What Is the Ripple Effect in House Prices?

YNM Real Estate
20 December 2021

As a property investor, have you heard others talk about the ‘ripple effect’?

The ripple effect describes the scenario when a suburb experiences high demand and high growth in house prices, which puts it out of reach for home buyers, who then look for similar infrastructure, amenities and/or “look and feel” in adjacent areas – which then become the next demand/growth suburbs.

Booms typically have their start in the prime areas, and send ripples out to neighbouring suburbs as priced out buyers look for the next best thing.

Often one can buy for a lower price in these next demand or growth areas, and obtain a better return on investment once the predicted growth realises. The trick is in how to identify potential growth areas.

The next growth area may not be the immediate neighbour suburbs. You need to look beyond the map, to understand the drivers for growth that exist in the primary boom area. Is it good access to quality schools, health care, transport and infrastructure? Whatever the driver for growth is, and there may be more than one, you need to find the neighbourhoods with the most similarities – these are the areas that are most likely to be part of the property growth ripple.

A ripple effect in property values most commonly moves from the inner suburbs outwards, and along or away from the coastline.

Be aware that a ripple in property values can be interrupted by a change in the general property market – things like rising interest rates, affordability and market confidence can affect the duration and extent of the property cycle. So in addition to pursuing the next area to become part of a growth in property values – keep an eye on the general property market trends.

Also consider geographic factors – the potential for growth can diminish in line with the distance travelled. A good rule of thumb is to keep within a five to 10 minute drive of the current boom area.

Look out for major roads or highways that may create a psychological barrier – people will be reluctant to live on the other side of these types of divides.

If you are in the property market for an investment – be aware of the trend, and ensure that you equip yourself with sufficient in depth knowledge to ride the wave and benefit from the ripple effect. It is always a good idea to tap in to the experience and knowledge of the market gained by a professional real estate agent to ensure that you don’t get caught out.

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