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Certainly, when investing in property you must understand the “technical” side of things (e.g. property values, vacancy rate, interest rate, insurances – the list doesn’t actually end) but I believe that understanding human nature is arguably the most important attribute a property investor will need to achieve success.
When you understand human nature – which is what drives the real estate market – you can begin to see patterns of behaviour and the subsequent results of those behaviours. Understanding these patterns will allow you to time the market well and as every savvy property investor knows: investing in property is all about the timing!
Gentrification is, put simply, a change in the fortunes of a particular suburb, including changes of the demographic that reside there. These changes are a direct result of middle class (or upper class) individuals moving into an area and investing their time and money into creating changes to that area for the better.
As the area continues to change in terms of its demographic, infrastructure, amenities, and employment opportunities, property values tend to grow as the area loses its stigma and more individuals at higher wage levels move in, putting upward pressure on values.
There are six stages of gentrification, which are expanded over a period of about fifteen years. Take a close look and see if you can spot your suburb among these stages.
As with all things real estate, change begins with people. Working at a grassroots level, individuals meet together to discuss changes needed in a particular area.
Look for (and attend) chamber of commerce meetings and council meetings to get a heads up before changes have even begun. This allows you to buy in as soon as possible, if all other factors look favourable, maximising the return on your investment.
This is the planning stage. Typically, developers, government entities and the local community become involved at this point. Plans are drawn up, objections heard and any changes to the plans are considered at this time.
Look for examples of pioneering development such as a new residential project, a new rail line, schools, shops, hospital, etc. Developments like these change the face of the area because they significantly impact the area demographic in terms of lifestyle, employment opportunities, etc.
As a by-product of pioneering development, the area will experience intensive development. For example, consider the new hospital. Intensive development would be something such as new labs or scientific infrastructure, or perhaps the construction of a medical educational facility as an offshoot of the hospital.
All of these changes bring skilled workers to the area, who earn higher incomes and subsequently spend those incomes, which fuels gentrification efforts.
At this point you’ll see the population shift. Socio-economic classes change; lower class become middle class, middle becomes upper class. Once higher wages are part of the economic landscape, property values grow as well.
This is where it gets really fun! The Turbo Gentrification phase is depicted by an influx of wealthy individuals who choose to move into a suburb and spend a great deal of their resources continuing the gentrification trend. It’s supercharged because they are spending A LOT of their money in the area.
If you’re serious about investing in property spend some of your time studying human nature in terms of the impact it can have on changes to the market. If you can spot the next hotspot by looking for signs that gentrification is in the works you’ll be well positioned to get the best possible return for your efforts.
If you’d like to know more about the signs of gentrification and how you can spot locations which sport these signs, come along to our next Property Investor Night. They’re free, they’re fun and they’ll furnish you with some great information which can help you in your property investing journey. We look forward to seeing you there and until then, happy investing!