How to Analyse Whether To Invest In A Suburb – A Working Example
When you invest in a property you are really making an investment in the market the property is located in.
This is similar to the old adage “buy the worst house in the best street”. If you buy an average property in a great market, it is likely you will do well over the long term. However, invest in a great house in a poorly performing market and you are probably going to achieve mediocre returns.
That's why when starting your property investment journey it's essential to take the time to analyse the market, the city and suburb your prospective investment is in. Don't just think about the property alone.
A client recently asked me why we recommended an investment in Cashmere, Christchurch. I thought I would share the response, as it may be a useful case study, showing how to analyse a suburb's property market.
Does the Cashmere property market have strong fundamentals?
The first place we look to see if a suburb's property market has strong fundamentals is median household income and homeownership stats in the suburb. High household incomes and homeownership are indicators this suburb is an in-demand place to live.
If a suburb is preferred by wealthy people who own properties, this is likely to continue into the future. This demand from people who can afford higher prices suggests property values could continue to increase over time.
Of the 246 Canterbury suburbs investigated, Cashmere East and West rank 11th and 13th on Median Household Income (see below).
The proportion of people living in their own homes in these two suburbs is also much higher than the Christchurch City average. Cashmere's homeownership is between 84-86%, compared with 62-64% for the whole city.
These two stats are positive indicators for Cashmere's long-term property market.
How does Cashmere compare with other suburbs?
The majority of the suburbs that ranked in the top 15 for median household income are also worth investigating as investment options.
In this case, most of the other 15 suburbs are located far away from the central city.
Right now we feel there is a real opportunity to invest in the Christchurch City District. This is because over the next 10 years we expect property prices will benefit from the refreshed CBD, as well as infrastructure investment from Christchurch City Council.
This is supported by KPMG's Magnet City Framework. This report from the UK states Christchurch is among one of the most magnetic second-tier cities in the world (alongside Oklahoma City, Pittsburgh and Tel Aviv).
This means that Christchurch is likely to attract significant population growth in the future (and population growth from young wealth creators).
Of the remaining five suburbs, one (Holmwood) has a prohibitively high entry price for most investors. Although Holmwood has the highest median household income, it also has a median house price of $1,130,000. We feel this means it is not practical for an investor to enter the Holmwood market.
However, for the purpose of this analysis, Mandeville and Deans Bush (both in Riccarton) are worth considering. They also enjoy strong fundamentals, high incomes and close proximity to the city.
Which suburbs achieved the best gains for property owners since the turn of the century?
While historical performance makes no guarantee of future performance, understanding what has happened in the past helps us to think about what could happen in the future.
For this analysis, we considered the capital gain achieved within 60 Christchurch suburbs over the last 18.5 years (2000 to mid-2018).
Over that time, Cashmere homeowners received higher capital gains than 87% of property owners in other suburbs, see below. And the suburbs that achieved exceptional capital gain above Cashmere are again the prohibitively expensive suburbs, e.g. Fendalton.
To precisely compare Cashmere to Riccarton: Riccarton came 23rd in the list of suburbs that delivered the highest capital gains to their owners.
Over the last 18.5 years, Cashmere property owners earned $99,000 more in capital gain than Riccarton property owners. This is why, for this client, we had greater confidence in Cashmere, as an investment, over alternatives in Riccarton.
But Cashmere (and Christchurch) property prices are flat. Why would anyone invest in a flat market?
These clients also had concerns about investing in a relatively flat property market.
I believe that if you're not investing in a flat market, you're getting into the market too late. If you buy property when values are already increasing, then another property owner will receive the capital gains you could have earned. The key is to invest in the right area that appears to have strong fundamentals.
This can be seen in historical data. Cashmere was flat from the start of 2000 until the end of 2002. Prices actually decreased and then recovered. Prices then climbed by $289,000 over the next 6 years, before coming back and flattening off for the next four.
Since 2012, the market has slowly climbed and has still generated $124,000 in increased wealth for Cashmere property owners.
If you invested at the start of that flat market in 2000, you still would have achieved gains of $420,000 by backing Cashmere.
It's possible to make good money in a flat market, you just need to hold for the long term so that the market fundamentals have a chance to play out.
Summary
Now, of course, I can't tell you when property prices will increase, or even if property prices will increase.
But what I can say is that when I compare the fundamentals of the Cashmere property market with other suburbs and look at historical performance, Cashmere appears to make a good investment.
Whenever I write an analysis of a suburb or city, I no doubt attract criticism about what I've included, or what I've left out. A recent Stuff article I wrote attracted outrageous comments!
The important thing to me is that when making a property investment decision, rely on data. Rely on facts. Decide what data you think is essential and then conduct an analysis.
And if you need help running these types of analyses, then work with a property coach like Opes or seek advice from a professional, like those at Adair Mortgages.
By Ed McKnight / Economist at Opes Partners