When researching a suburb for investment purposes, one of the most important fundamentals to analyse is the suburbs economic strength.
A major characteristic of a strong and healthy local economy is one that has a diverse range of employment supporting it.
Diversity of employment is essential for driving constant demand for property within a market, whilst also playing a pivotal role in mitigating risk.
Suburbs with a single dominant industry
Suburbs supported by single industries, such as mining towns or tourist destinations, are typically labelled as high-risk locations, as the residential property values in these areas mimic the performance of its dominant industry.
In the event of a mine closing down in a mining town, the majority of workers lose their jobs, and therefore, leave the mining town in search of work elsewhere. As a result, there is a population outflow and demand for property is reduced.
Suburbs with multiple industries
Whereas, suburbs supported by multiple industries typically have a more stable economy. If one industry of employment is suffering due to weak economic conditions, this will have a lesser impact on the market as a whole, as people have the freedom to flock to other industries and continue to live within the suburb. The demand for property is then maintained.
To highlight the importance of a suburb with a diverse range of employment, I will compare two suburbs’ population growth between the 2006 and 2016 census periods, and price growth over the last 10 years [1].
The suburbs are located in Swanbourne and Kalgoorlie, both located in Western Australia. Each area is supported by entirely different industries:
Considering that Perth has not been an outstanding performer over the last 10 years, how do the suburbs compare?
Swanbourne
Swanbourne is a western coastal suburb of Perth, Western Australia, located 3.9km from Perth CBD. It is an affluent, upper middle-class suburb with a diversified economy.
Key highlights for Swanbourne:
Diversified Economy. Supported by a variety of employment sources such as Defence, Health, Legal and Education.
Population Growth. 15.5%
Price Growth. 14.4%
Suburb Insights for Swanbourne [2]
Kalgoorlie
Kalgoorlie is a small city located 595km of Perth CBD in the Goldfields-Esperance region of Western Australia. Kalgoorlie is heavily dominated by just one industry.
Key highlights for Kalgoorlie:
Single Industry Economy. Dominated by the mining industry with 20.2% of its population working in Gold Ore Mining.
Population Growth. 4.7% (an increase of 17.7 people a year for 10 years).
Price Growth. -29%
Suburb Insights for Kalgoorlie [2]
Location conclusions
Overall, Western Australia has unperformed over the last 10 years due to various economics headwinds, however, in the same period, Swanbourne experienced modest price and population growth.
Kalgoorlie, however, has seen minimal population growth and a significant drop in prices as the resources sector of the state struggles directly affecting the performance of Kalgoorlie.
Key takeaways
Overall, investors need to target suburbs that are supported by multiple industries, which will promote stability and long term price growth in the property market.
However, the economy or employment of an area should not be the sole focus driving the investment decision. Wise investors always conduct relevant due diligence on the other 6 key macro fundamentals, driving capital growth in markets as well, before engaging in any property investment.
James Allnutt – Property Investment Consultant
P: (02) 9939 3249
References
[1] ABS, Census 2006 & 2016
[2] On The House - www.onthehouse.com.au