METHODOLOGY
HOW THEY’RE RANKED
For property buyers and investors alike, it’s crucial to find markets in which demand exceeds supply. But how is this done? Here is a list of some of the key metrics used to gauge supply and demand for real estate:
• AUCTION CLEARANCE RATES
The auction clearance rate is the number of properties that sell at auction as a percentage of all properties auctioned. Imagine a market in which the bidding is fierce for most auctions; the auction clearance rate will obviously be very high. This single metric can be used as a gauge of demand relative to supply.
But what if there was only one auction? The clearance rate can only be 100% or 0%. That’s a massive difference for the supply and demand story based on the result of a single auction. This is why it’s important to consider multiple indicators, rather than just one indicator in isolation.
• DAYS ON MARKET
The length of time a property spends listed for sale before selling is called the “days on market”. Imagine eager buyers ready to make quick offers as soon as a new property hits the market. Properties will sell very quickly in markets where demand exceeds supply. The lower the average days-on-market figure for a suburb, the more likely demand exceeds supply.
• VENDOR DISCOUNT
This is the difference between the original asking price and the eventual sale price. When demand exceeds supply, sellers are in the box seat and are less negotiable on price. Buyers are forced to make strong offers or miss out, so the average discount rate is usually quite small.
• RENTER PROPORTION
The renter proportion is the percentage of renters in a market compared with the total number of residents. Investors don’t want to be competing for tenants with other landlords. The proportion of renters should ideally be as low as possible since it is a supply metric.
• VACANCY RATE
The percentage of rental properties that are currently available for rent is a measure of the demand and supply for rental properties by tenants. When vacancy rates drop, it means rents are likely to rise.
• RENTAL YIELD
The rental yield is the annual rental income as a percentage of the property’s value. The yield can sometimes be a precursor to capital growth. But it is also an indicator of the cash flow potential for a property market.
• PERCENTAGE OF STOCK ON MARKET
The measure is the number of properties for sale in a specific market versus the count of all properties in that same market. Some suburbs are larger than others, so when calculating supply you need to do so as a percentage. The percentage of stock on market is a great indicator of supply. For strong price growth we want supply to be as low as possible.
• ONLINE SEARCH INTEREST
When a potential buyer examines a property for sale listed on a real estate website, their search is recorded. If we have a count of the number of searches and compare it with the number of properties, we have a rough idea of the level of demand relative to supply.
• USING THE POWER OF BIG DATA
It’s virtually impossible to manually collate the data to research thousands of property markets around the country in a short time. Fortunately, there’s a shortcut that can be used to cull the list to something more manageable without missing a terrific opportunity – it’s the use of big data.
Big data is the new resources boom for property buyers and investors. So instead of buying in risky mining towns, you can now mine data to find safer locations set to deliver quicker gains.
Gone are the days of subjective, opinionated research used to find growth hotspots. The experts and their divining rods are being replaced by data science. Big data algorithms have already been outperforming the growth picks of the highest-profile experts in property investment.
So in taking up the challenge of predicting the best markets today that we believe will outperform by 2020, we used our demandsupply formula that we call the LocationScore. We score every suburb (by house or unit) out of 100. The higher the score, the more demand exceeds supply, which greatly increases the probability of property value rises in that location for that property type.
To determine the LocationScore for each suburb and property type, we combine the eight metrics listed here. Some metrics are more important than others, so we allocate each one an importance rating. Then we combine all eight metrics based on their relative importance into one overall score.
These top 20 lists contain the top markets as ordered by LocationScore for each price range. It’s these markets that, in our view, have a better chance of experiencing immediate capital growth than markets with lower scores, indicating declining or soft demand.
Historically, 83% of the top 20 LocationScore markets have outperformed the national average growth rate over the next three years. What is also interesting is that quite often the LocationScore top 20 had growth rates that were double the national average, reinforcing the fact that the law of supply and demand influences price movement in property.