How To Analyse A Property Market – Interview with Jeremy Sheppard

[youtube id="bJlyM_sM6I4" align="left" mode="lazyload" maxwidth="500"] Analysing a property market and understand what areas are likely to grow can be difficult. In this interview with Jeremy Sheppard from DSRdata.com.au we learn how to use data to find the best places to invest. One of the hardest things to do as a property investor is to know how to analyse a property market. We can look at so many different suburbs. We can look at different cities. But it's really difficult to know – is that area actually going to grow in value or is it going to stay stagnant or decline? So, today, I did an interview with Jeremy Sheppard from dsrdata.com.au. He is my go-to person when it comes to understanding how data impacts our view on a suburb and impacts whether we think a suburb is likely to grow or not. There's a lot of people out there touting wisdom about population growth and income statistics and all of this sort of stuff, but often, the advise they give is actually wrong. And Jeremy has his counterintuitive approach where he really looks at the data, really understands what the data means and how it's going to affect a suburb. And he displays all the data for free over at dsrdata.com.au. So today, I got on the line with him and we discussed a whole bunch of things about how to analyse a property market. We looked at a lot of different things. Originally, I was going to break this up, but it was such a good interview, I decided to leave it all together. Here's a short list of some of the things that we're going to discuss. We look at the DSR Data story, so why did he start DSR Data? What's so great about demand and supply and why is that important? We look at is capital growth sustainable? One of the things people say is if an area has grown in the past, it's going to grow in the future. That may not actually be true. We look at how to analyse a property market using his tool and using other data. We look at whether or not population growth causes capital growth and the answer is, no, it actually doesn't, but we talk about that. We look at whether or not the property clock is a bogus idea. I really like this part of the interview where we talk about whether or not we think the property clock actually has merit, or is there a better way to look at things? We also talk about how to estimate the peak of a market, so we're not buying at the peak and then prices drop. We also talk about why we may not actually need to buy properties under market value. We discuss a whole bunch of other different things as well, but I'll leave it with you for now. Here's the interview with Jeremy Sheppard from dsrdata.com.au. Ryan: Okay. Well, let's start. So how did you get into property analysis, data analysis or suburbs? What caused you to start your site DSR Data? Jeremy: First of all, getting into the data. I found myself spending a lot of time researching and I also wanted to keep things objective. I knew that a numerical basis for property investing is a good idea for objectivity because the numbers don't have emotions and it helps me keep my emotions out and prevents me from making subjective decisions. But the other issue was that I wanted to buy in the best places in Australia and there's nearly 16,000 suburbs. So, how do you go about filtering that down? Having an automated tool just zips through all of them, looking for at least some positivity in certain statistics. That, to me, it just struck a cord and I found myself gathering the same sort of data all the time for individual suburbs, so why can't I just do it for all of them? So that's where, I suppose. Ryan: How do you decide on the criteria to say, "Well, I'm going to look at X, Y, Z." And the different points that you eventually decided on? Did you do this all by yourself? Like, is this a project at home sort of thing? Jeremy: Yes. Yeah, yeah. It started off as just a home project. Yeah. I want to make good investments, how do I go about it? Initially, it was really just what was available. If there was data that I could readily get my hands on and it had some kind of impact on supply or demand, then yeah, I grabbed it and used. There's still data out there that I can't get that I really, desperately want. Ryan: Like what? Jeremy: I really cool one would be the count of people turning up to an open inspection. I think that would be a great indicator, but you've got to there manually. That sort of stuff just isn't published online. So more work to do, I guess. Ryan: So you just kind of went as a home project, “Okay, I'm going to do this for my own investing.” Back to my previous question, what made you choose – there's a lot of data out there, right? You can get access to all these different points of data. How do you know that one data point will affect supply and demand and one won't? Jeremy: I guess it's a case of just seeing how market reacts over a few years and then looking at what was it that was really – that stood out to me about that market. In the past, I've noticed if I'm in a bit of a bitch fight with other buyers, I know that having a large number of people, large number of buyers is a good indicator of demand and supply. I also noticed that high-yielding markets was a pre-cursor to capital growth because the tenants move in first, they're more agile than buyers because it's easier to sign a lease than to sign a contract to purchase a property. If a location was attractive, you'd find the rent scale up first and that was an indicator to me. So one of the things that I looked at was high yield and days on market – how quickly are things getting snuffed up. I guess it's a case of you get a feel for what's going on in a market when you're there at the [inaudible 5:55] phase and then try to translate that to indicators of some sort, like vendor discounting. If the vendor is desperate, that can drop the price down a long way and I know that's a sluggish sort of market. So, yeah, it was just a simple case of thinking carefully about each statistic and how it influences capital growth. That sounds really subjective, ironically. Ryan: It does. Jeremy: But there's got to be a point where you say, "Okay, I value this statistic more than the other statistics because I've personally seen it has more of an impact on capital growth. Ryan: With all of the things that we're looking at, are we talking – everything is like correlation, right? Instead of causation, do you think? The stats that we're looking at are a correlation to demand and supply. Like the stats we're looking at don't cause demand or supply. Is that right? Jeremy: Yeah, exactly. Yeah, yeah. Spot on. Ryan: So, we're kind of looking at trailing statistics more so than leading statistics. Is that right? Jeremy: You're right and then wrong because what we want, ideally, as property investors, is a crystal ball – some sort of lead indicator. But we are looking at historical data. We're looking at stuff that's right now. Vacancy rates are really easy to figure out right now because you can jump on onthehouse.com or domain or realestate.com.au and you can see what is exactly available. And so you get an up-to-the-minute or up-to-the-hour depending on how tidy the property managers are at advertising your property for rent. You can get an idea right now. Things like census data, the number of renters versus owner occupiers in a location. That, right now, being 2015. The last census was on August 2011. So, it's a tad out of date. Things like sale values, they can be like a good 3 months out of date. So you are looking at historical data, but you're also able to foresee the future because if you can accurately measure the imbalance between supply and demand and you found a location where demand does exceed supply, there has to be a balancing act. Property market is a bit like homeostatic organisms, you know. Ryan: I don't know what that means. Jeremy: Just try to maintain balance. Your skin sweats when it's hot. It gets goosebumps when it's cold to try and thicken itself and protect you against the cold. There's this continual tug of war between supply and demand. You have a market where demand exceeds supply, prices go up. And all of a sudden, that subdues demand because people don't want to pay that much again and so there's that in-built feedback loop. So the vast majority markets are always – or almost always – in supply and demand balance. As investors, obviously, we want to find those markets where demand exceeds supply by a significant degree. So, if you can find a market that's out of balance, you know what's going to happen in the future. It's going to come back towards balance. And so, it is a lead indicator of sorts. Ryan: Yeah. So, you're saying if there's more demand than supply, then effectively, prices have to rise because it's always trying to create that balance between supply and demand. So, if the demand is really high, then prices will likely rise in order to meet that demand and then things will level out as prices go up because more people will drop out of that market because it becomes too expensive. Jeremy: Yes, exactly. Yeah. Ryan: So, ideally, when people are researching an area, they're looking for more demand than supply because the equilibrium forces there will kind of force that area up. What are we talking about in terms of – like with DSR Data – what are we talking about in terms of time frame? Because, obviously, you could have areas where demands exceeds supply, but might have a year growth left in them versus areas that might grow consistently for the next 5 or 10 years. Can we do anything to look into that or is that kind of out of our reach? Jeremy: I've done a fair bit of analysis myself on that sort of thing and it really varies depending on the market. I can't say that a high demand-supply ratio means that prices will increase over the next 6 months or 6 years.