Predicting future growth strategy.

[Blair007]

Hey

so im not really looking to buy right now but I'm still interested in knowing whats going on in the market. i like picking a few suburbs that i think will do well and look back at them down the track to see how they have performed. I don't know what people think of this method but i like marking down all the suburbs for a particular city or area of a certain city and then right next to them the median prices. every now and then you will come by a suburb with a median value of say 500k and its surrounded by suburbs with medians of 600-800k. if the location of this suburb is good i.e. within 15k of major city, with good fundamentals, then too me it looks like the suburb is guarrented above average growth. people wanting to get into those surrounding suburbs would settle for the lower valued one and eventually gentrification would take place and shoot up the price.
is this assumption accurate? does anybody else use this theory when researching property?

cheers

 

[D.T.]

Absolutely.

 

[oc1]

Absolutely.

I wouldn't listen to Dave, he's deluded.

 

[ToGetProperty]

For short term, it seems true.

However, for longer term, "most suburbs have the same/similar annual growth rate."

This can be proved by picking up and mag. and compare each suburb's growth rate for 10 or 20 years.

 

[MarkB]

However, for longer term, "most suburbs have the same/similar annual growth rate." This can be proved by picking up and mag. and compare each suburb's growth rate for 10 or 20 years.

If you want to prove it, I'll leave it to you.

But it is worth noting that if you're trying to grow your portfolio (as in acquire more property) - then the reality is that a dollar now (or in the near future) is worth more than a dollar in the long-term-future.

What follows is something I have filched from a post of mine from 2005 - specifically it concerns the calculation of the "Internal Rate of Return" (IRR) and how an IRR can actually mask an underperforming asset.

Consider 3 cashflows, each with approximately the same IRR (between 19.91 and and 20.60%), but with vastly different cash flow patterns, and net cash flow amounts.

In each case, in Year 0 the net cash flow is -$20,000 (minus $20k).

* * *​

..........OPTION 1........OPTION 2......OPTION 3

Year
0..........-20,000........-20,000........-20,000
1...........1000...........15,000............0
2...........2000...........11,000............0
3...........3000..............0.................0
4...........4000..............0.................0
5...........5000..............0.................0
6...........7000..............0.................0
7...........9000..............0.................0
8...........11,000...........0.............25,000
9...........13,000...........0.............35,000
10.........15,000............0.............45,000

Net CF....$50,000......$6,000 .......$85,000

IRR.........20.24%.......20.60%.......19.91%

* * *​

If the IRR is any indication, all 3 options are about as good as each other.

And, depending on ones individual circumstances and goals, any one of the 3 could be "best".

But to look at how IRR may mask an underperforming asset, my guess is that you need to consider the opportunity cost of the alternatives chosen.

Option 3, for example, has the highest net CF over the 10 year period, but (talking a hypothetical property here) gives you no income / capital gain to use until the 8th year.

Option 1 is nothing startling, pretty much slow and steady with a stronger trend towards the latter part of the decade. That series of cash flows / capital gains will help you sleep at night, but it will be a few years before you can use it as leverage.

Option 2 has (easily) the lowest net CF position - only +$6,000 over the decade. But this is achieved in years 1 and 2 ($26k back in 2 years) and it could well allow you to move into other investments.

This is an example of how an IRR can mask an underperforming asset. If any asset is bought with a view to using is as a stepping stone for more assets - and it doesn't allow you to do that - then regardless of the IRR that asset underperforms for you.

 

[vaughan]

... i like picking a few suburbs that i think will do well and look back at them down the track to see how they have performed...

What's also a good exercise is to do it in reverse: look at suburbs that are doing well now, then turn back the clock and see what they looked like 3 or 5 years ago.

I'd suggest you start with postcode 2770. 2770 has done unbelievably well in the past 12 months.

Those that bought in the past 3 to 5 years have done very well for themselves, enjoying both positive cash-flow and capital growth while still being in commuter distance to Sydney. I was one, so I can say with some authority that 3 to 5 years ago most people thought I was certifiably crazy for buying out there.

IMHO to get good capital growth you have to be ahead of the pack, slightly. Once you're in the pack (like buying anywhere in Sydney now) you're near the top of the market and will need to wait for the next cycle to get good growth, which might entail holding through a slump or flat period for a few years. (When I bought in 2011 I was buying a just slightly above what people had paid in 2003-05 so I bought just as the rise was starting. Several other more astute buyers that frequent these forums had seen the opportunity some 12 months earlier and acquired a couple of properties by then.)

EDIT: I think you also have to consider what the driver was for the growth during the period, and ask whether that driver is likely to repeat itself again soon. Usually the drivers don't really repeat: think the GFC, and then the interest rate drop. Neither of these is likely to happen again soon. I think that 2770 boomed partly because there was a shift from negative gearing (which had been the dominant strategy for decades) to positive cash-flow, and 2770 was the closest place to Sydney that came close to +cf.

 

[PHP]

What's also a good exercise is to do it in reverse: look at suburbs that are doing well now, then turn back the clock and see what they looked like 3 or 5 years ago.

I'd suggest you start with postcode 2770. 2770 has done unbelievably well in the past 12 months.


Hi Vaughn,

Sorry for the noob question. But how exactly do you do this process? I mean what are the reliable resources for historical information to determine a suburb's state 12 months ago, comparing it to 6 months ago, and the present. I understand realestate.com.au can provide this info, residex reports and rp data reports, property investing magz have this info. any more reliable sources?

 

[ToGetProperty]

It is good to see different people have different ways to achieve financial freedom.

I give one example which can give you plenty information about PI.

• 55 Tungarra road, Girraween was sold 1.42m, not long ago.
• The property I bought is only few houses away and was paid at $499K during GFC.
• The agent who sold number 55 told me that he can sell my property at 1.55M without DA and 1.6 with DA.

Now, the question is the capital growth in Girraween isn't that high for last few years, but those properties can achieve a much higher annual growth rate because it can build 8 townhouses.

Also, the timing is so important here.