The most overlooked factor of property investing: Supply
Supply is the factor most over-looked by property investors.
Those who take the time to do some research before tossing a few hundred thousand at an investment property tend to focus on demand, with scant regard for the flipside of the growth equation.
Some organisations that purport to advise investors preach a simplistic follow-the-population-growth strategy.
If high population growth was the core element in a good locational choice, the leading capital growth performers in the past five years would have been the Gold Coast and Wyndham City in the south-west of Melbourne. Gladstone, boosted by massive new demand from the influx of tens of thousands of gas project employees, would have soaring prices right now.
The opposite is true in those markets. The too-often forgotten factor is supply.
The Gold Coast has had five years of falling property values because of too much supply, which overpowered the impact of high population growth. Wyndham City, which overtook the Gold Coast as the municipality with the greatest annual additions to its population, has recorded no growth in prices in the past three years, because of an excess of house-and-land packages – ultimately flogged off to distant investors by dodgy marketing companies on behalf of desperate developers.
Gladstone, after recording high growth in rentals and prices in 2011 and 2012, has seen rising vacancies and sharp downturn in prices because developers went overboard yet again.
So there are two key pieces of information investors must examine before committing to a target location: vacancy rates and building approvals.
The rapidly-growing location of Gracemere is a good case study. Gracemere is about 10 kilometres west of Rockhampton, one of our favoured regional centres because of its growth factors and affordability. The population of Gracemere was around 5,000 at the 2006 Census and 8,400 five years later.
Earlier this year senior Hotspotting writer Bob Wilson visited Gracemere as part of a research safari through Queensland and the Northern Territory. He commented about Gracemere: “What was once a sleepy country town surrounded by grazing paddocks has become a development free-for-all as investors buy up those paddocks and built houses on them.”
The problem is that they’ve built too many. Way too many. One of our clients phoned last week to tell us: “Gracemere has just been smashed by developers. There’s a massive oversupply.”
He said there were hundreds of empty rental properties and rents have dropped sharply. A quick check with SQM Research shows that the vacancy rate in the Gracemere postcode has risen from around 2% late last year to 9% now. Australian Property Monitors data shows that median price growth has stalled recently and is starting to go into reverse.
In a recent update of our research on Rockhampton, we noted that residential building approvals in the Rockhampton Regional Council, which includes Gracemere, in the 2012-13 financial year were almost double the year before.
Some would see that as an attraction, being indicative of a growth centre. I saw it as a warning signal, that developers might be making the same mistake they made in Mackay and Gladstone, generating over-supply.
Gracemere is increasingly an outlying suburb of Rockhampton so its over-supply issues are likely to impact the wider region. Investors would be wise to keep on eye on vacancies there.
Terry Ryder is the founder of hotspotting.com.au and you can contact him via email or on Twitter.
