1 in 5 'hotspots' result in negative growth
Mar 01, 2018
In what RiskWise Property Research describes as “a systematic failure”, close to a quarter of property ‘hotspots’, rather than delivering for investors, have incurred negative capital growth, while two-thirds underperformed the market benchmarks
Almost a quarter of so-called ‘hotspots’ have delivered negative capital growth, 14 of these in the double digits, according to the latest property analysis by RiskWise Property Research.
An examination by the research house of the 2014 Top 100 Hotspots showed 23 suburbs named in the ‘hotspot’ predictions across Queensland, Western Australia, the Northern Territory and South Australia delivered negative capital growth over a three-year period.
RiskWise CEO Doron Peleg said not only had ‘hotspots’ underperformed the market in around two-thirds of the suburbs named in the Top 100, about a quarter of them had also delivered negative capital growth, with no or little capacity to be able to bounce back.
“Our research found that almost one in four ‘hotspots’ resulted in negative capital growth. This means the current approach to ‘hotspots’, which is affectively ‘buy and pray’, is a systematic failure,” Mr Peleg said.
“Property investors have suffered major losses due to so-called experts naming ‘hotspots’ that are proven failures. Overall 23 ‘hotspots’ across Queensland, Western Australia, the Northern Territory and South Australia delivered negative capital growth in the past three years. Of these, 14 delivered a double-digit negative capital growth.
“While not meeting the benchmark is obviously an issue, when it comes to negative capital growth this has the potential to create significant financial losses, often resulting in negative equity to highly leveraged investors, and that is a major concern.”
He said the 2014 findings were consistent with 2011 and 2012 ‘hotspots’ which delivered negative capital growth, with some mining towns plummeting to -46%.
RiskWise research found in 2011 there were 22 ‘hotspots’ identified as having delivered negative capital growth over a five-year period, and 14 ‘hotspots’ in 2012.
These included Roxby Downs (-46.3%), Emerald (-41.1%), Port Augusta (-31.7%), Gladstone (-27.6%) and Bowen (-24.2%).
“People who invested in the mining states not only suffered significant losses but there was no capacity to recover from them,” Mr Peleg said.
“Meaning these so-called ‘hotspots’ not only suffered from negative capital growth but also negative equity, with no comeback likely.”
“This has most certainly resulted in many investors losing money, particularly in regional and mining areas.
“Our research on hotspot predictions and their three-year results, suggests that only 37 per cent of houses and 33 per cent of units of the 2014 Top 100 Property Hotspots performed as well as the market benchmark. Which means that, overall the 2014 Hotspots, performed significantly lower than the benchmark.”
He said one of the key factors in the poor predictions was the lack of a comprehensive risk-return analysis on region, location, suburb growth, property type and features.
“In the absence of that analysis it is harder to properly identify and accurately assess the risks and the projected returns,” he said.
“The second issue is that other macro-factors were probably not taken into consideration. For example, though the mining boom was over, and business investment in the mining states was therefore likely to be poor, leading to poor economic growth, a weak job market, low population growth, and therefore, poor capital growth, 36 of the 100 HotSpots were in WA and QLD.
“In fact, none of the hotspots in WA and the NT met the benchmark and only two of the 23 hotspots in QLD outperformed the benchmark.
“Frankly, we feel that is a very surprising result, particularly since the hotspots were ‘formulated through an intensive research process and calculation methodology’ and ‘by Australia’s top property market analysts’.
“It goes to show how important it is to perform risk-based research and get independent, balanced and informed advice from different sources.”
The following report shows RiskWise’s detailed analysis of the 2014 Hotspot predictions and the steps that should be taken to avoid similar false forecasts in the future:
RiskWise Property Research – property hotspot predictions underperform the market
Last year RiskWise Property Research performed a research analysis on 2011 and 2012 hotspot predictions and their five-year results which suggested that only 37 per cent of 2011 Property Hotspots and 43 per cent of 2012, performed as well as the research benchmark … significantly lower than the predictions.
One of the key factors in the poor performance was that some macro-factors were probably not taken into consideration, in particular, the potential impact of a slowdown in the mining boom on land and property prices and demand in regional mining areas.
This month, March 2018, RiskWise Property Research has performed an analysis on the 2014 Property Hotspots to assess whether this time around they outperformed the market.
Background: Economic condition in January 2014In 2014, the mining boom was over and the potential impact of the post-mining boom era, particularly on the ‘mining states’ such as Queensland and WA, had been assessed by leading economic experts. The major risks and opportunities in the property market were easier to understand. There was a significant reduction in business investment in the mining states leading to poor economic growth, a weak job market, low population growth, and therefore, poor capital growth.
On the other hand, both business investment and government spending in NSW and Victoria were stable.
At the time housing was relatively affordable (when assessed on the basis of price-to-income ratio) in Sydney and Melbourne, and when house prices in these capital cities were assessed against the long-term housing prices in Brisbane and Perth. In addition, the RBA cash rate was declining, something that historically has had a very strong connection with capital growth.
The panel of experts which identified the Top 100 2014 Property Hotspots excluded “markets where investors are likely to only make short-term gains over a period of less than five years”. The panel members also excluded “speculator markets, one industry mining town and future retirement or holiday havens”.
However, RiskWise Property Research performed its own analysis on the 2014 Property Hotspots. It assessed these Top 100 Hotspots against the market benchmark exceeding the capital growth for the relevant property type in Australia as well as in the capital city of the state of each suburb.
The research was undertaken by RiskWise Property Research using standard statistical methods that are typically used to assess investment performance in equities and other investment classes. The aim being to set a standard risk-return investment benchmark performance to compare hotspot investments with other returns, using commonplace investment valuation methods. It evaluated the 100 best suburbs in the country (as projected by property experts and published in Your Investment Property Magazine in 2014) and identified whether the strong capital growth predictions were realised three years later. Each suburb was reviewed against two benchmark components:
o three-year national capital growth for each property type: house / unit etc.
o three-year capital growth for the capital city of each suburb.
Our research on hotspot predictions and their three-year results, suggests that only 37 per cent of houses and 33 per cent of units of the Top 100 2014 Property Hotspots performed as well as the research benchmark. Which means that, overall the 2014 Hotspots, performed, again, significantly lower than the benchmark.
This low success rate is very similar to the results achieved by the experts in relation to the 2011 and 2012 Hotspots. That is surprising, given the risks and opportunities in the housing market had been by far clearer in 2014. Even in NSW and VIC, the best performing states, only 63 per cent and 50 per cent, respectively, of 2014 hotspots houses achieved returns in line with the benchmark and once again lower than predicted.
So why did the Hotspots perform poorly despite a panel of property experts predicting growth? One of the key factors in the poor performance is that a future view requires a comprehensive risk-return analysis on region, location, suburb growth, property type and features. In the absence of that analysis it is harder to properly identify and accurately assess the risks and the projected returns.
The second issue is that other macro-factors were probably not taken into consideration. For example, while it had been known that the mining boom was over, and that business investment in the mining states was projected to be poor, leading to poor economic growth, a weak job market, low population growth, and therefore, poor capital growth, 36 of the 100 HotSpots were in WA and QLD.
Unsurprisingly, the results in the poor-performing economies have been low, with none of the Hotspots in WA and the NT meeting the benchmark and only two of the 23 Hotspots in QLD outperforming the benchmark.
Examples for poor-performing suburbs:
Next steps 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?
1.Look for independent, balanced and informed advice from different sources.
2. 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.
3.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. Reconsider your investment and avoid paying over inflated prices if you can see that the market may become flooded in the future. Always take oversupply advice from an independent party and not from a biased source, such as the developer.
All of this research requires considerable knowledge, time and effort in a very busy world. This is why RiskWise has created its Individual Property Risk Report - the first of its kind to provide future-view risk-return analysis on individual properties in specific suburbs. Using a sophisticated algorithm, it combines all these factors to provide a future view of capital growth and rental return to help you make better informed property decisions.