We hear about some investors buying property successfully throughout the property cycle – in good times and bad. How do they do this?
I am a macro investor – which means the first step to deciding where to invest is picking the right suburb. Picking the right suburb is critical because this will account for most of your capital growth over your investment journey.
The biggest risk in a downturn is buying in a market that is oversupplied.
What is the DSR?
One key tool that I use to decide which suburb to invest in, is the Demand-Supply Ratio (DSR). The higher the ratio, the greater the demand is relative to supply, and vice versa.
The DSR is a composite of many factors, distilled into an algorithm.
These factors include time on the market, vendor discount, vacancy rates, etc.
How to read the DSR?
Simply put, markets with a high DSR can be expected to outperform markets with a low DSR.
Does it work?
If we look historically at performance since 2012, suburbs with a DSR of 30% (high supply, low demand) grew only 5% for the two year period between 2012-2014.
Compare that to suburbs with a DSR of 77% (high demand, low supply) which grew 20% over this two year period.
Examples:
Let compare two investment options and try to decide which will outperform over the next few years.
Let’s compare a unit in Rose Hill vs units in Mosman.
Rouse Hill – Unit:
Here we can see Rouse Hill Units have a DSR of 42%, where supply exceeds demand.
Mosman NSW – Unit: Here we can see the DSR for Mosman units is 67%.
Verdict: based on this data, we would expect Mosman units to outperform units in Rose Hill.
Obviously these are unlikely to be true alternatives, but it does illustrate how the tool works.
Shortcomings
The biggest criticism of the DSR is that it is a predictive tool that uses retrospective data. That is, it looks to past/present data, not future trends (eg upcoming infrastructure). This is a true and fair criticism.
While past performance is a very reliable indicator for the robustness of an area, it does not tell us everything we need to know.
Similarly, your strategy may in fact be to find the biggest “bargains” and buy into weakness. In this case, a lower DSR suburb is for you.
Conclusion
As a buyer’s agent, knowing where to buy is a large part of determining my success. Also, knowing where I can push the negotiation the hardest is also valuable.
I hope you have enjoyed this sneak peak in some of the tools of the trade to be a better property investor.
Go to DSR at: www.dsrdata.com.au
Of course, if you would prefer to use experts to manage your property acquisition from beginning to end, please contact me at john@bridgetobricks.com.au
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