In short, the ripple effect is the way in which property booms begin in a central location and radiate outwards to influence surrounding areas, much like the almost hypnotic effect of concentric, ever increasing circles when you drop a pebble into the water.
According to the ripple effect, if prices rise in suburbs close to the CBD in the first instance, the ripple effect will soon see them spread to the middle suburbs and later on to outskirt areas and suburban jungles.
The ripple effect is such because buyers who are priced out of the booming area try to get as close to the action as they can, and therefore settle for lower cost properties close to the action, but not at the core of the boom.
These areas then start to gain popularity, and demand pushes prices upwards as they turn into the "next best" areas.
These areas then start to gain popularity, and demand pushes prices upwards as they turn into the "next best" areas.
Benefits of the ripple effect
The ripple effect can be the chance for investors who missed out on the initial boom area to grab their slice of the pie -- investing in areas close to the prime area that has surged in price, but without paying exorbitant boom prices which often won't be recovered through cash flow or capital gain for some time.
In most major cities the ripple effect has already played out, and investors will find prices are already pretty high in the outlying areas surrounding the inner prime location.
But one way to find a ripple effect opportunity is to look for suburbs that have underperformed in 5-year growth averages that are located in close proximity to areas with high growth rates for the same period.
In most major cities the ripple effect has already played out, and investors will find prices are already pretty high in the outlying areas surrounding the inner prime location.
But one way to find a ripple effect opportunity is to look for suburbs that have underperformed in 5-year growth averages that are located in close proximity to areas with high growth rates for the same period.
Eventually, these under-performing areas will experience a catch-up -- and there could be some very good bargains worth picking up.
Finding the right suburb to invest in - using the idea of the ripple effect
As always, property investors will need to do their research. If you can find suburbs near the cbd that have underperformed compared to other comparable suburbs then you are on the right track. Once you have identified the suburb, then the search for a suitable property could begin.
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