What makes a street, area – or even an entire suburb – 'hot property’? Sometimes it’s a surge in demand, a flurry of building activity, a slew of new cafes and shops or dollars slated for infrastructure.
Each year, REA Group compiles its Hot 100 list to pinpoint suburbs tipped to see short- to medium-term growth based on the factors above and others including location, family appeal, affordability – and of course – investment prospects.
When looking at that last metric, it’s important to set some parameters around what might make a suburb a top pick for investors.
If we take into account recent price growth, affordability and rental yields – 37 suburbs from the Hot 100 list emerge as having good investment potential for either houses, units or both.
Using the most recent PropTrack data, we can filter the Hot 100 list for affordability by only including suburbs with median house and unit prices of less than the national medians of $868,000 and $654,000, respectively.
Then we can look at annual price growth, and only include suburbs with YoY price increases of more than the national median price growth of 4% for houses and 3.6% for units.
Lastly we will only consider suburbs which had gross rental yields of more than the national percentages of 4% for houses and 4.9% for units.
This leaves us with a total of 37 suburbs.
There were 24 suburbs from the Hot 100 list which met the criteria for houses and 21 suburbs for units. Eight suburbs were identified as having good investment prospects for both houses and units.
Of course no one has a crystal ball, and past price growth does not always indicate future growth. However, identifying affordable suburbs with recent and continuing price growth is one way investors can maximise potential for a healthy rental income and growth in equity.
One suburb – Rockhampton City in Queensland – hit the trifecta for house investment. It had the lowest median price at $359,500, the highest annual price growth of 53% and the highest rental yield at 6.5% of the suburbs which met the parameters for houses.
If a typically priced Rockhampton City house were to see the same annual price growth in the coming year as in the previous one, its value would hypothetically increase by $190,535. That’s on top of an annual gross rental income of approximately $23,367, based on a 6.5% rental yield.
That’s potentially $213,902 in gross earnings from rent and equity – almost 60% of the original purchase price of the property.
Even if the property only increased in value by half as much – say 25% – that’s still $89,875 in possible equity in one year, and $113,242 in potential gross earnings when coupled with rental earnings (more than 30% of the original purchase price).
To put that in perspective, if we did the same thing with the national median house price, annual growth and rental yield, money earned from the investment would be just 7.9% of the original sale price.
Queensland and South Australia had the most suburbs where investors could find houses which met the criteria for investment prospects.
Suburbs including Queensland’s Kirwan and Gatton, along with SA’s Munno Para West and Andrews Farm, each recorded more than 20% price increases in the year to February.
Despite the rapid price growth in these suburbs, they were still relatively affordable, with median house prices between $530,000 and $614,000.
What’s more, each had rental yields well beyond the national figure of 4% for houses – recording gross returns between 4.7% and 5.2%.
Six suburbs in Western Australia fit the parameters, two in New South Wales, and one in Tasmania. No Victorian suburbs made the criteria for housing investment.
When it came to units, Queensland had the most suburbs – eight in total – to meet the criteria, followed by Victoria with four, WA with three, Tasmania and the ACT with two, and NSW and SA with one each.
The strongest yields could be found in Wright in the ACT and Mandurah in WA, each with 5.7% returns for unit rentals.
Queensland’s Banyo saw the strongest price growth YoY for units at more than 50%.
However, more affordable WA suburbs – Bassendean and Mandurah – still recorded strong annual unit-price growth (just over 32%) and each recorded much higher yields than Banyo at 5.6% and 5.7% respectively, compared with Banyo’s 4.7%.
A unit bought in Bassendean at the current median of $550,000 would bring in $31,200 in gross rental income based on a yield of 5.6%.
If prices were to increase at the same rate in the coming year as in the previous one, that property would potentially be worth $730,950 in 12 months. That is a combined $212,150 in potential gross earnings from rent and capital growth – representing 38% of the original purchase price.
For comparison, if we did the same thing with the national median unit price and rental yield, just 8.5% of the original purchase price would be earned in rent and capital growth.
Every suburb on the Hot 100 list recorded 10-year price growth for houses – the majority had a more than 35% increase and more than half saw gains between 90% and 200%.
For units, just one suburb saw a 10-year decline – Geraldton in WA – but that was overlooked due to its huge YoY increase of 57% and its other prospects including a thriving export industry.
In this way, it is important for investors to look at both long-term and short-term market trends – and of course to consider their own goals – to find the suburb and property that is right for them.
