5 market indicators you need to understand before you invest in property

We take a look at some of the numbers that may help with your decision if you’re investing in property and what they tell you about the market.

There’s no shortage of data about property available online. From median prices and rental yields to auction clearance rates and days on market almost everything is at our fingertips. And all this information can help you with your decisions if you are investing in property.

“Property investment experts have always used data to help them identify investment grade properties in locations primed for superior capital growth. These days, though, the abundance of data online makes it seem ‘easy’ for anyone to do the same,” explained director of Metropole Property Strategists, Michael Yardney.

You need to be careful though. “Statistics can tell you anything you want, especially if you have underlying biases to purchase a particular type of dwelling or in a specific location,” warned Mr Yardney. “That’s why it’s vital to dig deeper and consider a number of different metrics before investing anywhere. Successful property investing comes down to a combination of science (data) and art (having this perspective to interpret the data trends correctly).”

So what numbers should you be looking at and what do they mean? Here are five key indicators to consider.

 

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Source: Monkey Business Images (Shutterstock)

1. Vacancy rate

The vacancy rate shows the proportion of rental properties that are vacant and is usually expressed as a percentage. In very simple terms if there were 100 properties for rent in a particular suburb but two were untenanted that’s a vacancy rate of 2%. The calculations are a little more complex than that. For example SQM Research, one of the organisations that researches vacancy rates, only includes listings that have been advertised for three weeks or more.

So what does this information tell you? A higher vacancy rate generally indicates lower demand for rental properties in a particular area whereas a low vacancy rate suggests that there is more competition for properties.

If you are looking for an investment property an area with low vacancy rates will be more appealing because not only are you more likely to be able to rent out the property but you could potentially attract more tenants. This gives you a larger selection of people to choose from to find a suitable tenant. You may be able to charge higher rent in a location with low vacancy rates.

In terms of what is a ‘good’ vacancy rate most experts say that anything under 2% is considered a landlord’s market. About 3% generally means that the market is pretty balanced and anything more than 4% is considered a tenant’s market. Of course the vacancy rate is only one of the indicators to consider.

2. Rental yield

The rental yield shows you how much you are making from your property and is expressed as a percentage. There is a gross rental yield and a net rental yield.

To calculate the gross rental yield you work out the annual rent you’ll charge, divide it by the value of the property and multiply that number by 100 to get the percentage.

So let’s say you rent out a property for $600 a week ($600 x 52 = $31,200) and the property is worth $600,000. Your gross rental yield would be 5.2% – $31,200 ÷ $600,000 x 100 = 5.2%.

Gross rental yield doesn’t factor in your expenses though. To do that you’d need to calculate the net rental yield. This involves subtracting your expenses from the income and then dividing that figure by the property value and multiplying by 100.

So looking at the previous example let’s assume your annual expenses come to $10,000. You subtract that from the income of $31,200 and that comes to $21,200. Your net rental yield would be 3.5%  – ($31,200 – $10,000) ÷ $600,000 x 100 = 3.5%.

You can do some research to find out what the average rental yield is in your chosen area to know what you are aiming for. It’s also worth noting that properties in regional areas tend to have a higher rental yield than metropolitan locations. According to CoreLogic gross rental yields in Sydney were 2.9% as at August 2020 but 4.5% in regional NSW.

Peter Koulizos, the Program Director of the Master of Property at The University of Adelaide, warned that rental yield can be a tricky indicator, especially if you don’t look deeper into the numbers. He offered this example: If a property is earning $20,000 a year and it is worth $400,000, the rental yield is 5%. We assume that if the rental yield increases to 6%, it is a good thing. It is a good thing if the rent increases to $24,000, whilst the value stays at $400,000. However, it is not so good if the rent stays at $20,000 and the property value drops to $333,333. In both cases, the rental yield is 6%.

“If you’re focusing on rental yield, look carefully at the numbers and ensure that your rental yield is increasing because the rent is increasing, not because the value is decreasing,” Mr Koulizos suggested.

 

Auctioneer
Source: Fractal Pictures (Shutterstock)

3. Auction clearance rate

The auction clearance rate is the percentage of properties that were listed for auction that actually sold in a particular week or month. This is a number you hear or read a lot about in the media as it can be viewed as an indicator of the condition of the property market.

When auction clearance rates are low (generally about 60%) it typically means that demand is low and that property prices may be in decline. If the auction clearance rate is high (more than 75%) then it’s generally a sign that demand is higher and prices are fairly strong.

Looking at the clearance rate for just one weekend won’t give you a true picture. There may not have been a lot of properties up for auction or a sporting event that affected the numbers. It is better to look at the trend – that is, are auction clearance rates increasing, decreasing or remaining steady over a longer period of time.

4. Days on market

Days on market (DOM) is the number of days a property will typically spend advertised for sale before it sells. To give you an idea in the three months to August, typical days on market was 45 days across the capital cities and 69 days in regional locations.

When looking at days on market absolute numbers are nowhere near as important as the trend pointed out Mr Yardney. “I’ve found the trend of Days on Market is a key indicator of whether we’re in a buyer’s or seller’s market as it serves as a marker of the relationship between supply and demand. If it’s taking longer for properties to sell, it’s usually a sign of softer market conditions and vice versa,” he explained.

Mr Koulizos agreed saying that DOM is a good indicator of the activity in a particular area. “If the DOM is decreasing, it indicates that there are more people wanting to buy than people wanting to sell,” he told Canstar. “If the DOM is increasing it could potentially mean that there is a buying opportunity as some vendors get very nervous when their property is taking too long to sell.” This could be people who have to sell because of death, divorce or they really need the money and will sell at almost any price added Mr Koulizos.

5. Vendor discount

The vendor discount is the difference between the price a property was originally advertised for sale and the final sale price. “When there are fewer buyers out looking for property than there are properties for sale, vendors usually need to discount their asking prices to secure a buyer,” explained Mr Yardney. “Earlier this year as we started to hibernate in our coronavirus cocoons, vendors had to discount their properties to get buyers to make a commitment. Today, other than in Melbourne, as many of the property markets around Australia are picking up steam with plenty of buyer interest, vendors are tending to need to discount their asking prices less to effect a sale.”

Looking at the vendor discounting in a particular area can give you an idea of how much you may be able to negotiate on the price for a property.

You can also look at discounting on an individual property to determine how motivated the owner may be to sell. “If the property has been on the market for three months and the asking price has not changed, they are not that keen to sell,” Mr Koulizos explained. “However, if the asking price is reduced early on in the marketing campaign, say after two to three weeks, it indicates that the owner is keen to sell and it may present an opportunity to buy a property below market value.”

Lowest interest rates for 1-year fixed home loans

The comparison table below displays some of the 1 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 3-year fixed home loans

The comparison table below displays some of the 3 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

Lowest interest rates for 5-year fixed home loans

The comparison tables below displays some of the 5 year fixed rate investment home loan products on Canstar’s database with links to lenders’ websites available for a loan amount of $350,000 at 80% LVR in NSW, and available for Principal and Interest repayments. The results are sorted by ‘current rate’ (lowest to highest), then by provider name (alphabetically).

*Comparison rate based on loan amount of $150,000. Read the Comparison Rate Warning.

 

This article was reviewed by Editor-at-Large Effie Zahos before it was published as part of our fact-checking process.

Main image source: Andrii Yalanskyi (Shutterstock)

 

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