Why hot spots don't work and how they hurt your long-term wealth creation
Over the years there have been many property investment fads, but few as pervasive as the infamous ‘hot spot’. Touted by spruikers, data suppliers and the media as quick money makers, hot spots catch many investors and even homebuyers unawares.
By definition, a hot spot is a suburb or area in which property is predicted to benefit from quick short-term gains in value - take for example mining towns in Queensland, Western Australia and Northern Territory, where mining activity leads to a surge in local activity, which drives increases in rental rates and property prices to meet a sudden influx in demand.
Sounds great, right?
History shows that despite an initial “sugar hit”, a hot spot is usually characterised by slow or limited growth in the long-term that often undermines short-term gains.
Melbourne’s EastLink freeway is a specific example of this phenomenon where select properties in suburbs surrounding the development, including Ringwood, Wantirna and Heathmont in the east, and Seaford in the bayside, demonstrated a spike in property prices at the commencement and conclusion of construction.
There was even a spike in prices following the initial announcement.
Fast-forward to now and the prices of EastLink affected properties have returned to long-term performance trends that more accurately reflect their truth worth.
The danger to investors chasing hot spots is risk of paying more for the property, a financial outlay that can take several years to recoup in capital growth terms.
Even chasing high rental returns in hot spot areas can lead to disappointment, as short-term high rents do not offset the high ancillary costs associated with the property purchase, such as stamp duty and legal fees, once the market has cooled and rental rates return to normal levels.
Instead, when buying property for investment, or even as an owner occupier, take a more strategic approach that considers the long-term performance of the asset.
Base your decision to buy on the facts, including comparable historical sales history - a long-term consistent performance history is the most reliable indicator of future outcome.
Basing your decision to purchase on a location’s proposed future development, such as improvements to local infrastructure or amenities, can lead to disappointment, particularly if the project doesn’t progress past the planning phase.
When considering a property for investment rental returns are important, but they shouldn’t be the main reason for buying a property.
In the long run a property with a good capital growth profile and solid rental return will outperform those properties with seemingly high returns.
It is also worth noting that rental guarantees are in fact no guarantee of long-term growth performance, so be wary.
Following these simple steps will assist in differentiating between an average property and a high performing, investment-grade, real estate asset that can bring you one step closer to securing your long-term financial goals.