Hotspotting has been credited with providing property investors with the inside edge on where to buy. Here we look at what it means and whether it can work for you.
What is hotspotting?
It's the process of identifying the locations that will show superior capital growth in the future. These are often suburbs that are currently underperforming but are within close proximity to more popular suburbs. When these popular areas become too expensive, buyers often look to the neighbouring suburbs, causing an outward ripple effect.
How do I find a hotspot?
Investors trying to buy into the next hotspot will often get their advice from online reports, magazine articles and wealth creation seminars. It's important to look carefully at who is providing the 'expert advice' that an area is a hotspot, as it may well be the PR agent of a developer or someone with a vested interest in the area.
Is it possible to do my own hotspotting?
If you have the time and resources, you can do your own research to find the hotspots that are in your price range and suit your investment strategy. Experts recommend you look for areas that have any number of the following characteristics:
- affordability of dwellings
- good transport links or planned infrastructure improvements
- a population that is growing faster than the national average
- median household incomes that are growing faster than inflation
- access to a diverse range of employment opportunities and evidence of new industry and businesses opening not closing
- a downward trend in rental market vacancy rates based on a long term pattern of industry coming to town and attracting residents
- planned local council infrastructure and services to support a growing population.
Are their risks to hotspotting?
Hotspots often become popular places to invest and the risk is their newfound popularity may artificially inflate property prices, which cannot be sustained in the long term.
Critics of hotspotting argue that property investors should instead look to buy in areas that have a long history of capital growth and are likely to continue to outperform because of the demographics of the people living in the area. They caution investors to ask themselves why is an area suddenly a hotspot and what will make it worth holding in five or ten years time?