Using the ripple effect to catch a wave of property price growth can result in capital gains that are around four to seven times greater than if you buy after the wave has passed through, explains inSynergy’s Chief Property Investment Advisor, Richard Sheppard.
All property markets have a cycle of growth – every suburb, every capital city and every sub-region. Almost all growth cycles in Australia result in between 80 and 150 per cent growth over approximately a seven-year period.
The cycle moves like a wave or a ripple. It starts at an epicentre like a capital city with high employment and property demand and then moves out in waves or ripples of growth.
At inSynergy, we prefer to call them waves as ripple understates the amount of growth that happens in a cycle.
And while this cycle does occur in a wave, the trough is more of a plateau where you may see minus-20 to plus 20 per cent growth over a seven-year period.
How the ripple effect works
Prices within a “high demand” area boom as people flock to a CBD, beachside region or other high-demand districts. People then buy in neighbouring areas that aren’t as expensive but are still close to the ripple’s epicentre. This trend pushes prices up in that ring, and the ripple moves out to further suburbs.
As these outer suburbs see price surges, investors who bought before the arrival of the wave in that suburb will see excellent investment returns.
Buying in a suburb that is ahead of the ripple or the wave will almost always mean that you will catch the full force of that wave, rather than investing after the wave has already passed through.
How infrastructure affects the size of the wave
Sometimes it appears as if new infrastructure can start a ripple, however new infrastructure is actually a wave within a wave. It generates even more property value growth within the specific region serviced by that infrastructure.
However, when the infrastructure is already in place, it is priced into the market. The wave has already passed through.
The sweet spot for timing is when infrastructure construction has just commenced or when contracts are signed. Only when this occurs, do we recommend our clients take action. Any sooner and government plans may change.
How yields predict the coming property wave
If property boom cycles occur with the “the ripple effect”, then property yields are the winds that signal the coming waves.
The average yield for an area is almost far stronger at the start of the boom. The growth wave is usually preceded by the yield wave.
That’s because rental yields are quicker to respond to growth indicators – it’s easier for the rent to go up than property values.
The Sydney to Newcastle wave
At inSynergy, we have mapped Australian property market cycles over the last 60 years, and the ripple effect between Sydney and Newcastle has been one of the clearest and strongest examples of this phenomenon we have ever seen.
The last boom started in Sydney about seven years ago, moving up the coast through the northern beaches, the central coast and then up the coast to Newcastle.
It is now flowing west and northwest from Newcastle’s CBD and beaches and is starting to hit some of Newcastle’s outer suburbs.
We have identified one area in particular which has some of the highest developments of infrastructure we have ever seen for a medium-sized population and is set for a powerful surge in property values.
We recently applied this ripple effect science to advise clients to sell Sydney property 12 months ago and buy in an outer suburb of Newcastle. In that time, Sydney went backwards five per cent while this Newcastle suburb has grown by 27 per cent. On $1 million of property, that equates to a capital gains difference of $330k difference in one year, while also achieving almost 100 per cent higher net yields.
Important Note and Warning: This information is general in nature and should not be considered personal tax advice. We highly recommend you discuss these concepts with your accountant, property investment adviser and investment finance mortgage broker jointly to ensure any considered concepts are suitable for your personal financial situation, as one effect of the concept may negatively impact another part of your plan.