Property growth drivers

2nd Feb 2017By: Margaret Lomas

When it comes to property investing, the term growth driver is bandied about pretty much everywhere. A growth driver when it comes to property is a characteristic which
impacts positively on both yield growth and value growth.

Past growth is not an indication of future growth, and so if you are presently looking at historical data about how an area has performed over the past five years, it’s not going to help you much. On the contrary, historical data may well tell you where not to buy, since it’s likely that strong past growth means that the best time to buy has already passed.

To buy a property in an area with all of the necessary characteristics for sustained growth over time, you must know the important difference between ‘intrinsic’ and ‘extrinsic’ growth drivers. By being able to place the economic data you are reading into one of these two separate groups, you will be able to make a stronger prediction about the future potential of that area.

Extrinsic growth drivers

Extrinsic growth drivers are the economic influences which contribute to the growth of an area, but which originate outside of that area as a result of influences occurring elsewhere. They are not a result of any micro economic change within that area, but they do come from activity, planning and events which occur temporarily.

When a large infrastructure project or a major building project is planned and executed in an area which has a smaller population, there is generally insufficient local labour available to fill the jobs which are being created. Often, workers will come from surrounding areas, or even from interstate, and for the period of the project, they will be living in that area, most likely in rental accommodation.

This will place a temporary pressure on many of those economic factors which normally result in property growth. The retail and hospitality trades will improve as these new residents spend what they are earning, injecting it into the local economy. Rental accommodation will experience short-term stress and vacancy rates will plummet. A derivative of this will be house price increases – potential landlords witnessing the plunge in vacancy rates may see this as a sign of an impending house price boom and buy into the market, creating pressure on prices. The population is boosted by the new workers, often bringing their families, and the economy enjoys a burst of activity.

To the untrained eye, the features of a strong and growing micro economy will be evident, and the temptation to get in quickly and on the ground floor creates a pseudo demand that can look like a true economic boom.

When the project completes, the workers move on to the next project, and the vacancy rates begin to rise. The funds which were being injected into the economy also dry up and many small businesses, which may have started up or flourished during the building of the project, close down. Pressure is removed from property prices, and in fact prices drop, as distressed landlords sell up. Often, values can return to ‘pre boom’ days, and investors are left with property that is difficult to rent and hard to sell.

Similar results can come from other external sources. Pure investor sentiment, where the rumour is circulating that an area is heating up and investors from all over the country vie for a small pool of available properties, can create a short-term property demand which places a false reading on true house price growth. Equally, property developers who buy up cheap parcels of land, subdivide and then engage clever marketing companies to sell the properties – often to buyers from outside of the state – can also create an impression of potential growth which is never backed up by true economic vibrancy.

Intrinsic growth drivers

Intrinsic growth drivers are those factors which affect growth, but which are organic, sustainable and consistent. These are the economic influences which are created by a complete set of circumstances, rather than single, individual events. They are influences which can be repeated and sustained over time, and which are a sign of underlying economic growth.

Intrinsic growth drivers include

  • Population growth from residents moving into town attracted by factors other than short term employment.
  • Changing demographic mix, where the types of people who live in town are becoming more diverse. A growing area needs young people, families and retired people to create a community. Generally speaking, it is community which provides stability. Areas with a concentration in one demographic category typically grow less well than those which are more diversified.
  • Improved accessibility to the area through transport infrastructure and upgrades.
  • A strong and articulated council development plan, providing services and infrastructure for that growing population.

It’s the depth that counts!

You can see that it’s an important feature of property investing to understand that success is not just about looking for ‘growth’ any more than it is just about looking for cash flow.

It is about the depth with which you can gather the important economic data to be able to assess the true potential of an area. Doing so will provide you with a safety net of sorts, and allow you to stay in the market over the long term by considering all of the financial implications a purchase will bring.

You don’t need hundreds of properties to ensure a solid financial future. You don’t even need dozens of them. Eight to ten well researched and chosen areas, with sustainable growth and short-term yields high enough to manage interest rate rises and vacancies, will result in a solid, growing base of assets which will give you more choices in retirement than you ever imagined.