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Market Categorisation Deep-Dive: Early Adopter

InvestorKit buys in three categories of markets based on each client’s portfolio requirements – Early Adopters, Hotspots and Second-Winds. We are creating a blog trilogy to explore each of these categories. In this blog, we are going to talk about the Early Adopters.

Image for the article - Market Categorisation Deep-Dive: Early Adopter
Market Categorisation Deep-Dive: Early Adopter

Half a year ago, we introduced the concept of Market Categorisation in a blog.

We believe that market categorisation is a better system than market cycle in describing property markets because market cycle tends to oversimplify things whilst market categorisation takes both market cycle and many other influencers (eg. economy, demographics, demand vs. supply, etc.) into account.

InvestorKit buys in three categories of markets based on each client’s portfolio requirements –  Early Adopters, Hotspots and Second-Winds. Let’s explore these categories with a blog trilogy from this week on.

In this blog, we are going to talk about the Early Adopters.

 

What is Early Adopter?

Early adopters are the markets that have come out of the last slump and are gathering market pressure for growth. Its long-term growth is below the average level, having a lot of space ahead to catch up (chart below).

Image of 6464c65fb4e7f480df69914b 1.%20Early%20Adopter%20Price%20Trajectory

Townsville is a typical Early Adopter. Its house prices went through a 6-year slump from 2013 to 2019 as the mining boom ended, only picking up from 2020. Its 10-year growth is much lower than regional Queensland’s average (below chart).

Image of 646749f9c072b056760dde49 2.%20Townsville%2010y%20vs%20Regional%20QLD

What do market indicators look like in an Early Adopter?

The spiderweb chart below is a brief description of the market conditions and trends in an Early Adopter (indicator scores: 1=worst, 5=best):

Image of 6464c6832d8bd29126e8f84d 3.%20Spider%20Chart
• Strengthening economy

Early Adopters feature improving or thriving local economy, usually indicated by heavy infrastructure investment and low/lowering unemployment rates. A thriving economy assures increasing housing demand by boosting consumer confidence and attracting more residents.

Townsville’s economy is in line with the above description.

Townsville was a major hub for fly-in-fly-out mining workers during the mining boom. Its economy was impacted heavily by the end of the mining boom, with the unemployment rate surging to 10%+ in 2016.

But the local economy has been recovering since then:

Queensland Government’s infrastructure investment in the Townsville region has been rising since FY2015-16 (except for a brief drop in FY2020-21, as shown in the left chart below). In FY2022-23, the per-capita figure for Townsville ranks #3 in all Queensland regions (the right chart below), much higher than the Southeast QLD regions.

Image of 6464c731eb81a45c992790cd 4.%20Infrastructure

Meanwhile, Townsville’s unemployment rate has been trending down since 2016. Currently, it’s sitting at an extremely low level of 2.2%, the lowest in over a decade (chart below).

Image of 646c08c5d61034fb01aeac1f Townsville%20Unemployment%20Rates

The robust economic recovery is companied by a substantial increase in internal migration: After losing residents to other regions for seven years, Townsville started gaining migrants from other areas in 2021 (chart below).

Image of 6464c7487a8c7dc3a282d2c5 6.%20Internal%20Migration

As the economy and internal migration recover, housing demand in Townsville is driven up, contributing to rising price pressure and rental market pressure.

• Improving price pressure

As demand increases and supply doesn’t catch up, Early Adopters see price pressure rising, which is reflected in dropping sale days on market and inventory (listings-sales ratio).

Emerging as an Early Adopter in early 2021, Townsville’s price pressure has been trending up since then. From Aug 2020 to Aug 2022, the number of house sales in Townsville has been rising faster than the number of for-sale listings (below chart), leading to fast dropping inventory, from close to 10 months of stock in 2020 to less than 3 months now.

Image of 646c091acf828e03c51c06fe Blog %20Market%20Categorisation%20(2)

As the inventory dropped, the number of days on market for sale has also been declining fast, decreasing by almost 2/3 in 2 years (below chart), pushing Townsville from an Early Adopter towards a Hotspot.

Image of 6464c78c4d92de95a134344b 8.%20Days%20on%20Market

• High rental pressure

Early Adopters feature tight rental market/high rental pressure, too, as the rental market usually first feels the housing demand increase.

Vacancy rate is a leading indicator of rental market pressure. The below chart shows that Townsville’s rental vacancy rate was already lower than 1.0% in 2019. The initial shock of COVID brought the vacancy rates up to 2% briefly before they dropped back to <1.0% and stayed low since then.

Image of 6464c7b2aa1042e7657f742d 9.Vacancy%20Rates

• Decreasing established supply

Property market slumps are often associated with increased established supply (for-sale listings). An example is North Queensland (where Townsville is) from 2013 to 2017). In contrast, decreasing supply level is usually associated with improving market pressure. It will lead to future price growth if other influencers also do well (eg. North Queensland’s falling number of listings since 2017 (chart below) contributed to its later price growth along with the improving economy and housing demand).

Image of 6464c7bab5eb7937fd6e2b41 10.%20North%20QLD%20Listings%202010 2023

• Low incoming supply

Too much incoming supply (new builds) could lead to oversupply issues, which harms value growth. Therefore, low incoming supply should be a major feature of an Early Adopter.

Incoming supply can be measured by the building approval numbers / total number of houses ratio. The chart below is a Townsville example.

Image of 6464c7c9b5eb7937fd6e2c8f 11.%20Building%20Approval

In the past decade, Townsville’s new house building approvals have been trending downward. The decrease in new construction activities resulted from a cooled-down property market but, at the same time, rebalanced the market supply and demand toward its next growth phase.

 

Who is it ideal for?

Early Adopters feature relative affordability and healthy to high rental yields. Therefore, they are perfect for investors who have lower budgets and require higher cash flow to help with mortgage repayment and deposit savings.

The below table shows Townsville’s relative affordability (house price / annual income ratio) and rental yield together with four popular property markets. Townsville’s house prices are much more reasonable relative to its residents’ purchase power, and the 5.9% rental yield gives the Townsville property market high resilience against the interest hikes since last year.

Image of 6464cf77464456767470f771 Screenshot%202023 05 17%20at%2010.03.04%20pm

Buying in an Early Adopter may not be seeing instant high capital growth but will enjoy a relatively affordable purchase price and be exposed to the entire growth phase in the coming years. Moreover, as these markets are not hot yet, you’ll have fewer competitors and a higher chance of getting a discount.

InvestorKit is a buyer’s agency that constantly monitors and tests data to categorise and re-categorise markets to ensure they best suit clients’ needs. Feel like knowing which markets we have now in the Early Adopters category? Talk to us today by clicking here and requesting your 45-min FREE no-obligation consultation!

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