What is the most important statistic for predicting capital growth? You’ll be surprised to find it’s not income, vacancy or even capital growth history.
What is the most important statistic for predicting capital growth in an area? If you’re looking at investing in property in an area, is there one statistic that you can look at and you can research to understand, yes, this area is likely to grow or no, this area isn’t likely to grow.
Hey, I’m Ryan from onproperty.com.au, helping you find positive cash flow property. This month, we’re talking all about suburb research because this is an area that a lot of people have trouble understanding. A lot of people have trouble doing suburb research. So I’m helping you with these free videos and I’ve also got a paid course where I go into detail on all of this stuff. Check it out at onproperty.com.au/suburb.
So, is there one statistic that you can look at to predict capital growth? Or, is there a most important statistic for predicting capital growth? Could it be income growth of an area? I have heard people say this, that income growth predicts capital growth of an area. But there are a few problems with this interpretation of the data. Income growth, firstly, it’s collected very sporadically. There’s a census every 5 years, one night. The census is run on one night and income is stated voluntarily on the census. So, you can say, I earn $120,000, when you only earn $50,000.
Okay, so, the data on income isn’t necessarily going to be the most accurate data. It’s also quite delayed, so, the most recent census as I’m recording this in 2015 is 2011. So, that data is 4 years old and the difference between the data is 5 years. So, we’ve got 2011 and then we’ve got 2006. So we have no idea what happened in between 2006 and 2011 when they have those 2 data points to go off.
So, income, it’s very difficult to use as a predictor of capital growth because it’s so sporadic. It is a long periods of time between them, and also, it’s a voluntary thing. As well, income actually indicates the people that are living in the area, not necessarily the people that want to move into the area. So people talk about income growth is good because it increases affordability in the area, but those people actually already live in the area and if they’re getting richer, then maybe there’s a nicer suburb that they’re eventually going to want to move to.
Now, I do understand that income growth can correlate to capital growth and things like higher disposable income can lead to renovations, which can improve the value of property. So, I definitely think it is a driving force. But it’s not like the most important statistic when you’re looking at capital growth of an area. In fact, I actually have it as a secondary statistic in my course on advanced suburb research. I think it’s interesting to look at, but I just think it’s not so valuable that you could bank all of your research on this one figure.
What about population growth? Population growth could indicate that an area is likely to grow because there’s more demand in the area. But if you think about it, for a population to grow, there have to be more properties for people to live in. Because people aren’t going to move to an area and live on the street, they actually need a house or a property to move into. So, population growth kind of indicates supply more so than it does demand.
Could it be the vacancy rates of an area? Vacancy rates are definitely valuable, but then we’re talking about the renters of an area, not necessarily the home buyers. And I have seen areas with high vacancy rates that have still had good capital growth. So, I don’t know how we can understand that.
Really, it’s very hard to say what’s the most important statistic for predicting capital growth. Let me put it this way – what is your most important organ in your body? Like, in your body, what is the most important to you? You know, we might think, our heart. We might think our brain. Maybe those two pretty important, pump blood and actually think for us. Probably the brain, okay, I’m going to go with the brain. I love my brain, I think it’s pretty important. Let’s say my brain’s most important, so I’ll just take away my heart. All good? No. Of course not. I’m going to die.
Brain and heart are important, so we’ll just keep those two, but I’ll take away my stomach, or my liver, or my kidneys, or whatever. I know this is a gruesome picture but if you took away your liver, you would die. If you took away your kidneys, you would die. If you took away your stomach, you would die. So, the same is true when you’re thinking about suburb research. Is there one statistic or one brain or one heart? Well, no, they all kind of work with each other in order to understand an area.
And I think the problem that we have, which we talked about in the last episode, which is What is the True Driver of Capital Growth, and that’s demand and supply. When demand exceeds supply, then we tend to have growth in an area. But the problem is, demand is made up of so many different things. So many different things cause demand in an area. It could job growth. It could be income growth. It could be desirability of an area. It could be proximity to amenities. It could be a variety of things. And also, on the supply side of things, things change there. Renovations happen, development happens, all of this sort of stuff.
So there’s so many different facets of it. And the problem that we talked about in the last episode is that when we’re analyzing a suburb, we’re not actually going through all the job listings to understand what are the jobs in the area? how does the income compare to what it did last year? Is there job growth in the area? Because, as well, people might live in an area but work somewhere else. So, it’s very difficult to get.
What we’re actually looking at when we’re looking at vacancy rates, or population growth, or we’re looking at vendor discount or days on market or median house prices of an area and capital growth trends. When we’re looking at that stuff, that’s actually a result or a byproduct of demand-supply. So, we’re actually analyzing the byproducts to understand, what is driving this area for capital growth?
So, what’s the most important statistic? Well, there is none. There’s a lot statistics that you need to look at when doing your capital growth. So don’t just assume, just because income is growing or population’s growing or vacancy rates are low, therefore, an area must grow, because that’s not always the case. You should always do your research, do it properly and compare lots of areas to each other to understand what’s the best area for you to invest in.
If you need help understand exactly what statistics to collect and how to make sense of all that data – because it’s all good to go out and buy a report or even to fill out my checklist – but if you don’t understand what the data means, then it’s absolutely useless to you. So if you want a one-page checklist with all the key data points on there, and you want my video tutorials showing you exactly how to collect that data using nothing but free tools, and also how to make sense of that data so you can compare data and choose the best area for you. Then, you might be interested in my Advanced Suburb Research course. I’m very proud of this course.
I think it’s going to help a lot of people understand how to do suburb research and understand the drivers behind suburb growth and choosing an area with low risk and potential high returns. It’s going to be super valuable. Check it out, go to onproperty.com.au/suburb.
So, what’s the most important statistic for predicting capital growth? There is no most important statistic. In the same way, there’s no most important organ in your body. Or, even if there is a most important organ, you still need everything else. So, when you’re going out there and when you’re researching a suburb, look at a variety of different statistics. Look at the trends in those statistics and compare suburbs to each other to really get an understanding of the best suburb for you.
I’m Ryan McLean from onproperty.com.au. And until next time, stay positive.