a strata is a unit.

Huge high rise block = unit,
Duplex on 400m2 = unit,
Villa with a backyard and a spa = unit .

If you were looking at the stats alone, you'd miss out on heaps of opportunity.

 

Yes scarcity is only one side of the supply - demand equation. But how does this tie in with the thread, % of properties in a market is not an indicator of supply or demand.

 

In calculations I perform at the property type level, I group townhouses with houses if they have more than 2 bedrooms. I ignore legal title.

 

Amazing!

I suspect the data that most investors use isn't so well organised.....

 

Not really comparable on lots of levels:

• Strata vs Freehold (with all of the advantages/disadvantages)
• Land Size (debatable as many stand alone houses are on very small blocks)
• Price-point (usually a large discrepancy between the two types of properties)
• Demand - distinct mindsets of the users (those that want a freestanding house and will compromise on location vs those that want location & don't prioritise the form of the property eg common walls vs freestanding)

 

The legal ownership is not known in the majority of cases. Land size is often unknown too, and especially internal size. Obtaining the mindset of the buyers/renters is not available either.

Bedroom count is admittedly simple. But it is available for every property listed for sale, almost without exception. Crude but better than nothing.

I recommend checking the demand & supply metrics for both houses and units anyway.

BTW, supply and demand metrics for a property market may not apply to peculiar properties in the same suburb (e.g. studio apartments or 7 bedroom houses) as these might not reflect the general demand and supply of the suburb.

 

This is the thing with data - it tells you a 'thing', but we, as the investor, are the ones who make up a story about what that 'thing' actually means.

Which might be completely wrong.

Or it could be right - you won't know unless you verify your story with people who actually know what's in demand in a suburb because they're at the coal face of it.

Data on it's own is not enough without being verified and confirmed from different sources.