Milk Chocolate property differentiates itself from the rest in the ways how data is mined, analysed and used. We are building an automated process to collect, clean, process, and generate actionable insights, which is used to identify opportunities across 18,000 suburbs in Australia.
Hundreds of properties have been bought based on our proprietary data-driven process over the past few years. In fact, when assessing the performance of our purchased properties and the suburbs that we bought in, the capital growth and rental yield are higher than the market average. The results have shown that our ways of doing things work, and we are confident in our ability to apply data on a large scale to change the ways people deal with properties.
The Milk Chocolate Property analytics team has been working on important data tasks. The aim is to re-assess the market trends amid the current health and economic crisis, and set out some important data and modeling algorithms that can be implemented at a large scale in the near future.
Capital growth: residential and commercial properties
Capital growth is not the same across suburbs due to the differences in demographics, amenities, and other local attributes.
The ability to pick the right property in the right suburb will significantly boost the property value in the long-run. For example, just a 2% difference in the capital growth of a $500,000 property will generate a $1.2 million dollars difference over 30 years.
Our data engine scans transaction data across Australia for high growth suburbs. We start from the capital city level, down to the local government area and then the suburb level. More importantly, we have the ability to pick the right properties for the right customers, taking into account the customers’ risk appetite, budget, lifestyle, and other factors.
We do this by scraping all property transactions in real-time across the country, then the data is cleaned, processed, and fed into our modeling framework to generate actionable insights to help us to pick high growth suburbs.
CPI
The Consumer Price Index (CPI) is the measure of changes, over time, in retail prices of a constant basket of goods and services representative of consumption expenditure by resident households in Australian metropolitan areas.
The simplest way of thinking about the CPI is to imagine a basket of goods and services comprising items typically acquired by Australian households. As prices vary, the total price of this basket will also vary. The CPI is simply a measure of the changes in the price of this basket as the prices of items in its change.
In financial planning, investment appraisal, and accounting calculations, CPI is an important parameter that determines the final results. In real estate, CPI is used to forecast income, expense, and cash flow. For example, if CPI is 2.5%, then all income and expense items will be indexed to CPI to ensure the price levels are current at any point in time.
We have collected CPI data since 1950 and investigated the trends over different periods of time. From that, we have adjusted CPI for different periods, as well as the long-term trend into the future. A realistic assumption of CPI will not only make our property plan more accurate but also help us to make more informed decisions about the best time to draw equity, buy, or sell. Experience tells us that the right timing to enter or leave the market is crucial for successful property investment, and thus the right information to be used is important.
Property cycles dating
In essence, the property market moves in cycles over the very long-term. Property values may rise due to strong market growth, remain steady or even decline during certain phases of a property cycle. Thus, as an investor, it is important to know where the market is within the cycle to ensure you secure your property at the right price.
It is also important to note that there are submarkets within a market that may perform differently during the same period of time. Data shows that the higher the price, the high the volatility, which is generally applied across capital cities, local government areas, and suburbs. For example, the eastern suburbs of Sydney have been more volatile than the western suburbs; Sydney and Melbourne have been more volatile than Adelaide and Brisbane.
Dating the different stages of the property cycle is important to determine the most opportunistic time to enter or exit the market. However, it is extremely important to specify the cycle stages ahead of time. Our data team has collected as much data as possible about the previous cycles, then we calculated the average duration between cycles, as well as the highest growth and the lowest decline to infer the future cycles.
We anticipate that there is likely a degree of error between our forecasting and reality. Therefore, we also calculate the long-term growth (i.e. average growth over many cycles), which is reliable for long-term forecasting.
Renovation matrix
Renovation has been a proven method to manufacture equity in a relatively short period of time. Not only will renovation increase property value, but a renovated property will also appeal to higher-quality tenants: they may have more stable jobs, higher income, and are more likely to lock in longer lease terms.
Then the next natural question is that, among thousands of properties across suburbs, which one is a better pick? To answer this question at a large scale, we have developed a proprietary algorithm that is able to compare individual properties based on a number of factors.
The first step is to collect transaction data during the recent period (i.e. 12 months). The MC engine scans all transactions across Australia to extract the relevant information, which will be used to evaluate the potential gain and cost from the renovation.
Overall, we find that the renovation opportunities are not distributed equally between suburbs. In fact, there are more opportunities in the high-end segment of the market, such as close distance to CBD, the beach, in affluent suburbs, and in gentrification regions.
Transaction data
There are approximately 10 million properties in Australia in 2020 and 5% of them are being transacted per year. MC has access to 100% of all property transactions in Australia in real-time, which enables us to build powerful algorithms to monitor the market trends: price trend, rental yield, and the upcoming suburbs.
Deep market intelligence also allows us to confidently negotiate a fair price on behalf of our clients, as well as to ensure that the purchased prices are sitting comfortably with the game plan.
Key indicators
It seems purchasing a property is an easy process: you like a property and you pay money for it. In reality, it is not that straightforward. In fact, it is costly to enter and exit the property market: beside long-term financial commitment, substantial fees will be paid including stamp duty, agent fee, conveyance fee. Therefore, it is paramount to select the right property in the right suburb and the right time.
At MC we have built a data-driven process that allows us to make decisions about whether a suburb is worth buying into based on a range of factors, from long term capital growth to unemployment rate, from the demographics of residents to distance to everyday amenities. In the end, the data that we based our decisions on is current, unique, and meaningful.
There are multiple factors in play that eventually lead to investment outcomes such as capital growth and rental yield. Even the same factors may have different effects on different markets. For example, the same level of population growth may have different impacts on the demand depending on a suburb’s distance to CBD. Or whether there are any new developments in the pipeline that may significantly change the dynamics of the market? All in all, we make complicated matters simple that allows us to make informed decisions that lead to sustainable wealth creation for our clients.
Get in touch to find out how we can help you with your property journey.
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