Podcast:

In this video:

0:45 First factor: Lack of land
1:52  Second factor: Lack of skilled labour
2:58 Third factor: Increasing population
4:23 Fourth factor: Increase in average wages

Hi, Daimien here from Integrity again and today we’re going to talk about the 4 factors that are proven to make property prices go up.

Obviously us property investors, we know now from our last videos that we don’t want to buy locally, we want to buy where it’s booming.

So how do we tell where it’s going to boom?
Well to do that we just simply need to look at these 4 factors:
1. Lack of land
2. Lack of skilled labour
3. Increase in population
4. Increase in average wages

Now let’s go through each of those in turn.

Firstly: a lack of land.

Now just like when a cyclone hits north Queensland or wipes out a banana crop, we have a simple supply and demand situation. If there is a lack of supply, prices will go up. If there is a surplus of supply prices will go down. So it’s the same situation with land. What we’re going to do is that we’re going to look for places where there is limited land
supply.

Now, limited land supply can be created in a couple of ways:

1. A built out area, an inner city suburb
2. An island that has been built out and there is simply no more land to release

But other factors could also create land supply shortage

1. Swamps
2. Rivers
3. Mountainous terrains

There could also be artificial things such as:

1. Mining lease
2. Aboriginal land claim
3. Stubborn land holder who doesn’t want to sell their land

Therefore, the land that is available is restricted in some way. Where you’ve got a situation like that, you’re sure to see upward pressure on prices.

Now point number two: lack of skilled labour.

Now for a long time I tried to work out who sets the market? Did the seller set the market? Did the buyer set the market? And now I realised, “Actually no!” The people who really set the market are the builders. Because all builders are running a business, and they won’t build a house for less than what it cost to build them and they still need to make a profit. So builders, quite simply, will refuse to build anything unless they can sell it for a certain price. And then every other property is benchmarked against the new build price.

So when you have a situation where there is a lack of skilled labour, the cost of building becomes more expensive, because tradesman that are there will put the rent up on the builders and ask the builders for more money, who will in turn, pass that on to you. So often in some of these regional hotspots, there is a skilled labour situation and the builders will have to pay more and more money to these tradies to build their houses. So then you get a situation where the cost of building goes up and that puts upward pressure on prices.

So first two so far was: a lack of land, second: lack of labour. Now let’s move to the third: an increasing population.

Now this one is a bit of no-brainer. People know if you have lots and lots of people moving into town then the housing supply there will be at a premium and all those people will compete. The best example of this is at an auction, when we have this phenomenon called social proof. If you got an auction and there’s only two people there, then there is a good chance that the property is not going to sell that day, if it does its will sell for a very low price. However, if there’s a hundred people at that auction or open home, hovering around buying a property, there is a very good chance that the property will sell for a premium. Why? Because those people will see each other and they will compete naturally against each other because they will see proof that there is demand for the property. It’s the same phenomenon that applies when you go out for dinner. There might be two restaurants side by side, one is empty and one is 90 per cent full. Now most people will assume that there is something wrong with the other restaurant that’s empty and go to the one that is 90 per cent full even though they may have to pay more and get worse service. It’s all about social proof.

So when you have a situation where there is lots of new jobs being created in the town or the government might be moving an army battalion there, or something like that. Usually that’s a very good indicator that property prices are going to go up.

And then finally, we have increase in wages.

Let’s go back to the auction scenario again. Every person in that auction has a figure in their head that’s been put there by their mortgage broker or bank manager. That figure is their borrowing capacity. So regardless of how competitive that auction is everyone in the audience has a glass ceiling called their borrowing capacity and they simply won’t bid once they get pass that point. However, in a lot of these regional towns where we have these infrastructure booms going on, there is not enough sufficient workers locally, so they have to recruit those workers from other population centres. The way they recruit those workers is to offer them attractive pay salaries for them to move into town. So, not only do you have an increase in population, but you also have a lot of people turning up who are cashed up and have bigger borrowing capacities than the normal people, and they will compete against each other at their new salary and pay more money for the property.

So what are the 4 factors again?

1. Lack of land
2. Lack of skilled labour
3. Increase in population
4. Increase in wages

Now the best example of this phenomenon recently, the last 10 years will probably be Port Hedland in WA. Get on realestate.com and search for properties for sale in Port Hedland and you will see that the cheapest 1 bedroom unit in Port Hedland at the moment is about $800,000. You have to see it to believe it. Why is that so? Port Hedland is constricted by land, it has a lack of skilled labour, they’re constantly increasing the infrastructure there so they are bring workers in from other parts of the country and they are paying them ridiculous salaries which in turn means that they can afford to pay more money for the property. Am I recommending that you go to Port Hedland and buy property now? Actually, no I am not. That’s yesterday’s news story, what you want to do is look for the next Port Hedland, the next place where those same factors are occurring.

So that’s it for today happy property investing!

Remember if you want more education or coaching go to http://www.propertyinvestmentmentor.com.au. That’s what we do there.

Or, if you are happy with your education and you know you just want a good property, go to http://www.integrityproperty.com.au. That’s what we do there. We find the best locations and the best properties in those locations and present them to you for inspection.

That’s all today, thanks very much! Until next time.

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