It’s important for property investors to understand the difference between a population and home building hotspot – and what we at Hotspotting would define as a property growth hotspot.

There are those who believe that the best philosophy in selecting good places to buy real estate is to follow the population growth – and buy in the locations where population is growing the most or the fastest.

This, we believe, is a very poor strategy.

Very often, the locations that have the highest population growth rates do so simply because they’re locations on the fringe of a major city where there’s land available for building new housing estates – and naturally the population will grow there, often from a very low base.

And sometimes the growth in prices in these kinds of locations is subdued because there are large quantities of new housing supply being created – i.e. there’s an absence of shortage.

By contrast, some of the best capital growth is often achieved in locations where there is little or no population growth – because they’re established suburbs with no large vacant areas for new homes to be built.

The only way the population can grow in such places is by increased density – for example, houses are knocked down and replaced by apartment buildings.

Recently the Housing Industry Association published its latest hotspots report – and their definition of a hotspot is very different to ours.

The HIA report seeks to identify the areas where the greatest amount of new population and new home construction is occurring.

Media reported on this with headlines such as: “Population Boom Creates Hotspots”.

A typical article said:

“Surging population growth is creating housing hotspots in the suburban outskirts of Australia’s major capital cities.

“The annual Housing Industry Association Population and Residential Building Hotspots Report says the northwest Sydney suburbs of Box Hill and Nelson are Australia’s biggest hotspots for construction, followed by Fraser Rise and Plumpton in Melbourne’s west.”

Now, this is a perfectly valid report for the HIA to produce, because it speaks to the primary activity of its members, the important business of creating new dwellings – something the nation needs, because there’s a serious shortage.

The HIA definition of a hotspot is “areas where population growth eclipses the national rate of 2.4% and building work is worth more than $200 million”.

But it’s important to understand that such places are not necessarily good places to invest.

The Hotspotting definition of a hotspot is a place where there are underlying economic factors likely to create superior capital growth in the medium to long term.

Our EMPERICAL formula for selecting the locations likely to become capital growth hotspots includes the strength and depth of the economy, the size of the population (but not how much it is growing), the existing infrastructure and amenities, investment in new infrastructure and a number of other features.

Locations that satisfy the various criteria in our EMPERICAL formula are far more likely to deliver superior capital growth than city fringe locations where the population is growing fast through new housing estates.