How Smart Investors Use The Ripple Effects.
When the property market is running hot, as it has been, a common trend that occurs is the ‘ripple effect’, where buyer demand and capital growth ‘ripples’ outwards from one suburb to the next.
Simply, as prices increase beyond the reach of buyers in the suburb of their choice, they tend to look for ‘the next best thing’ that falls within their budget; in adjoining, lower priced suburbs.
As more and more buyers start buying in these adjoining suburbs property prices start to rise.
This ‘ripple effect’ in capital growth most commonly moves from the inner suburbs outwards, and along or away from the coastline.
For smart property investors the trick is to pick these suburbs before the ripple of price growth hits or before it has become too established a trend.
This sounds easy, but requires good timing and plenty of research.
One method is to measure property values based on median prices between adjoining suburbs.
If there is more than 10% variation, chances are the suburb next door could play catch-up.
Another method is to closely monitor median price trends. Generally, at the start of a property cycle, the inner suburbs will be the first to show signs of growth, which will then ripple outwards.
Once the cycle has kicked off, look for properties within your budget as close to the growth areas as possible.
While I like the ripple effect concept, there is no certainty that this will always occur.
Growth does not keep moving outwards indefinitely; there are a few factors that can stop growth from rippling further out:
Firstly, a change in the general property market can stop the growth of property values.
Obviously things like rising interest rates, affordability and market confidence affect the length and breadth of the property cycle. When price growth in the major Australian markets came to a halt at the end of 2003, the following two years saw the highest capital growth rates return to the inner city suburbs and the ripple of price growth didn’t make it to many of our outer, less affluent suburbs.
Investors who were betting on the ‘next best’ outer ring suburb lost out when the growth ripple didn’t quite make it that far. Interestingly the same thing happened when our property markets picked up in 2012 after their two year slump after the GFC.
Secondly, geographic factors can prevent a ‘ripple’ from continuing.
For example, if the primary driver of the ‘ripple’ is proximity to a trendy suburb or fashionable dining or entertainment precinct, the reliability of capital growth is likely to decline in line with the distance travelled.
A safe rule of thumb is: any more than a five to ten minute drive is too far!
Other geographic barriers are main roads or highways – some of which have a sort of psychological effect – people don’t really want to live on the “other side.”
And it’s been the same this cycle
With many of our property markets having performed strongly for well over few years now, once again I’ve noticed the ripple effect as capital growth “ripples out” from those early strong performers to adjoining suburbs.
If you’re in the property market for you first (or next) investment or even your home, this is a trend you should be aware of.
But it needs on the ground knowledge to really take advantage of it and not get caught out.
Sometimes there is a perceived price differential between one region or another, or one street and another or even one side of the street and the other, but it’s that way for a reason.
It always was that way and will always be that way.
I’ve seen interstate investors or even local investors without intimate knowledge of a particular suburb get caught out buying a “perceived bargain” when that side of the street or that orientation will always be worth less than the other.
I guess what I’m saying is that, especially at this more mature stage of the property cycle, you really need intimate knowledge of the suburb you’re planning to buy in so you don’t get caught out.
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