This article appeared in Vision China Times.
The BoomScore™(www.DSRScorecom.au) is a combination of a number of property price movement indicators like auction clearance rates, stock on market, vacancy rates, days on market, discounting, yield, online search interest and the ratio of renters vs owner-occupiers in an area.
When deciding where to invest, there is a huge amount of data to work through if you were to evaluate all 15,000 suburbs. We've made this possible with the BoomScore™ which compares all Australian suburbs against 8 leading indicators of demand and supply like auction clearance rates, stock on market, vacancy rates, days on market, discounting, yield, online search interest and the ratio of renters to owner-occupiers in an area.
The BoomScore™ gives the investor an overall summary score of the suburbs relative capital growth potential.
Today we examine ‘Renters vs Owner-Occupiers’, the fifth statistic in this 9 series and making up the overall BoomScore™
Capital growth is generally proportionally higher in a suburb with a higher ratio of owner-occupiers to renters. When assessing a location, you want to make sure there are enough tenants to rent your property but also enough owner-occupiers to both buy your property when it comes time to sell and to ensure the area is well looked after.
Some would say suburbs dominated by owner-occupiers are better maintained and consequently tend to receive better valuations particularly when refinancing is involved.
Owner-occupiers take pride in the appearance of their home and will often spend money to maintain this appearance. An expense that might not make commercial sense but will help uphold the values of all properties in the area including your investment property.
Conversely, landlords generally spend the bare minimum on their investment properties, which can keep prices subdued when the majority of properties in the area are investor stock.
So a balance in the ratio of owner-occupiers to renters must be considered before jumping into the next hot location.
Where can you get this data?
Most property websites provided this information from the Australian Bureau of Statistics that collates it from Census data. Keep in mind this data can be as much as 5 years old with the last Census update taking place in 2011.
Nevertheless you can still get a sense of the ratio between owner-occupiers and renters across all suburbs before doing your own local level research.
Some pockets and streets in a suburb may have more or less tenants relative to owner-occupiers which is why ‘on the ground’ research is so important once you have identified you shortlist of suburbs using the stats.
We recently endorsed a project in Elanora, QLD. The table above says the renters make up 20% and owner-occupiers the balance of 80%
The ratio was actually closer to 85% owner-occupiers in the particular estate where these townhouses are located.
Owner-occupier dominated suburbs generally cost more to buy into which can effect rental yields: the higher the purchase price relative to the rent, the lower the rental yield.
Investors also have to protect their exit strategy, i.e. buy with the end in sight.
If we are targeting a location that is relatively more expensive, say pricier than the median value for the region, then we might be limiting our pool of investors when it time to sell.
We might also be sacrificing rental yield for some unknown future capital growth that this high proportion of owner-occupiers generally delivers.
One way to limit this imbalance in rental income and capital growth potential is to find suburbs with both a high ratio of owner-occupiers to renters but where vacancy rates are very tight.
A suburb with a high BoomScore™ (visit boomapp.com.au) will mostly have a good mix of both.
The project mentioned above with 85% of occupants in the immediate area being owner-occupiers also has a vacancy rates of 0.63%. That’s very tight with high demand from tenants and low supply putting upward pressure on rents.
Looking for opportunities.
Some locations are so tightly held without much new stock coming onto the market that councils can be forced to increase densities around existing stock. We’ve seen this happen in NSW and QLD recently as councils are forced to take up extra density to meet the demand of location residents.
This can open up tremendous opportunities for both the investor and the locals. We've seen areas where changes in planning laws mean aging owner-occupiers don't have to leave the area to downsize to an area with higher density housing e.g. moving from the high maintenance large detached family home to a more manageable townhouse.
We recently took on a project of 4 units with the owner who wanted to remain in the area, close to established friends, and to continue buying their meat from the local butcher who they had built a relationship with over the years.
Changes in planning laws meant their detached house block could now have 4 townhouses constructed.
The end result? They got a brand new low maintenance townhouse similar in size to their old home but with less grass to mow.
On top of their new townhouse (that valued higher on completion than their unimproved property), they banked a nice lump sum for those overseas retirement holidays.
When looking at an area, ask yourself who will buy my townhouse in years to come.
- Is the area changing and likely to move towards a higher ratio of owner-occupiers (and therefore push their prices up)?
- Are rental yields proportionality higher for similar townhouses in suburbs with a similar ratio of owner-occupiers to renters?
- Are vacancy rates currently very tight and likely to encourage more investors into the area so as to widen their exit strategy to cover both owner-occupier buyers and investors?
- Is stock on market as a percentage of all properties in the area very low and likely to stay low.
- Is internet search interest for the area increasing relative to the broader region and overall Australian property market average.
Manually finding out this information for all 15,000 suburbs and then ranking them based on how well they compare is, of course almost impossible, but Boomtown (boomapp.com.au) does this all automatically for you.
So what is the ideal ratio between homeowners and renters?
The answer really depends on your strategy.
I would say the question really is, “what’s the optimum mix in all the known supply-demand data including the ‘ratio between owner-occupiers and renters’ (‘renters’ in Boomtown) and ‘vacancy rates’, ‘rental yields’ etc?”
That’s why examining the overall BoomScore is crucial.