What are going to be the property ‘hotspots’ in 2016?

I was recently rung by a journalist from one of the major daily news sites asking me for my predictions on the property hotspots for 2016.

Apparently an article that he wrote two years ago predicting the hotspots for the coming year was one of the most popular on their website, and now coming to the tail end of the year it seemed opportune to write one for 2016 and for me to update my opinion.

While I love giving my opinions to the media, I hate being asked for “hotspots” because that’s not how I work.

Rather than looking for the next hotspot or the next big growth area, which a few months later will be proven wrong, I prefer to use a strategic approach to finding investments that will outperform the averages over the medium to long-term.

Interestingly before I replied to the journalist I had a look at the original article online and was fascinated to see some of the predictions others had made and how those suburbs – the so-called next “hotspots” – have actually performed over the last year or two.

“Interesting” is a good choice of word, in fact a generous choice of word for how some of those suburbs have underperformed.

Many of the outer suburbs and regional towns just didn’t gain the traction the hot spotters were hoping for, just like many of the mining town “hotspots” that were the flavour of the month a few years ago have left the landscape littered with investors who lost money. Places like Port Headland, Moranbah, Mandurah, Cairns and Gladstone

SO WHAT WILL DRIVE OUR PROPERTY MARKETS NEXT YEAR?

The impacts of wild volatility in the Australian dollar, overseas economic issues, a flood of foreign buyers, APRA tightening the screws on investor lending and the long period of low and stable interest rates may all appear obvious in the rear-view mirror, but what lies ahead is inherently difficult to judge… perhaps impossible.

However likely factors affecting our property markets over the next year include:

1. The Australian economy, which is slowing. How this pans out and how the RBA responds with interest rates will clearly be a major impact on our property markets.
2. APRA’s regulations targeting investor and now owner occupiers will slow demand, especially from new investors and home buyers who were “marginal” in their ability to service loans. Also this will impact investors with large property portfolios who are rent reliant for serviceability will find it harder to get loans.
3. Population growth will continue albeit at a lower rate, and people will head for our four big capital cities, but particularly Melbourne and Sydney where the growth in service industries is creating the most jobs.
4. Interest rates are likely to remain low next year and may even drop further if our economy falters.
5. Business confidence is rising as we seem to have stable government at both the federal and state levels.
6. Consumer confidence has been rising since Malcolm Turnbull was elected prime minister but this remains fickle.
7. Job growth and steady unemployment rates will lead to increasing consumer confidence.

This combination of factors means that 2016 won’t be as good for house price growth as 2015 was.

But that doesn’t mean a property crash is on the way either.

Nationwide price falls are unlikely until the RBA raises interest rates, which probably won’t happen until 2017.

However, decreasing affordability, changing sentiment and oversupply in several sectors such as CBD and off-the-plan apartments will create a volatile mix that will fragment and slow our property markets – moving some from a seller’s to a buyer’s market.

This is already evident with falling auction clearance rates particularly in the Sydney property market.

AS ALWAYS DEMOGRAPHICS WILL DRIVE OUR MARKETS

Let me explain…

As Australia’s economy bumbles along I can see little wages growth over the next year or two, but I do see interest rates rising sometime in 2017 and both these factors will affect some suburbs more than others.

What I mean by this is that rising rates are likely to affect suburbs that are more interest-rate sensitive like blue-collar areas, regional locations and first-time buyer locations.

On the other hand, property values are likely to increase in the more affluent, gentrifying middle ring suburbs of our major capital cities where the locals’ income is less dependent on CPI rises in wages and where rising interest rates are less likely to have an impact on disposable incomes.

So my top picks for suburbs that will outperform would include suburbs where people have higher disposable incomes and are able to, and prepared to, pay a premium to live there the because of the amenities in the area.

Property price growth in Sydney will likely slow to around 5% over the year ahead and Melbourne prices should grow a little more than this (+7%).

Prices will fall a little more in Perth and Darwin as the mining boom continues to unwind, while Hobart and Adelaide are likely to see continued moderate property growth, but the Brisbane property market should start to pick up further as it plays catch up rising around 7% over the year.

And I can’t really see a reason for regional or mining town real estate to have much capital growth. There is no influx of new people moving to these regions little to strengthen their economies and investors are no longer buying up big in these regions.

2016 WILL BE GOOD TIME TO CLEAN UP YOUR HOUSE OR HOUSES

While I still see some good opportunities in selected property markets, I recognise that strategic property selection will be critical as capital growth will not be as strong next year as it was this year.

I also see 2016 as a window of opportunity for those with underperforming properties in their portfolio to divest themselves of their lemons, because the odds are they will continue to disappoint.

The best way to uncover an underperforming asset before it eats too far into your bottom line is to annually review your portfolio and ask yourself some hard questions:

1. Is this property performing like I expected it to?
2. Is this property outperforming the market?
3. If this property were on the market today, would I buy it again?
4. Is there anything I could do to improve my property, so that it generates a more attractive return on my investment?
5. Is this property likely to outperform the market averages for the next decade or more?

Sure, property is a long-term investment, but occasionally the right thing to do is to cut your losses and sell up so you can buy a better property.

And don’t wait for your local market to get better, because the gap between the value of the property you own and the top performers will only get wider.

However, if your property is tenanted, consider selling it at or near the end of its lease term to widen the appeal of your property by making it attractive to both owner-occupiers and investors.

Michael Yardney is a director of Metropole Property Strategists, which creates wealth for its clients through independent, unbiased property advice and advocacy. He is a best-selling author, one of Australia’s leading experts in wealth creation through property and writes the Property Update blog.