What’s going on guys Its Jordan de Jong here and welcome to Part 2 of my 3 Part series on how to find an A-grade market, A-grade area, and A-grade property, today I’m focusing on the A-grade area and how to identify areas with potential for future capital growth. If you haven’t read part 1 on how to find an A-grade market, read that first as it goes into some critical detail on different market cycles, I’ll leave a link in the description section below. As a quick refresher though, that blog doesn’t address a market as its commonly referred to as “the whole Australian Property Market” or state-specific housing markets, it tackles an A-Grade Market in the form of the 1000’s of submarkets throughout Australia. Because there are 1000’s of submarkets, they can be very area-specific, so some of the topics discussed in that blog can also be applied when looking for an A-Grade Area. I won’t go into detail but these include: Population growth, high incomes and stock on market, essentially we are looking for an increase in demand and shrinking supply. For this blog in particular as a very high-level overview, essentially there are four main elements that we will discuss which I would look for when analyzing an area, being commutability, liveability, current trends & potential future impacts. The first two commutability & liveability feed into something called gentrification, which is the process where working-class residential neighborhood is re-established by middle-class homebuyers, landlords and professional developers. This brings higher income earners into that neighborhood, which in turn brings more wealth into that area, this comes in many different forms a good example would be through small businesses such as local cafes. First up, let’s talk about commutability meaning the distance required to travel for everyday life activities, we only have 24 hours in a day, 66% of which we are either sleeping or working, and we don’t want to spend the remaining 34% commuting between these activities. These every day activities change depending on which stage of life you are in, but primarily involve work, education & the city. Walking is predominantly the most efficient method of commuting, being less than a 15-minute walk to drop the kids off at school or at least being able to walk to the closest public transport is a huge benefit rather than having to drive to a strain station to then catch a train into the city. Being able to catch public transport into the city removes the requirement of having to find parking in the CBD, paying to use toll roads and constantly paying for fuel. Just look into the census data for the area on the number of people who take public transport before presuming that distance to the closest train station is the holy grail and being right on top of a train station isn’t ideal either. Public transport, of course, isn’t for everyone, and for those who have the luxury to drive to work should have quick access onto the main distributors, this all ties back into the cities middle radius and anything between 6-15km is considered acceptable. It’s all well and good to have access to commutable areas, but without it being liveable, no one would want to walk in the streets, so let’s go over the things that make an area liveable. Firstly, I would look for areas with a high ratio of Owner Occupiers compared to investors, generally, 70% or greater, because owner-occupiers take pride in their homes, more often than not they look after their property cosmetically and ensure it is well maintained. Secondly, if all of a sudden something was to impact the property market, such as interest rates skyrocketing or negative gearing prevention policy’s being approved, this would cause many investors to reactively sell, and if you have a property in an area full of investors that are irrationally selling their properties, it increases supply in the area bringing the value down on your property. No one likes a busy road, in particular, the main road you get stuck in traffic, its noisy most of the time and even when you think it’s going to be quite, there’s generally a hoon or two causing a ruckus, when looking in particular area, focus on the quitter streets with easy access to these main roads. As I was talking before about gentrification and small businesses popping up, it's handy to be walking distance to local shops to run down and get a loaf of bread for Sunday morning breakfast, or if you’re not in the mood to cook even being able to walk to the local café. Everyone is in a different stage of life, so these small businesses also include restaurants, shops, and even stores, alongside that being close to amenities such as parks for the kids or walking/riding tracks all aid the resourcefulness of our free time and therefore increasing liveability. The final point for liveability is the community in general, at a micro level this starts with the neighbors, we all want good friendly neighbors who would take out your bins or check your mail if your away. At the macro level, it extends from the barrister at the local café to the patrol on neighborhood watch, if I was driving in a new area and every second house had security shutters and locked gates it doesn’t feel overly inviting and hinders the community feel. Current trends are also good indicators to gauge the current state of the area, these tie in quite closely with finding an A-Grade Market but are well worth mentioning here too, at the forefront, I would look good historical capital growth over the last 10 years. Property cycles are generally quite long and span over several years, by taking a 10 year or more approach it would factor in on the ups and downs of a cycle, I would look for areas with higher historical capital growth than the region average over a 10-year period. In saying that, I would also analyse the last 2 or 3 years, and ensure that there hasn’t been a recent growth surcharge, if the area has grown more than 30-40% in the last couple of years it could mean the properties are overpriced and might go through a season of price correction, unless of course, it has grown at that rate historically over the last 10 years. Time on market is also a good indicator of how quickly properties are being sold, with a decrease in time on market, it means there is more demand and properties are being purchased either at their first auction, sold prior to the auction or early on in the private sale process. An auction campaign generally runs for 4 to 5 weeks, so I use 30 days as a benchmark for time on market, although if I was looking at one particular property that has been on the market for 60 or 90 days it’s easy to presume that everyone else thinks it’s a bad property and not to buy it. Sometimes this is the case, and if you carry out your due diligence you’ll figure out why, but other times, this could simply be the owners initially overpricing their property for the current market conditions and after a few price reductions, it could potentially be well-valued asset and worth considering. This ties into vendor discounting, which is how much a vendor is willing to discount their property to get a sale done if you look at vendor discounting and time on the market together on a graph, they are completely countercyclical, whereas time on market decreases the negative vendor discount percentage increases. Although we have already talked about higher incomes increasing the value of properties in an area, population age ties this all together, I would look for areas where younger professionals between 25-35 are living, they have their whole career of wage growth ahead of them. Peter Koulizos recently did a study on early-stage indicators of gentrification in Adelaide and specifically relating to that 25-35 age gap found that both a decrease in the percentage of people aged 18 years and under and decrease in the proportion of couples without children where early-stage indicators. I would check recent vacancy rates, you want strong rental demand so that when you go to rent out your property your not having to pay your mortgage for months without rental income, a maximum benchmark is 30 days on the market before being leased. Although we don’t have a crystal ball and can’t predict the future, there are some things that may impact an area both good and bad in the near future. I would completely avoid areas that are heavily industry reliant such as mining towns or temporary working areas, although these might drastically go up in value, I would consider this short-term investing and you have to time the market perfectly to make your money. I would look out for government spending in the area, this usually provides services that benefit the area and should increase the demand for the area once spending is complete. I want to know what other indicators you guys look out for when scoping a potential investment area, leave them down in the comment section below. This blog doesn’t cover every single little check that you should do, always talk to locals and understand that every area comes with its own due diligence checks. There might be a sewerage pipe running through half of a street or a rough patch you should avoid, these are things that only the locals would know. On the flip side of that, don’t fall into analysis paralysis with all of the checks I’ve talked about here, there might only be a handful of areas that tick 100% of these boxes, so understand that some of these checks are more valuable than others. As always, seek your own professional financial, legal & investment property advice for your current situation, these blogs are just my opinion and should never be considered personal advice. Until next time, happy house hunting.

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