The Problems With Suburb Hotspot Lists
Lists about suburb hotspots put out by magazines and websites tend to outperform the general market, however there are some problems with suburb hotspot lists that you need to be aware of.
A lot of people love the property hotspots that the magazines and the websites put out there each and every year to say, “Here are the hotspots for 2016 that you should invest in.” “Here is a list of areas most likely to grow.” But there are some problems with these suburb hotspot list that I wanted to talk about and make you aware of.
The first problem is that you can only actually invest in one suburb. And so, while this list tend to outperform the general market in Australia, there are going to be suburbs in this list that will under-perform and there’ll be some suburbs that will extremely over-perform to make up for the under-performing suburbs. So the problem is, as an investor, you can only invest in one property in one suburb. So even though these lists give you a better chance of achieving success, investing in one of these properties in the list isn’t a guarantee of success.
So you should never just stop at the hotspot list, you should always do more research so you can hopefully find that suburb within the hotspot list that’s going to outperform all the others. So, that is a problem that you can invest in one suburb, not all of them, and so there’s no guarantee there.
The second problem is that you don’t necessarily understand how they chose each area. Often, they use different criteria to choose each area, depending on the report that you are looking at. It will affect what areas they choose and how they choose those areas. If you’re going from Residex and choosing one of their reports versus one of the reports in API Magazine versus a report in Your Investment Property Magazine versus a report on dsrdata.com.au. All of these different reports use all different criteria in order to estimate their hotspots.
Now, this isn’t a bad thing. Often, they’ll talk to market experts or they’ll get certain data to make these predictions, but if you don’t understand how they chose each area, how are you going to have the confidence to choose which suburb to invest in? How are you going to have the confidence to know that, “Yes, this suburb that I’m choosing that is in the hotspot list actually has the criteria required in order to grow.” How do you know that? And how can you have the confidence if you don’t understand how and why they chose each area?
So this is one of the major limitations of hotspots and one of the major limitations of recommending areas for people to invest in in the first place. If you don’t explain to those people how you got your prediction, how you got your data, then they will receive the information, but they probably won’t do anything with it because they don’t have the confidence. So, if you are one of those people looking at hotspots, then try and understand how they chose each area. What information they used and what it means. So when it does go time to invest for you, you can invest with confidence.
The third problem with hotspot list is that the areas may not fit your investment goals. It’s great news that some suburb in Sydney is a hotspot, but if studio apartments are starting at $1 Million and you’ve got $60,000 for a deposit, well, that’s not really going to be a feasible investment for you. If you can only borrow $300,000 from the bank, you’re not going to be able to invest in this hotspot. Or maybe you have goals of passive income, positive cash flow financial freedom, but a lot of these hotspots are negatively-geared with really low rental yields, maybe they’re high-risk as well.
You need to actually assess, what are your investment goals? What are you trying to achieve? In what time frame? Are you trying to replace your income and the next 10 years? Are you trying to get $100,000 in capital growth in the next 2 years? What are you actually trying to achieve? You need to understand that first and as you go through this hotspot list, try and find the areas that match up with your investment goals and then do more research into those areas.
So, one of the problems is you’ll be like, yup, there’s all these hotspot areas, but just because they’re good investments for some people just because they’re likely to grow, doesn’t automatically make them good investments for you. Especially if they don’t fit in with your investment goals. So, always, always consider your own investment goals.
The fourth problem with these suburb hotspot lists is that often, by the time they come out, it’s often too late. The suburbs have grown dramatically already. You’ve missed the majority of the growth. You’re investing towards the end of the growth cycle, which means, yes, you may get growth for another year or something like that, but then it might peak and taper out.
So, often, by the time these articles come out, they’re too late because the market has grown significantly already. And then you’ve got the problem of a lot of investors seeing these articles, looking into these areas. Demand for these areas going up as a result of these articles. So, in a way, hotspot lists are a self-fulfilling prophecy. Because if you say, “An area is likely to grow, go ahead and invest in it, everyone.” and you send an influx of people into that area, that’s likely to push prices up and therefore, because you’ve said it’s a hotspot, now it has become a hotspot.
So, this is something you need to be cautious of. That by the time they come out, they may be too late or they may just be self-fulfilling prophecies by driving investors in there and it may not have long term sustained growth. So, always do your research into the area. Understand why is this area likely to grow in the short term. But then, also, look into the long term and to say, “Okay, are we near the peak of the market? Is this area likely to grow for the next 2 or 3 years? What are the future prospects for this area?”
The solution to these problems is to learn to do your own research for an area. That is a topic for another day. I’ve got a lot of episodes about different areas of suburb research, like population growth, auction clearance rates, discount on the market, stock on market percentages, all of these sorts of things.
There’s so many different aspects you need to look in to. But it’s important for you to learn to do your own research so that you can look at a suburb, you can take these hotspots lists for what they are – a list of suburbs that are likely going to outperform the general market. So you’ve got a narrow list of good potential suburbs. You can then go do your own research and choose the best of the bunch. And hopefully, this will help you to make a great investment.
So it’s very important that you learn to do your own research. It’s a topic for another episode. Go back and check out my episodes that I’ve already done on suburb research if you want to know more. But it’s very important that you don’t just rely on these hotspots. You do your own research.
The place that I recommend you start to do research, just go to dsrdata.com.au and create a free account. They show you great information. They show you the DSR number, which is the demand-to-supply ratio, which gives you an idea of demand in the area versus supply in the area. And the higher that number, the more likely an area is to grow in the short term. And they also give great information, like auction clearance rates for an area. Stock on market.
How much discount properties are getting. Vacancy rates. All the good stuff is over at dsrdata.com.au. So go ahead and check that out and use that to compare with the hotspot list that you’re working with to say, “Okay, here’s the hotspot list. I’m going to go through this data and compare them.” And then, you’re basically double-checking the hotspots. So that’s a great place to start.
If you want to learn how to do more research and the 18 statistics that you should look at when you are researching a suburb, then check out my course on Advanced Suburb Research by going to onproperty.com.au/research.
So there you have the problems with suburb hotspots list. These lists are great. They generally do outperform the general market in Australia. However, it’s not a guaranteed thing, you need to go ahead and do your own research as well. So I hope that this has been helpful to you. Until next time, stay positive.