You can't predict future property investment hotspots based on past performance: Terry Ryder

Many “experts”, asked to comment on the future of property markets, “predict” the recent past. They look at the last 12 months and transfer that forward, for want of an original idea. 

This, too, is the weakness of most real estate research companies. They offer services that tell us about the recent past. This is essentially worthless for property investors – but many fail to realise it and base their buying decisions on what happened last year. 

News that a particular location recorded double-digit growth in the previous 12 months will generate a surge of interest in buying there. 

I recently spoke to an investor who didn’t want to make his next move until he had created charts on the performance of targeted areas, similar to the charts created by analysts of other investment sectors such as shares. 

I thought it was a pointless exercise because it focused on history and intelligent property investing requires an assessment of the future. 

When people base their decisions on past performance they assume history will repeat itself. 

It’s not that the past is irrelevant. Certainly a location with a solid track record of capital growth can give some comfort to investors. But far more important is what lies ahead. 

The past does not always extrapolate neatly into the future. 

A decade or so ago, sea-change was all the rage. Many beach locations experienced big capital growth. But it was a short-term phenomenon, and anyone who based her/his buying strategy on that example of the recent past will have been disappointed. 

Sea-change locations have been among the worst performers on capital growth in the past five to 10 years. The Gold Coast, the Sunshine Coast and the Fraser Coast, which all experienced big bursts of population growth, have been among the worst Queensland performers on capital growth in the past five years. 

Anyone who had charted the population growth and real estate performance of Mandurah in Western Australia up to 2007 might have concluded that this was the key to good investment: sea-change locales with a great water environment an hour or so from the capital city, with good road and rail links.

Population growth over the preceding two decades had been spectacular, and house price growth in the previous five to six years had been phenomenal. But it’s been mostly downhill since 2007 for Mandurah’s property market. 

One of the big problems of such places is the narrowness of the economic base. Most seaside towns and cities depend on tourism, and that’s a fragile position, because tourism is so vulnerable to economic downturns. 

There have been periods in which the prestige suburbs of our major cities have sparked to life for short periods with big annual growth in values – but it’s a mistake to assume this makes such places prime real estate, as is claimed by some. The millionaire suburbs are among the most volatile markets in Australian real estate and seldom deliver superior growth long term. 

The key point is that an attractive recent past does not translate into a prosperous long-term future. 

Things change. One of the core changes currently happening in Australia is the rise to prominence of markets in regional Australia. The track records of the recent past do little to inform the future in this regard, and creating performance charts on this would be misleading. 

The fundamental change in heartland Australia derives from global shifts. The economic power base is shifting from Europe and the US to Asia. It’s a major transformation – indeed, a revolution – and it’s long term in nature. 

Its consequences for Australia include demand for our food and mineral resources and expansion of our export ports. This increasingly is putting serious focus on key regional cities. 

There’s little in the historic performance of Townsville in Queensland, Newcastle in NSW or Geraldton in WA that would elevate them to a top 10 list of best investment prospects in Australia. It’s what lies in their futures that makes them compelling possibilities.