Even in NSW, the best performing state, only 51 per cent and 57 per cent of 2011 and 2012 hotspots achieved returns in line with the benchmark and were lower than predicted.
Why did the hotspots perform poorly despite property experts predicting growth?
One of the key factors in the poor performance is the fact that a future view requires a comprehensive risk-return analysis of region, location, suburb growth, property type and features. In the absence of that analysis, it is harder to identify and accurately assess the risks and the projected returns.
The second factor is that other macro considerations were not taken into account. For example, in 2012, BHP Billiton shelved US$30 billion of major projects as part of a significant cost reduction exercise, indicating a slowdown in the mining boom, and the future impact on land and property prices and demand in regional mining areas.
Can the hotspotting approach to making property investment decisions really predict the best property returns? We have found that when you apply a combined and in-depth risk-return approach with a macro overview, and review this over five years, many hotspot suburbs have significantly underperformed, possibly resulted in investors losing money, especially in regional and mining areas.
The research was undertaken by RiskWise Property Review using standard statistical methods that are typically used to assess investment performance in equities and other classes. The aim is to set a standard risk-return investment benchmark performance to compare hotspots investments with other returns, using commonplace investment valuation methods. It evaluated more than 200 of the best suburbs in the country and assessed whether the strong capital growth predictions are realised five years later.
Each suburb was reviewed against two benchmark components:
- Five-year national capital growth for each property type (house/unit); and
- Five-year capital growth for the capital city of each suburb.
Many of the hotspots suburbs significantly underperformed against the expectation.
In a volatile market, where even the Reserve Bank has raised concerns and is advocating action to protect against a downturn in property returns, what can we learn from this research?
- Look for independent, balanced and informed advice from different sources.
- Take a risk-return view based on many factors including property type, property details and demand in that suburb, location, future building factors and larger macro factors that may affect that suburb. When comparing two areas or properties that are projected to deliver a similar capital growth, invest in the area/property that carries a lower level of risk.
- Ensure these factors are based on specific properties in specific suburbs, so you assess the individual property and not just the suburb or area that has been predicted as a hotspot.
4. Use these factors to take a future view of the investment risk versus the return. For example, if you are purchasing a unit in an area where thousands of units have already been approved by the local council, you need to consider how these units will impact the future price and demand for units in the area. Re-consider your investment and avoid paying over-inflated prices if you can see that the market may become flooded in the future.
Doron Peleg, chief executive, RiskWise Property Review