How data can help property investors identify gentrification before it happens

Despite the views of some people, all property will not always increase in value, so we all have to work a little harder to ensure that our investment selections add up, especially during these slightly more turbulent times.

Searching for the next up-and-coming suburbs and regional centres can be a risky exercise, but it has the potential to pay dividends.

It requires a certain amount of crystal ball-gazing and a level of courage, but if you get it right, the rewards can be well worth the effort.

Spotting gentrification requires analysing data for tell-tale signs of imminent changes, as well as visiting the location to reinforce the data and determining which pockets, streets and properties in the location are the best quality.

It also requires investors to have the financial capability, conviction and courage to purchase in a location that may not quite be on the map yet.

What are the risks of targeting gentrification?

Over many years, you should expect a general outperformance of a micro-market where gentrification has been completed.

On the flip side however, what often occurs is prospective purchasers are looking for the next upcoming market, but end up buying into a market that’s already shown recent substantial growth.

In other words, they get in too late, which isn’t necessarily the end of the world if the location is considered to be a long-term desirable location.

But sometimes, the double-whammy is that the market is not actually a gentrified location.

For example, if an investor purchased in a location that hasn’t been gentrified yet, but benefited from the ripple effect of property values as surrounding suburbs evolved, this location could be first hit – and with the largest force – when the market is in the downwards phase of a cycle or there is a downturn in the economy.

How to analyse data to reveal gentrification

Chairman of the Property Investment Professionals of Australia Peter Koulizos has identified four factors to help identify the early days of gentrification in a location:

• A decrease in people under 18 years old that’s greater than the state average.
• An increase in couples with children that’s greater than the state average.
• An increase in those who lived at a different address five years ago that’s greater than the state average.
• An increase in women working in professional occupations.

House hunters can find this information in publicly available census data, figures from the Australian Bureau of Statistics, as well as suburb profiles.

If we were to sum up the signs of gentrification, it would generally be an increase in 30 to 40-year-old professional couples who’ve moved into an up-and-coming suburb that was previously considered an ugly duckling.

These types of locations in capital cities are generally not yet popular, though show early signs of changes. The previous demographic still predominantly resides there, but they’re gradually selling up.

Search for established locations that are as close to the CBD as possible, but still have a bit of a tainted reputation. These locations may have previously been considered industrial, a bit rough around the edges, too far away from the city or a combination of all three.

The current demographic still lives there predominantly, yet the attractive liveability factors such as cafes, restaurants, community based infrastructure and schools are all in place. But if everyone’s talking about the location, gentrification may have already occurred.

If you’re a data junkie, one of the key things to look for is whether average income growth in the area is increasing faster than the city average. The area should ideally in the top 10 per cent of income growth rates, but not necessarily income itself.

However, the population growth of the suburb should be approximate to the greater city average, implying limited availability of land and properties.

Higher income earners will drive up prices. The lack of available land and property would increase demand whilst at the same time keeping a lid on supply.

With long-term property investment, careful analysis of macro and micro locations does the heavy lifting when it comes to financial returns.

If you have the skill to spot a gentrifying location, this can speed up the rate of return on your investment. If not, stick to tried and true fundamentals, they are likely to hold you in good stead if you have a long-term view.

David Johnston is the founder and managing director of Property Planning Australia.