With an abundance of information readily available, property investors are now armed more than ever to make educated property investment decisions.
There are a few key property metrics all property investors should understand and consider before deciding to purchase an investment property.
Put simply, the median house price is the midpoint of all houses and units sold at market price over a set time.
The median house price can provide strong insights into the current value of residential property in a particular suburb. It can also show how the suburb has performed historically.
However, it shouldn't be your only reference point for price data.
It's also not always an accurate representation of monthly performance. For instance, in months where a low volume of properties are sold, or, an oddly high amount of expensive or less expensive homes were sold, it can skew the data.
Overall, it's wise to use median prices over long periods to monitor the trend of prices.
Days On Market.
Days on market (DOM) refers to the number of days from the date a property is listed for sale, to the date when the seller has signed the contract of sale.
On a local level, DOM determines how other buyers are reacting to a certain property.
A high DOM may imply the property may have an unattractive feature or indicate that the asking price is too high.
DOM can also aid in the assessment of the current sentiment of a property market.
Auction Clearance Rates.
Auction clearance rates are the percentage of property sold at auction over a certain period, whether it be based on a weekly or monthly period.
This type of metric can be useful when predicting the direction of the property market and should be considered as a general indicator of strength or weakness in the market.
It's often used by the media to assess the current sentiment of each state property market around Australia.
Auction clearance rates are good market indicators, but it's equally important to remember that private treaty is by far the most common method of sale.
Clearance rates may also differ dramatically by suburb and state given the many factors that directly impact auction clearance rates. Some include seasonality, interest rate, or numbers of bidders at an auction.
Gross Rental Yield.
The rental yield measures the profit generated each year from an investment property as a percentage of the properties value.
To calculate gross rental yield, divide the yearly rental income by the property price, and multiply that figure by 100.
There is no definitive ‘good yield’ percentage, as they can differ from market to market. However, in metropolitan areas, yields typically range from 3-5%.
In regional areas, you will typically find much higher yields (>6%) as the price of a property is much cheaper.
A rental yield of 5% is typically considered a strong yield and will likely cover most of your costs, especially in a low-interest-rate environment.
The vacancy rate represents the percentage of unoccupied rental property within a market.
Typically, a vacancy rate of 3% is a market evenly balanced between renters and landlords; 4% or more is an oversupplied market; under 3% is undersupplied.
For investors who are cash flow conscious, purchasing a property in markets with lower vacancy rates will typically achieve stronger yields than those with higher vacancy rates (vacancy rate below 3%).
Within undersupplied markets, rental competition is high as renters compete over listings. Consequently, the risk of vacancy is lowered and landlords have greater potential to increase asking rent.
This is by no means an exhaustive list, however, they are essential data points to cover when conducting your own property research.
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James Allnutt – Property Investment Consultant
P: (02) 9939 3249