Why hotspot suburbs should not be the Holy Grail for property investors

Hotspot suburbs are the Holy Grail for property investors, but they oughtn’t be.

By the time of common knowledge or publication in national property magazines on newstands, locations with a red-hot reputation have most likely passed their invest-by date.

Picking and purchasing gems before they have got their shine is the wisest strategy.

The Residex forecaster John Edwards says this involves buying at the right price, in the right place and at the right time. Not an easy trifecta. 

Investors shouldn’t totally ignore the tipsters’ industry that surrounds the spruiking of hotspots, but sensibly should be seeking out individual property that represents good buying value, where ever it’s located. The much published hot spot lists are a terrific resource, but I'd suggest they be more a reference book, and template for individual suburb research, rather than a call to action. 

Much of the current hotspots buzz centres on mining towns.

And there’s no better example of the hotspotting herd getting it wrong that Zeehan, the picturesque small west coast Tasmanian town with a population of around 850.

It saw significant speculative investment from 2003 to 2008, largely driven by mainlanders seeking dwellings with good rental returns at the cheapest end of the national market.

The investor demand had been driven by a number of exposés of the town promoting it as a hotspot.

Things really took off after a 2006 segment on Channel 9’s A Current Affair that highlighted the town as the cheapest for housing in Australia.

Prices that were around $10,000 in the early 2000s, jumped to $80,000 post the ACA story and then typically went as high as $150,000 at the time of the Avebury nickel mine opening. They’re now back to $100,000 according to a recent Australian Housing and Urban Research Institute (AHURI) study by Professor Andrew Beer.

While the June 2008 opening of the mine assisted prices along, the mothballing of the mine in December 2008 – and the loss of almost 200 jobs – has since caused house prices to plummet dramatically.

In its wake there’s been a procession of residential investors defaulting on their mortgages and business closures are all too common.

These have continued into 2012, with the worst case found by Property Observer reselling at $55,000 – its 2004 sale price – after having peaked in 2008 at $190,000.

Currently, Zeehan’s housing market is described as depressed by Beer and unlikely to recover from this position until the Avebury mine reopens. Property Observer has noted however a few very small upticks since 2011, suggesting it might be bouncing along the bottom.

But with poorly maintained stock, lack of services and funding for local infrastructure, along with the poor overall Tasmanian economy, it’s very much a case study of a town in decline.

Professor Andrew Beer wrote in June 2012 that Zeehan was emblematic of the mining industry generating a whole new housing dynamic with great volatility.

Of course, the mere term “hotspots” implies volatility – investors getting in and out of a market in quick succession. None of the wise "property is for the long haul" strategy embedded in this approach.

Boom/bust markets ought to be treated with utmost caution – and are not necessary within the sustainable portfolio of the savviest of investors.

It is true that sometimes the greater the risk, the greater the reward, so for some it represents an engaging endeavour.

Property Observer has the advantage of cherry-picking some of the good ideas of many experts with national profiles.

But do your homework on what's suitable for your individual investment strategy.

Our recently published eBook – Tools for getting through the Hotspot Tipping Maze – doesn’t intend to scare investors off hotspots altogether, but to ensure that they have their wits about them.

Not only when it comes to the property and its location, but also its promotion.

Investors ought to bear in mind who is making the recommendation, what interest they may have in the hotspot and whether they will earn income from the sale of real estate in this area. By all means proceed with a good deal purchase, so long as you are happy with the transaction transparency.

Investors need to arm themselves with sufficient research to make a considered investment.

The due diligence should include a thorough investigation of the local rental market, vacancy rates in the area and zoning issues. Investors should also do a study incorporating a cashflow analysis, looking at return on investment and depreciation.

And endeavour to bounce off any investment ideas with a team of advisors. Start with an estate agent or two and add an accountant. Try to touch base with the local valuer. Ensure you have a good solicitor. Then maybe extend it to include an architect, or town planner, if there’s the possibility for improving its value beyond its current state.

Remember of course even the local experts can get it wrong, not just the tipsters in the national magazines.