It happens around the country every year.
The property experts release their Top 100 hotspots throughout Australia detailing where the best buys for capital growth are likely to be. 
And every year property investors jump on the bandwagon hoping to secure the right house / unit in the right location for the right price, all with an expectation of great things to come.
These popular lists are considered the property bible by many who take their word as gospel and hope their financial prayers will be answered.
They say hindsight is a wonderful thing especially if it can teach us a few lessons, so research house RiskWise Property Research has taken a retrospective look at the 2014 Top 100 Hotspots — and where they are now.
The results tell a sorry story.
CEO Doron Peleg said as experts in risk management and property investment — and considering the significant risks associated with property investment in an ever-changing market — RiskWise was keen to understand whether the hot-spot approach to making property investment decisions really could predict the best returns.
“Sadly, we found that when you apply an in-depth risk-return approach with a macro-overview, and review this over three years, many hotspot suburbs have significantly underperformed,” Mr Peleg said.
“This has most certainly resulted in many investors losing money, particularly in regional and mining areas.
“Our research on hotspot predictions and their three-year results, suggests that only 37 per cent of houses and 33 per cent of units of the Top 100 2014 Property Hotspots performed as well as the market benchmark.
Which means that, overall the 2014 Hotspots, performed significantly lower than the benchmark.”
Mr Peleg said the low success rate was similar to the results achieved by property experts when identifying the 2011 and 2012 Hotspots.
He said one of the key factors in the poor predictions was the lack of a comprehensive risk-return analysis on region, location, suburb growth, property type and features.
“In the absence of that analysis it is harder to properly identify and accurately assess the risks and the projected returns,” he said.
“The second issue is that other macro-factors were probably not taken into consideration.
For example, though the mining boom was over, and business investment in the mining states was therefore likely to be poor, leading to poor economic growth, a weak job market, low population growth, and therefore, poor capital growth, 36 of the 100 HotSpots were in WA and QLD.
“In fact, none of the hotspots in WA and the NT met the benchmark and only two of the 23 hotspots in QLD outperformed the benchmark.
“Frankly, we feel that is a very surprising result, particularly since the hotspots were ‘formulated through an intensive research process and calculation methodology’ and ‘by Australia’s top property market analysts’.
“It goes to show how important it is to perform risk-based research and get independent, balanced and informed advice from different sources.”
The following report shows RiskWise’s detailed analysis of the 2014 Hotspot predictions and the steps that should be taken to avoid similar false forecasts in the future.
RiskWise Property Research — property hotspot predictions underperform the market
Last year RiskWise Property Research performed a research analysis on 2011 and 2012 hotspot predictions and their five-year results which suggested that only 37 per cent of 2011 Property 
Hotspots and 43 per cent of 2012, performed as well as the research benchmark … significantly lower than the predictions.
One of the key factors in the poor performance was that some macro-factors were probably not taken into consideration, in particular, the potential impact of a slowdown in the mining boom on land and property prices and demand in regional mining areas.
This month, February 2018, RiskWise Property Research has performed an analysis on the 2014 Property Hotspots to assess whether this time around they outperformed the market.
Background: Economic condition in January 2014
In 2014, the mining boom was over and the potential impact of the post-mining boom era, particularly on the ‘mining states’ such as Queensland and WA, had been assessed by leading economic experts. The major risks and opportunities in the property market were easier to understand. 
There was a significant reduction in business investment in the mining states leading to poor economic growth, a weak job market, low population growth, and therefore, poor capital growth.
On the other hand, both business investment and government spending in NSW and Victoria were stable.
At the time housing was relatively affordable (when assessed on the basis of price-to-income ratio) in Sydney and Melbourne, and when house prices in these capital cities were assessed against the long-term housing prices in Brisbane and Perth.
In addition, the RBA cash rate was declining, something that historically has had a very strong connection with capital growth.
The research:
The panel of experts which identified the Top 100 2014 Property Hotspots excluded “markets where investors are likely to only make short-term gains over a period of less than five years”.
The panel members also excluded “speculator markets, one industry mining town and future retirement or holiday havens”.
However, RiskWise Property Research performed its own analysis on the 2014 Property Hotspots. 
It assessed these Top 100 Hotspots against the market benchmark exceeding the capital growth for the relevant property type in Australia as well as in the capital city of the state of each suburb.
The research was undertaken by RiskWise Property Research using standard statistical methods that are typically used to assess investment performance in equities and other investment classes.
The aim being to set a standard risk-return investment benchmark performance to compare hotspot investments with other returns, using commonplace investment valuation methods.
It evaluated the 100 best suburbs in the country (as projected by property experts and published in Your Investment Property Magazine in 2014) and identified whether the strong capital growth predictions were realised three years later.
Each suburb was reviewed against two benchmark components:
- three-year national capital growth for each property type: house / unit etc.
- three-year capital growth for the capital city of each suburb.
The results:
Our research on hotspot predictions and their three-year results, suggests that only 37 per cent of houses and 33 per cent of units of the Top 100 2014 Property Hotspots performed as well as the research benchmark.
Which means that, overall the 2014 Hotspots, performed, again, significantly lower than the benchmark.
Source: RiskWise Property Research; CoreLogic RP Data.
This low success rate is very similar to the results achieved by the experts in relation to the 2011 and 2012 Hotspots.
That is surprising, given the risks and opportunities in the housing market had been by far clearer in 2014.
Even in NSW and VIC, the best performing states, only 63 per cent and 50 per cent, respectively, of 2014 hotspots houses achieved returns in line with the benchmark and once again lower than predicted.
So why did the Hotspots perform poorly despite a panel of property experts predicting growth? 
One of the key factors in the poor performance is that a future view requires a comprehensive risk-return analysis on region, location, suburb growth, property type and features.
In the absence of that analysis it is harder to properly identify and accurately assess the risks and the projected returns.
The second issue is that other macro-factors were probably not taken into consideration.
For example, while it had been known that the mining boom was over, and that business investment in the mining states was projected to be poor, leading to poor economic growth, a weak job market, low population growth, and therefore, poor capital growth, 36 of the 100 HotSpots were in WA and QLD.
Unsurprisingly, the results in the poor-performing economies have been low, with none of the Hotspots in WA and the NT meeting the benchmark and only two of the 23 Hotspots in QLD outperforming the benchmark.
Examples for poor-performing suburbs:
Next steps
In a volatile market, where even the Reserve Bank has raised concerns and is advocating action to protect against a downturn in property returns, what can we learn from this research?
- Look for independent, balanced and informed advice from different sources.
- Take a risk-return view based on many factors including property type, property details and demand in that suburb, location, future building factors, and larger macro-factors that may affect that suburb. When comparing two areas or properties that are projected to deliver a similar capital growth, invest in the area / property that carries a lower level of risk.
- Ensure these factors are based on specific properties in specific suburbs, so you assess the individual property and not just the suburb or area that has been predicted as a hotspot.
- Use these factors to take a future view of the investment risk versus the return. For example, if you are purchasing a unit in an area where thousands of units have already been approved by the local council, you need to consider how these units will impact the future price and demand for units in the area. Reconsider your investment and avoid paying over inflated prices if you can see that the market may become flooded in the future. Always take oversupply advice from an independent party and not from a biased source, such as the developer.
All of this research requires considerable knowledge, time and effort in a very busy world.
This is why RiskWise has created its Individual Property Risk Report — the first of its kind to provide future-view risk-return analysis on individual properties in specific suburbs.
Using a sophisticated algorithm, it combines all these factors to provide a future view of capital growth and rental return to help you make better informed property decisions.
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