Don’t be sucked in by the property ‘hotspot’ hype

As our property markets show signs of life again, many investors recognise that this cycle will be different to the last; it will be a cycle of more subdued growth.

In order to outperform the markets, one of the most common questions is, “Where’s the next hotspot?”

People who ask my opinion are usually disappointed that, firstly, I don’t know and, secondly, I don’t really care.

I’m not in the business of speculating.

Instead, I make my investment decisions based on proven long-term performance, rather than short-term speculation.

The fact is hot-spotting – seeking out the “next big boom” location – is speculation and not true property investment.

If you look at the track record of people chasing the next trend it’s been pretty poor.

On the other hand, to “invest” in property requires the intention of generating long-term capital growth that tracks above average long-term price growth for the area.

Now, here’s what I find interesting: a lot of the hotspots predicted by some of Australia’s property analysts turned out correct.

Some of the regional areas and mining towns boomed, at least for a while as investors chased up prices but, unless they got the timing right, chasing the next hotspot has turned out disastrous for many investors.

Some are left with properties worth considerably less than they paid and with less rental income than they expected. Now they are unable to sell their properties as buyers have abandoned these markets which have little depth from local demand.

If you’re into investing in short-term trends, being right isn’t what’s important, it’s being right at the right time that counts.

Very few can do that, so the history of investors trying to find the next boom town is littered with people who get the story right and the outcome wrong.

Instead I buy in areas that have a proven long-term history of outperforming the average capital growth and are likely to continue to outperform because of the demographics of the people living in the area.

And I like buying the property for the right price – below its intrinsic value.

Hot-spotting is virtually the opposite of this sensible, not-so-sexy, tried and tested system for successfully building a property portfolio.

Let’s have a closer look at a few other reasons why I steer clear of looking for hotspots:

1. Hot-spotting is about short-term speculation, not long-term wealth creation.

Most property investors are trying to build their asset base so that one day it can replace their personal exertion income.
The key to building a substantial property portfolio is to use your first property to leverage into your next property and then use those two properties to leverage into more investments, and so on.

You will only have the ability to do this if you invest in locations that consistently provide long-term capital growth.

By definition, ‘hotspots’ are not these types of areas.

Just as quickly as they heat up, property values in these locations can come off the boil and cool very quickly.

Just look what happened to many mining towns and sea change locations, such as Mandurah.

2. Hot-spotting often means following the crowd and more often than not, the crowd gets it wrong!

Many people trying to buy in the next hotspot get their advice from online reports or “get rich quick” seminars and in the short term some of these predictions are self-fulfilling.

If you suddenly get a diverse group of investors buying up in a small town that has little market depth, this tends to push up prices “proving” this area really is a hotspot.

What’s really happening is that you’re seeing an over-inflated market that, more often than not, is unsustainable in the long term.

Some of our mining towns, the Gold Cost and Sunshine Coast are great examples of this phenomenon.

On the other hand, strategic investors buy counter-cyclically, when others are afraid to get into the market.

3. Hot-spotting requires accurate timing, yet most investors don’t have the necessary knowledge to know when it’s the best time to buy.

Some hotspots have excellent potential to generate long-term capital growth, but these are rare.

For example, there’s the inner-city suburb that’s yet to take off because while it’s on the verge of gentrification, yet it still has an air of industrialisation.

Some investors can pick these areas before the market takes off, but timing markets like this is difficult.

The real problem is that by the time you find out about the next hotspot, it may be too late to benefit from that substantial early growth.

Or the opposite could be true. You might end up jumping in too early and not reaping the rewards for many years while, in the meantime, your money has been tied up and you’ve missed out on real opportunities in proven areas.

A great example of this is the inner western Melbourne suburb of Footscray, which has been “going to improve” for the last 35 years but just hasn’t!

4. Hot-spotting is usually based on opinions rather than facts.

When you read articles in the media or hear reports on TV that suggest an area is about to take off as the “next big thing”, in reality you’re simply just being given someone’s opinion.

Be careful, are they biased because they have properties to sell and it suits them to be spruiking a certain area?

You’re better off to rely on your own research and due diligence, rather than blindly accepting a so-called expert’s potentially biased advice.

5. Hot-spotting can generate short-term inflation in suburbs that can’t sustain a high level of price growth over the long term.

Today’s hotspot could be tomorrow’s overheated market.

For example, when the resources boom hit Western Australia and far north Queensland, thousands of investors jumped on the bandwagon and bought into the mining towns that sprung up overnight and became a buzz of activity.

But now that the resources sector has cooled off, many of these towns have gone from boom to bust as the major industry supporting the local economy came crashing down.

I know of many investors who are still having trouble offloading their underperforming properties in these mining towns and regional centres which recently were called hotspots.

My suggestion is avoid the excitement of hotspots.

This may make your investment boring, but it allows the rest of your life to be more exciting as you grow your wealth.

So what is the alternative?

To ensure I buy a property that will outperform the market averages in the long term, I use a Four Stranded Strategic Approach:

1. I buy a property below its intrinsic value.

2. I buy in an area that has a long history of strong capital growth and one that will continue to outperform average capital growth because of the demographics of the people living there. I look for affluent areas where people are prepared and can afford to pay a premium to live, or gentrifying areas where a wealthier demographic is moving in and pushing up prices as they improve the area.

3. I look for a property with a twist – something unique, special, or a bit different or scarce about the property.

4. And I look for a property where I can manufacture capital growth through refurbishment, renovations or redevelopment.

By following this approach I minimise my risks and maximise my upside.

Each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in my favour.

If one strand lets me down, I have two or three others supporting my property’s performance.

Michael Yardney is a director of Metropole Property Strategists, who create wealth for their clients through independent, unbiased property advice and advocacy. Subscribe to his Property Update blog.