Desperate for capital growth drivers

Sometimes developers get desperate to find reasons why capital growth will take place in suburbs they've just built in. They need buyers and some buyers are investors. "How can we appeal to investors?" they ask. There's plenty of half-arsed research that can be reported.

And sometimes market commentators will get desperate trying to explain why capital growth recently happened in a certain location. The claims can get pretty tenuous when the basic drivers of growth are misunderstood.

Dodgy developer research

Sometimes I wonder whether they just don't know what drives growth or whether they can't estimate accurately the impact recent changes will have on growth. Other times however, it's clear they're simply desperate. Some pearlers I've heard recently include:

• A new childcare centre has opened up servicing the region [The entire Hunter region!]
• The local council has planned to spend $5mil on road upgrades
• A local celebrity likes to surf nearby

A single new childcare centre simply isn't a big enough driver of capital growth even for a single suburb. And a $5mil road upgrade for a local government area might mean planting some roadside bushes or repainting the lines.

    "Sweetheart, look how shiny these road markings are. We should move here."

This kind of "research" by developers and their marketers can creep into investor thinking. Investors in the future will see a childcare centre open up and will think "growth!" simply because they saw it in a report.

Tenuous claims to fame

Another example of desperation I've seen recently is attempts to explain recent growth. Quite often publishers will ask for comments from industry experts or local realtors. You can tell when some of them are fumbling for adequate reasons. The explanations just don't hit the nail on the head.

For example, Badgery's Creek is getting a lot more attention that it deserves already. This is the site where Sydney's new airport will be built. I've heard some claims that prices are already being pushed up in a location 16 km away. And this is years before the first "choik!" of tyres hitting tarmac is even heard.

Into stats or infrastructure

Sometimes it's easier to find the true cause of recent capital growth than it is to come up with the B.S.

Prices rise when demand exceeds supply, simple. So all we need to do is measure the imbalance. That is easy with the Demand to Supply Ratio (DSR). If auction clearance rates are high; and days on market are low; and vendors aren't negotiable; and vacancy rates are low; then surely we're talking about a market in which demand exceeds supply - no question.

But investors seem to prefer news about a massive infrastructure project that is believed will create demand. They don't want to look at the statistics for some reason. And I think that reason is due to a history of poor research reporting, often by developers or real estate agents trying to flog off their stock.

Big news vs no news

I've been looking at supply and demand numerically for more than 5 years now. Every month I calculate the DSR for tens of thousands of property markets country-wide. What I've found surprising is that in all that time, not once have I noticed a location with massive infrastructure occupying the top DSR spot. They haven't even appeared in the top 10 - never.

Property markets with great infrastructure projects definitely do influence demand. And they do have a higher DSR than average, but they are not the highest DSR scoring locations.

Although demand can creep up on us occasionally, more often it is supply that does the creeping. Bit by bit vacant land is exhausted. Combine this with a restrictive council and the supply may dry up quickly. Moderate demand over a number of years in a restrictive supply location gradually absorbs available stock. Eventually it reaches crises point and there's a boom in prices.

In other words, it is a lack of supply that seems to be the biggest driver of growth. Yet everybody is focussed on demand. I've even seen reports that only mention demand and never even touch on the topic of supply.

A gradual lack of supply doesn't make the headlines. That means developers don't find out and don't create a state of oversupply. No news can be good news for property investors. Big news on the other hand can be like a flock of swirling vultures in the distance.

Conclusion

If you're looking for reasons why capital growth has happened in a location and you can't find an infrastructure project to explain it, examine the stats. They're dead easy to look up and you can find charts showing their history.

Don't blindly swallow the developer's tale. Read any research report with a healthy degree of scepticism. Always look up the DSR for any location. It only takes a minute and gives an excellent ball-park idea of the nature of supply and demand. If you're still in doubt, look up the DSR+ for a more accurate indication of supply and demand.

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