Past Performance Indicator of Future Growth?

Hey guys,

I've heard quite a few times that past performance of a suburb is not an indicator of future growth. However I just had a chat with a guy who is involved in creating Residex predictions reports and he was of the opposite opinion. According to him, the only situation where this doesn't apply would be mining towns due to their high volatility.

I'm planning of buying an apartment in Perth (within the next 12-18 months) and I asked this person how I should choose the suburb to buy in. He proposed I should make a spreadsheet with a few columns - CG of a suburb over the 20 yr period, median income and rental yield and based on this information choose the suburb.

What do you guys think about this method?

 

After looking at yields and vacancy rates, get on the ground and use logic to look for potential that will drive growth!

Infrastructure, walkability, government investment, etc.

My suburb was barely on the map 20 years ago and I've had 62% growth in 3 years. Of course an extreme example but the principles apply.

Edit - use your spreadsheet but have a column covering these softer or less obvious factors

 

I don't agree with this approach. Look at Heidelberg West in Melbourne. It has been a terrible performer for the past 20 years.... until recently when it has boomed! You want to find the next Heidelberg West, an underperformer that has fundamentals in place for good future growth. A suburb with strong growth over the past 20 years might struggle in the next 5 years because that growth is built into the current price

 

Thanks a lot guys, that makes sense.

What suburb would you recommend for a 250k apartment? There aren't really many out there within this price range. Glendalough is one of them but it seems that it might stay undesirable for a while.

Wembley also seems to be very affordable for apartments.

 

Honestly, I think it's a mix.

Past performance can be a good indicator where prices are tied to fundamentals, because in a normal boom-bust cycle market these factors (population growth, incomes, actual physical supply, rental demand and so on - basically what people can afford related to what people need, supply and demand). Where a market is closely aligned with fundamentals, past performance is a good guide. Popular family areas will likely grow. Underperforming areas will, crudely speaking, often underperform for a reason.

But there's another kind of demand that isn't driven by fundamentals. You see this in an asset bubble, where inexperienced investors (we've seen many of them recently on this site asking for advice as they realise they simply don't know what they're doing) buy high and borrow big on the back of a manic, self-driving positive feedback loop. They buy seeing property as a get rich quick scheme, that takes no effort. That form of demand is dangerous, and where it exists it all goes out the window. All bets are off. Where prices have decoupled from fundamentals, you can't rely on past performance, because you know that 1. a lot of people are speculatively buying on the expectation of growth and 2. many of them are over-leveraged noobs who could panic when the market stalls.

 

well said highlighter! through work in the last 18-24 mths saw too many people go gung-ho with their borrowing due to fomo - yes their net worth may have increased, but equity is only true equity if you crystallize your gains!

 

Also factor into consideration, how a target demographic in specific suburbs choose to use their newfound equity. Do they re-invest into their own properties? That has been one of my criteria I do take into consideration especially re: up and coming areas in north Brisbane (i.e., Owner-Occupiers who are hungry to capitalise on growth by renovating/improving)

 

I would look for ripple effect from the higher performing suburbs over the last 20 years. If there isn't a super valid reason for the underperformance other than it just hasn't had its time yet then dive in. So it's a mix of logic, numbers and getting on the ground.

 

Agree here, as well as other comments that prices often take into account the suburb's desirability, facilities, location etc. These suburbs will probably continue to perform well due to these solid foundations, but won't probably have any steeper CG as the facilities etc are already built. The next suburbs out will be the areas where the facilities are being built, and where you could get the CG if you time the purchase.

 

I think the guy is straight up wrong. Past performance is pretty low down on the list on relevant factors in my book.

Otherwise the 'good' suburbs would have a price history chart that just looks like an exponential graph going up, and the bad ones just flat lines or even a linear downward trend. Funnily enough, that's not the reality.

 

This is too simplistic IMO, but what do I know

Also are you are buying to hold long term or looking for short term growth.

Look at the product first in the area and what has been in demand and compare apples with apples.

 

Thanks a lot guys.

I was thinking of buying Residex predictions report as a guide. However my main concern is that it might point to suburbs where apartments are well above my budget (which is quite limited, 250k). I've read on Somersoft quite a few positive recommendations about these reports.

So far I've got only two Perth suburbs that would be within my budget, Wembley and Glendalough. Wembley is a clear winner I suppose? Glendalough has a train station though.

Would you have a recommendation for any other suburbs that might be within my budget and still be a good value for apartments?

Cheers!

 

at this price point you may be looking at under 50 sqm, not a great option IMO
Don't buy unless you see Perth economy turning around, I dont see the point of sticking your neck out only to get it chopped off

 

I was thinking of something like this:
reiwa.com - 23G/47 Herdsman Parade, Wembley

I'm not sure about sqm but I'm looking for a 2 br apartment.

I most likely won't be buying within the next 12 months or so. I just want to do a research and pick a suburb so I'm ready to jump in when the economy turns the corner. I'll wait for two consecutive growing quarters as a sign of this.

 

You concentrate on Perth, which I could understand. While I understand the want to investigate this area as you're more familiar with it, if the fundamentals aren't there at the moment (and possibly for some time to come), why not concentrate on another area that is showing more promise at the moment. Much of the initial research is available online with the final checks done on the ground. Residex and similar reports will probably be able to say where different areas are at the moment for you to determine which area to focus on. I keep an eye on CommSec State of the State reports to understand the macro economic factors across each state. The Residex and Corelogic reports probably focus on property focused information.

You could try Residex prediction report

 

The poster would like to get an apartment where he can live near a University. If he buys a property that is convenient for students/staff, then it will always be leasable when he no longer requires it for his own use.

@ Realist135, the apartment at Wembley looks to be in a very very large complex. We can talk about that in another thread. Is Wembley a suburb with easy access to the infrastructure you require?

 

Ahhh yes! Problem of not reading whole thread before posting!

 

That info was in a different thread.I wouldn't expect you to be aware of it.

 

Thanks a lot Angel

All I require infrastructure wise is proximity to cbd, as that's where I'll be working. Good advice about the size of the complex, I'll try to find something within the complex of less than 10, no elevators, pool, gym etc.

For now I'd just like to find 2-3 suburbs I can focus on and monitor daily. Like some other posters said, scarborough and Doubleview seem promising for 300k price mark. Maybe Morley as well.

 

I thought about buying the residex predictions report. I even had a chat with a guy from residex/core logic yesterday and found out that the report for Perth mainly focuses on houses.