6 key indicators to heed when buying your next investment property

The Property Nerds swear by these six key data points, which they explain can be split into two groups – the price bucket indicators and the rental indicators.

Price bucket indicators

The price bucket indicators allow buyers to determine how many properties are coming up over the next year or two, the current demand and supply of listings and sales, and lastly, the change in the speed to sell.

According to Mr Paliwal and Mr Lardner the following three indicators are key:

Building approval pipeline

The Property Nerds advise using building approval activity data to make informed decisions.

According to Mr Paliwal, building approval data allows investors to determine the level of private investment activity. It also points to the level of housing demand and potential growth in retail and household services.

“The beauty of it is that you’re ahead of time, because houses don’t fall out of the sky,” he noted.  

There are two ways of looking at this data, Mr Paliwal said. One way is the percentage of incoming supply against the current number of dwellings.

“If we have 100 properties in a suburb and you’ve now got three properties approved, that’s a 3 per cent incoming pipeline with supply risk.

“When we scale that out to bigger numbers with a couple of zeros on the end, we often see that when the numbers start tracking a little bit above 3 per cent, they start to be markets that we should be a little bit wary of,” Mr Paliwal said.

The other metric involves looking at how many properties are being built relative to how many properties are selling.

“Why is it important? We’re looking at incoming supply risk,” Mr Paliwal explained.

Inventory levels

Inventory levels are a lead indicator for price movements. 

“What we do is count up how many properties you see listed for sale at any given time on an average day for a given region or suburb.

“We look at the average sales volume for that particular region and then we express that as a ratio. The theory is this, if no other property were to come on the market, if we effectively put a moratorium, if no properties are to ever be sold or listed again, how long would it take for everything currently listed for sale to clear out, and that’s expressed in months,” Mr Lardner explained.

Anything below three is a very hot market, he noted.

Mr Paliwal explained that, typically, everything above nine months is a high-risk category, or, in other words, a strong buyer’s market.

“To give an indicator of what we mean by inventory levels, if we had 30 listings and we have an average monthly sales volume of 10 per month, we’re saying that that’s a pretty tight market with three months of inventory,” Mr Paliwal explained.

Days on market

Days on market is a count of the number of days a property will typically spend advertised for sale before eventually selling.

“It’s a cumulative metric,” Mr Lardner said.

“It is typically measured from the first day of listing, through to the date of sale, and then we take median of that.”

According to Mr Paliwal, there is one key mistake he often sees people make when interpreting days on market.

“The key thing to understand is that it’s not always about whether it’s low or high. Sometimes we have to also consider that market and what it’s always been showing,” he explained.

Regional markets are touted to be a great example, with lifestyle properties usually taking a little longer to sell.

“If you had a look at the snapshot of a capital city and then let’s just say you went out to Ballarat, Bendigo, Geelong and you saw days on market in a capital city that’s much lower, it doesn’t necessarily mean that that’s a stronger pressure or a higher-performing market.

“That higher regional days on market may have come off some pretty highs and that big drop is the percentage change,” Mr Paliwal added.  

Rental indicators

Rental indicators relate to the vacancy rate, the rent size and the rental yield.

According to the Property Nerds, the following are key considerations for property investors:

Vacancy rate

Vacancy rates are a reflection of all the available properties in a rental market – properties still vacant after three weeks of advertisement.

“We measure that relative to how many properties are advertised by real estate agents. So, it’s not how many properties are rental properties in a suburb or the region, but how many are advertised,” Mr Lardner said.

He noted the ABS collects this data on a neighbourhood level.

According to Mr Paliwal, a vacancy rate of 0 to 1 per cent spells a rental crisis. The next range of 1 to 2 per cent represents a tight market, while the 2 to 2.5 per cent range signifies a “tighter” but balanced point.

Mr Paliwal noted that anything above 2.5 per cent is when the caution alarm goes off.

“Above three, renters you choose your price,” Mr Paliwal said.

Rents

Talking about rents from a data perspective, Mr Lardner explained that the reference point here is the advertised rental.

What investors need to pay attention to is the median price of the advertised rental and the percentage changes – looking for those rising rents.

“When we’re talking about houses, we’re looking to group houses and duplexes. When we’re talking about units, we’re talking about anything that is strata,” Mr Lardner noted.

Rental yields

A rental yield is the annual rental expressed as a ratio of the purchase price.

Mr Lardner advised investors to be cautious with the published rental yield data, because most are derived on the basis of the median rent and the median sale price, meaning that if you’re buying a property that is not at the median, you can't be sure that’s going to be the most likely yield.

“The smaller priced properties, the bedsits, have always had that higher yield,” Mr Lardner revealed.  

“What I always like to do is to take the median of a one-bedroom unit in terms of both sale price and rent price and use that to calculate the yield. That gives you a bit of a more accurate figure if you’re doing the analysis as an investor,” Mr Lardner said.

This can then be adjusted depending on the size of the property you're looking to buy.

For more information and tips, listen to The Property Nerds podcast here.