Consider micro-factors to invest confidently

17th Dec 2014By: Greville Pabst

Another year draws to a close and with it our attention turns to property market performance – both past and future. But whether you’re looking at capital city performance as a whole, specific suburbs, or even specific streets, it’s important to acknowledge each property market has its own ebbs and flows. That is, each market has as a different cycle that is subject to many combinations of factors including affordability, supply, employment and importantly, confidence, which makes predicting future market performance tricky.

Overall, Melbourne’s stock of established residential property remains stable, experiencing growth of approximately 8% during the 2014 calendar year. The result has been driven by low interest rates, low stock levels and high confidence, which will continue to underpin the local market in early 2015. Meanwhile, the new apartment market in Melbourne’s inner suburbs is subdued, due largely to oversupply issues.

The inconsistency between cycles in markets like Sydney and Melbourne, and even within cities, makes for confusing conditions for buyers who use macro statistics as a gauge of micro market performance.

When buying shares, investors don’t base a purchase on the performance of the overall sharemarket – but rather on the performance of the asset they seek to buy. Now, this sounds logical, right?

Unfortunately, when it comes to property, investors all too often buy based on sentiment and the latest median house data. Little consideration is given to the long-term performance history, in terms of capital growth and rental return of the individual property, a track record that typically informs future growth.

How to make the right purchase

When buying property, it’s important to consider the micro factors that impact the performance of the individual asset. These include layout and floor plan functionality, style, size, age and condition, orientation, aspect and more.

History shows poor quality property is more susceptible to wider economic fluctuations than quality well-selected property. That’s because there’s only a limited supply of quality properties available to the market – during market peaks buyers vie hand over fist for these properties. In fact, in some suburbs and streets there are waiting lists to buy property.. Conversely, during market troughs, even though demand contracts, quality properties still benefit from demand, while poorer quality properties flounder for buyers, often suffering from vendor discounting to sell.

High-density apartment blocks are often good examples of underperforming property. History shows this property type experiences lower levels of capital growth due to greater supply, among other factors, which dampens the assets’ performance during strong periods and considerably more so during a downturn.

Due to the complexity and uniqueness of each cycle, there is no blanket red flag to indicate market performance. Instead, buyers must recognise there’s no right or wrong time to buy – the most important factor isn’t timing the market cycle, but simply purchasing the right property and retaining it for some time.

Thoughtful consideration of the individual performance of a property will aid you with selecting one that performs well today and in the future, as it weathers the troughs that can affect so many other properties.