Do fundamentals still matter when markets are roaring?
For successive months this year, property data has been showing price rises in most locations.
However, while most major markets seem to be singing the same tune, there are differences in performance depending on dwelling type and geographic location – plus the figures don’t necessariIy reflect the investment fundamentals of a place.
Take the differing results of Darwin and Melbourne over the past year as an example.
According to CoreLogic, the median house price in Melbourne has increased only 2.2 per cent over the year ending April, but in Darwin it’s soared by 18.2 per cent over the same period.
Do these stats mean that everyone should start investing in Darwin and give Melbourne, our second largest city, a wide property berth for the foreseeable future?
Well, no.
Delving deeper into the data shows that Melbourne’s performance over the year may seem a bit underwhelming, but over the past three months its median house price has risen by an impressive 6.5 per cent.
The reason for the recent robustness? The end of those extended lockdowns in Melbourne, which scared the market into a temporary pause for a longer period than elsewhere around the nation.
Darwin, on the other hand, has been experiencing inferior market conditions for many years now, mainly due to its lacklustre investment fundamentals, which is a situation that is likely to return once this interest rate-driven market frenzy has started to dissipate.
At present, multiple stimulus packages, as well as cheap money, is appearing to ignite every market around the nation – a rising tide lifts all ships after all.
However, it is the locations with the long-term investment fundamentals that will remain afloat long after this market mayhem has passed, while others sink back to the less than stellar results that they normally produce.
This means that once the wind has been knocked out of the current property sails, it is the investors who have purchased in the locations with the soundest fundamentals that will be looking forward to the horizon.
So, here are five investment fundamentals that are non-negotiable in all market conditions, including booming ones.
Supply
We only invest in locations where there is a low supply risk.
This means that there is unlikely to be any significant new supply of dwellings constructed in the area anytime soon to negatively impact future capital growth performance.
Infrastructure We invest in capital cities and major regions at different times.
One of the reasons why we invest in particular locations is the infrastructure they already have, plus the major projects that are under way that are set to enhance the area for residents.
Economy
The relative strength, or weakness, of a local economy is the key determinant on its property market performance.
When a local economy is strong, then property markets tend to also be robust because residents feel wealthier.
We only invest in locations with solid economies that are also diverse to maximise the opportunity for superior growth performance over the medium – to long-term.
Jobs
Locations that have an abundance of jobs provide a clear indicator of a healthy local economy.
On top of that, lower unemployment means a more confident population, and jobs growth encourages new residents to migrate to a location as well, which adds to the collective community wealth.
Data
As I outlined at the start of this blog, the devil is in the detail when it comes to property data.
Recent property statistics certainly have a role to play in determining the investment fundamentals of a location.
We regularly analyse metrics such as days on market, vendor discounting as well as the online search popularity of a particular location, which can be a precursor to potential property price growth.
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