Property Hotspots

The past few weeks have seen the papers full of property hotspot charts. The tabloids love these. They make easy 'shock horror' headlines. If you're thinking of investing in property, this is what you need to know...

1. Understand the relationship between supply, demand and trigger events. The bottom line is that property prices behave in very simple and straightforward ways. For property to price-rise, a town has to have certain characteristics. It must have a limited supply of property. The supply-demand mix is the main influence on the property market. You need short supply combined with a shortage of land. You want it to be physically hard to build any new developments that might change that supply-demand relationship. You then need to see demand outstripping the supply of property. This drives prices up. Ideally, you want to see demand increasing so that it puts more and more pressures on the limited property supply. Those towns with property prices that increase most in value in a short space of time also have some sort of trigger event that pushes up demand; a new road or an extended tube line, as examples. When you're buying property, you look for short supply, high and rising demand and a trigger event.   

2. Ignore the hotspot charts. Many prospective property investors first become interest in hotspotting at this time of year. That's because they've been reading the hotspot charts published in the national press in January and February. In the past few weeks, they've been reading about towns - in the North-East for 2003 and along the Cornwall coastline for 2004 - that have gone up at twice the national average. Not surprisingly, they start thinking about buying into these towns as an investment. Don't! The best hotspots now - Highbury, Ipswich, Ramsgate, as examples - are for two to five years time. Anyone who buys in when a town is named in a hotspot chart is likely to see prices there either levelling off or even correcting shortly afterwards.   

3. Adjust the reward-risk relationship to match your target profits. All investments come with corresponding rewards and risks. That might be low-reward and low-risk or high-reward and high-risk (but never high-reward and low-risk, of course). With property investing, you can select a reward-risk relationship that suits you. If you are a speculative investor, you can invest early on the rumour of a trigger. Those investors who invested in the towns in Cornwall in 2002 now have substantial profits in their property portfolio. But they took the risks - if the migration west and other trigger events predicted hadn't happened, they'd not have profited as much. Other investors might prefer a lower risk-reward relationship. They can buy in later as events unfold. Sunderland was a hot tip for some time before its property price rises - and some investors waited for the bistros and cranes and what have you to move in before committing themselves. They took lower rewards than those who invested earlier, but felt more comfortable with the risks.

4. Look for the trigger events. Instead of focusing on last year's hotspot charts, start searching for triggers if you are looking to invest in property. Keep up-to-date with the news. Speculative property investors started buying into Highbury in North London when it was rumoured that Arsenal FC were going to move to a new stadium. That's paying dividends already! A newspaper story might tip you off that a major development is going to take place locally - such as the new holiday complex coming to Ipswich in Suffolk. That has to have positive knock-on effects in that area. Government sources are always worth monitoring as well. The new rail link that's been announced from London to Ramsgate has to rejuvenate that part of the country. Those investors who go for high-reward and high-risk investments have already moved in. Those who want to lower the risks (and take lower rewards) are waiting a while for these triggers to unfold. Whatever your approach as a property investor, remember to look forward not back.