How to Identify Real Estate Hotspots #08: The Ripple Effect

By February 15, 2018Buying, Investing

A real estate up-cycle tends to begin in the inner-city suburbs – and radiate out from there. A strong real estate market seldom covers all of a capital city at one time, but starts at a central point and ripples outwards over 3-4 years.

You can chart Sydney’s boom from 2013 to 2017 in this way. The areas that had high price growth first were those in the inner city. A year or two later suburbs a little further out were the ones with the highest growth. Finally, in 2016/2017, it was the outer ring suburbs with the most activity and high price growth. As we entered 2018, the Camden LGA in the far south-west of Greater Sydney was the leading growth market.

This pattern has also unfolded in Melbourne with its recent upcycle. The biggest activity early on was in the top-end suburbs but, by 2015 and early 2016, the major market expansion was being seen in the middle-ring suburbs. In 2017 and into 2018, the leading markets for sales activity and price growth were the cheaper, outer-ring markets, such as Wydham City.

It often happens this way. The inner suburbs grow first. Eventually their prices become a bit rich for mainstream buyers. So they look to the next suburbs.

Those who can’t afford Glen Iris (in Melbourne’s inner southeast)
might look in Ashburton. Those who can’t afford Ashburton will look a little further out in Chadstone. (The median house prices in Glen Iris, Ashburton and Chadstone were, in order, $1,988,000, $1,690,000 and $1,088,000 early in 2018.)

Eventually prices rise in neighbouring suburbs, forcing buyers to go further out. And out. And out. In this way, the price growth ripples outwards from the centre. It’s like dropping a stone in a bucket of water and watching the waves ripple from the centre to the outer edges. Hence, the Ripple Effect.

This phenomenon happens on a larger scale as well. A major up-cycle started in Brisbane around 2001. But it didn’t start then on the Sunshine Coast. There was a delay before the upward trend in prices radiated out to the coastal regions of the Sunshine Coast.

But while it was happening on the coast, it wasn’t happening up in the hinterland, in the hills around Maleny and Montville. That didn’t happen until later, in 2003 and into 2004. Maleny got a Ripple Effect from the coast, which had earlier got a Ripple Effect from the capital city.

Tasmania can attribute part of its 2003/2004 boom to the Ripple Effect – the boom had been raging on mainland Australia, including nearby Victoria, for two years before it rippled across Bass Strait to Tasmania. A similar syndrome emerged in 2017 and by 2018 Hobart was the capital city with the fastest-selling houses and highest price growth.

Regional centres close to Sydney caught the wave from the property boom in the capital city. Locations such as Gosford, Wollongong and the Southern Highlands experienced strong price growth in the period from 2014 to 2016.
As investors you can make money out of this syndrome. If a suburb or region is experiencing strong price growth, look to the suburbs or regions nearby. If they have not yet experienced that same kind of price growth, there’s a good chance they will soon (assuming that there are no detrimental features suppressing values there).

So buy there now, before the boom starts.

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The next article in this series is How to Identify Real Estate Hotspots #09: Sea Change/Hill Change

This is a joint publication of Snowden Parkes and Ryder Property Research.

It will be available on our website from Monday 15th March 2018. So check back again on our website.

If you find this article very useful and can’t wait for the next one to come out? We would like to hear from you!

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