In this article we explore 3 fundamental real estate market metrics and explain why many investors chose to benchmark suburbs based on these indicators before moving on to assessment of market supply and demand.
If you are a property investor, you should be on the lookout for areas with a lower proportion of renters to owners (R|O ratio). These areas will typically have higher capital growth potential and will be less risky investments.
Furthermore, when looking for potential investment, it is beneficial to find areas with a lower proportion of units to houses (U|H ratio).
Lastly, you should consider investing in a suburb with higher IRSAD scores. The ABS (Australian Bureau of Statistics) has already done the hard work for you by gathering employment, education and other socio-economic data and produced a weighted comparative index for these parameters.
Table of Contents
Renter to Owner (R|O ratio)
It is commonly accepted that a property market with a lower proportion of renters generally outperforms a market with a higher proportion of renters. That is why investors seek out areas where there is a lower proportion of renters as these areas offer greater potential for capital growth and rental yield.
So, why is it important to have a lower proportion of renters in a property market? There are a few reasons.
Renters are more likely to move than homeowners, which means that there is more turnover in the rental market with high proportion of renters leading to higher vacancy rates.
Furthermore, renters are more likely to default on their rental payments than homeowners are to default on their mortgage payments. This is because renters often have less financial security than homeowners, and they are also more likely to be impacted by economic downturns.
Finally, renters are less likely to take care of a property (and more likely to damage it) than homeowners are. This is because they do not have the same financial stake in the property, and they are also more likely to move if they are unhappy with the condition of the property.
Areas with a higher proportion of owner-occupiers typically indicate a more stable community. These neighborhoods may be more desirable, leading to potential increases in property values over time.
Markets with different R|O ratio: The Gap NT 4061 & West Haven NSW 2443
An oversupply of rental properties can lead to decreased demand and lower rental prices. This is bad news for landlords who are relying on rental income to help pay their mortgage, as well as those looking to sell their investment property.
Areas with a high ratio of owner-occupiers often see more consistent capital growth, as these homes aren’t frequently turned over. In addition suburbs with more homeowners can be less subject to market fluctuations, as they’re less likely to sell in a downturn, providing more stability in the real estate market.
It’s important to remember that an investment property is just that – an investment. And like any investment, you want to see it grow in value over time.
That’s why it’s important to have a healthy mix of owner-occupiers and renters in any given market. Too many renters and you could be sacrificing capital growth; too few and you may be missing out on steady rental income.
Units to Houses (U|H ratio)
It is a well-known fact that the more units there are in a real estate market, the lower is the likely ROI in the market. This is especially relevant to investors, as they are always looking for areas where there is potential for their investment to grow.
There are a few reasons why this is the case.
Firstly, when there are more units in an area, there is more competition for tenants among the investors. This means that landlords will have to lower their rents in order to attract and keep tenants, which in turn decreases the amount of rental income that they are bringing in.
Markets with different U|H ratio: Bilinga QLD 4225 & Merrimac QLD 4226
Secondly, more units in an area also means that there is a higher likelihood of vacant properties. This is because it is more difficult to fill multiple units than it is to fill just a few houses. When there are a lot of vacant properties in an area, it brings down the overall value of the area, as well as the value of individual properties.
Lastly, having a lower proportion of units to houses in a suburb also makes the area more desirable to live in. This is because it creates a more balanced community, and people are generally more willing to pay more to live in an area that is seen as being more upmarket.
Property markets with an oversupply of units can be at risk of price drops if the market cools or if there are regulatory changes. Investing in a location with a lower proportion of units can mitigate this risk.
In addition, ownership of a house usually provides greater control over the property, allowing for renovations and improvements that can increase its value, whereas unit ownership can come with restrictions by strata or body corporate rules.
However, these are general principles and capital growth and rental yield prospects of a suburb would also depend on other factors. The investor’s personal goals and strategy should be considered too as some may prefer the typically lower entry cost and potentially higher rental yields of units in certain markets.
Want to know what an acceptable percentage of units to houses is? Visit the data dictionary and find the U|H metric.
Index of Relative Socio-economic Advantage and Disadvantage
Have you been gathering unemployment, education and other socio-economic data on suburbs in order to help you with property investment decision making? What if I told you that ABS has already done the hard work for you?
Meet IRSAD – Index of Relative Socio-economic Advantage and Disadvantage. It is a metric that encompasses multiple socio-economic indicators that many investors use to bench-mark high performant markets. See detailed analysis of this metric in this article.
A high index of relative advantage and disadvantage means that the suburb is a more attractive place to live, and that there will be more people moving into the suburb. This increased demand for property will drive up prices, and investors who purchase property in the suburb can see stronger capital growth in the long run.
0 – 2
2 – 4
4 – 6
6 – 8
8 – 10
0 – 2
2 – 4
4 – 6
6 – 8
8 – 10
Markets with different IRSAD score: Pimlico QLD 2481 & North Adelaide SA 5002
On the other hand, investing in areas with a low ISRAD score can be risky, but it can also be very profitable. These areas have the potential for high capital growth as the government and community services invest in these areas to improve the socioeconomic conditions. However, it is worthwhile confirming that the government does indeed have plans to allocate spending on improving the conditions in these suburbs.
As a property investor, you are always looking for areas with high potential for capital growth. If you are considering investing in an area with a high IRSAD index, it is important to do your research and consider supply / demand indicators in the area.
In conclusion, metrics like the renter to owner ratio, unit to house ratio, and IRSAD scores are invaluable tools for property investors when benchmarking suburbs for potential investments. These metrics provide a powerful, data-driven approach to understanding the numerous factors which influence property performance.
A lower ratio of renters to owners can suggest strong capital growth potential and lower risk, as these areas often have more stability and better property upkeep. A suburb with fewer units relative to houses can point towards higher demand and lesser competition, possibly leading to higher rental yields and future capital growth.
Meanwhile, a high IRSAD score reflects a suburb with significant socio-economic advantages, indicating a desirable place to live which can translate to increased demand and potential property value increase over time.
Nevertheless, remember these insights on ratios and indices serve as a starting point for your research. Each investor’s needs and strategies vary, so consider other supply and demand indicators along with specific property details, to ensure your investment aligns with your wider goals.