Income growth the secret to boom suburbs: Louis Christopher
While finding an area that will return you solid capital growth is a multi-layered approach, looking for income growth might just be the missing ingredient you haven’t factored in, according to a researcher.
SQM Research’s managing director Louis Christopher gave Property Observer an insight into how he finds areas that are ripe for capital growth, from a researcher’s perspective.
“For us, we start off with income growth and understanding the localities that have experienced strong household income growth compared to surrounding regions and the rest of the country,” Christopher said.
There is a long back series of census data available form the ABS that allows investors to gain access to this information. However, more recent updates need to be sourced from elsewhere, such as the ATO.
“Income growth is one of the key drivers of underlying price growth. It’s the ability to increasingly support and maintain house prices and serviceability of those house prices,” he said.
“Quite often I’ve seen a situation where population growth is zero but house price growth is increasing.”
An example of growth without population growth would be Tamarama in New South Wales.
“I don’t think there has been a unit built there in years but it’s a highly desirable place and with the various restricted supply yet ongoing increasing demand, the prices have in that area tend to outperform the rest of Sydney,” he said.
He also looks at the following indicators:
- Population growth: This is still worth looking at, but zero population growth doesn’t necessarily mean zero growth.
- Mortgage Stress levels: If they are low, it implies that there is plenty of serviceability for a local area. If it’s high there will be more sellers. You can take a contrarian point of view as they often sell below fair market value, but the housing market is difficult to get something below fair market value and it’s becoming increasingly efficient due to the information and technology out there and values tend to be spot on.
- Sensitivity to interest rate changes: Mapping out changes to interest rates against real estate prices can help give an indication of areas more sensitive to changes
- Specific data sets for trends: Vacancy rates, stock on market, where the prices are heading
- Discount: Checking for a suburb that has a discount over the surrounding region. Has this suburb been rising consistently with the area, has it been falling behind or racing ahead? How has it moved historically compared to the surrounding suburbs in the region. That gives me some ideas of how it behaves in the cycle whether it has been bought or underbought.
- Future infrastructure
Mr Christopher does note that while his expertise lies in being a statistician, investors must remember to do both quantitative and qualitative research away from just the granular data level.
“I have trusted agents on the ground and ask them what they’re experiencing, and have long-term working relationships with them. They’ve been fairly accurate and objective with what they’re experiencing,” he said.
Asking what the bidding is like, the open homes, how the rent is performing and the interest from buyers in the area is crucial.
“You need to understand ‘why’. That’s the key. If it has fallen behind, is it because infrastructure has improved elsewhere? You need to know these things,” he said.
“To get down to the individual street level you need to get out there and inspect properties and tour the streets.”
Mr Harvey said that while statistics are useful, locals are able to provide pertinent information about an area that might not be available otherwise.
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