How long does it take for the value of a property to double?
After all capital growth is one of the main reasons people invest in residential real estate.
It’s often said that over the long-term the average annual growth rate for well-located capital city properties is about 7 per cent, which would mean properties should double in value every 10 years.
And while this is generally true, it also means that 50% of properties will not double in value over the next decade and 50% will grow in value more quickly.
But as a property investor we need to dig deeper…
There’s been a lot of fuss recently about the booming Sydney property market, but in reality it’s just playing catch up after a period of a number of years of minimal growth following its last property boom.
As the following graphic from CoreLogic shows, over the last 10 years even the hot Sydney market has not performed at that “mythical”7% per annum average capital growth.
In fact Melbourne was the only property market with this type of growth over the long term.
Of course there are markets within markets, so by geography, some by pricepoint and some by the type of property.
That’s why you can’t really use capital growth figures for a city like Sydney or Melbourne and make broad brush conclusions.
In the last 12 months capital growth in Sydney varied by location:
- Inner ring suburbs increased in value by 25.2%
- Middle ring suburbs increased in value by 22.2%
- And outer ring suburbs grew in value by 22%
Now that Sydney auction clearance rates are dropping, you’ll find vast various in clearance rates over the city with inner ring clearance rates holding up much better.
It’s also importnant to remember that…
Property markets move in cycles
This means that each state has its own property cycle and there are cycles within each cycle.
Different areas, different price points and different types of property have their own cycle.
Looking into these further, you’ll find that in each 10-year period there seems to be three or four years when the market is flat and in some cases the property values fall.
Then there are three or four years of low capital growth followed by a few years of strong price growth during the boom stage of the cycle.
As a property investor it’s important to be aware of and prepared for these cycles and your best chance of achieving above average capital growth is buying the right property, at the right price and most importantly in the right location.
A study by the Australian Housing and Urban Research Institute found that both in percentage terms and in absolute terms over the long haul, suburbs located reasonably close to the CBD where demand is high, close to employment and where the most people want to live and where there is no land available for release, outperformed the outer suburbs with regard to capital growth.
This means that while the value of well located properties in our capital cities have averaged around 8% growth over the last 2 decades overall regional growth has been lower.
Take the experience over the last decade:
While the value of many homes and apartments Australia’s 4 large capital cities have doubled other areas have virtually come to a standstill.
And some have even gone backwards – areas like some of the so-called “hot spot” mining towns where prices fell by up to 70%.
I’ve explained this in more deatil in by blogs: Investors in mining towns are stuffed and Learn from these mining towns where prices boomed then busted.
So how do you outperform these averages?
This system that we use at Metropole which has helped many clients build substantial property portfolios uses what I call a top down approach (going from the macro to the micro):
1. It starts with buying at the right stage of the economic and property cycle.
We look at the big picture – how the economy is performing and where we are in the property cycle.
2. Then we look for the right state in which to invest – one that is in the right stage of its own property cycle.
Each state in Australia has its own property cycle.
Now I’m not trying to time the cycle, but we don’t want to buy right at the peak when we’ll have to wait longer for capital growth.
We only invest in our larger capital cities where there are multiple pillars to the economy – these are the locations where economic growth and wages growth will occur.
3. Then within that state, we look for the right suburb – one that has a long history of outperforming the averages.
We’ve found some suburbs have 50 to 100 per cent more capital growth than others over a 10-year period.
Obviously those are the suburbs we target.
These will be areas where more owner occupiers will want to live because of lifestyle choices and one where the locals will be prepared to, and can afford to, pay a premium price to live because they have higher disposable incomes.
In general these are the more affluent inner and middle ring suburbs of our big capital cities
4. Once our research shows us the suburb to explore, we then look for the right location within that suburb.
In all suburbs there are various areas where you’d happily live in and areas you would avoid, like on main roads or too close to shops, schools or commercial areas.
5. Then within that location we look for the right property, using the 5 Stranded Strategic Approach below.
And finally we look for …
6. The right price. We’re not looking for a “cheap” property (there will always be cheap properties in secondary locations).
We’re looking for the right property at a good price.
We choose our properties in that order – a top down approach – which leads many people to ask why price is at the bottom of the list.
I guess this is because they’ve heard you make your money when you buy your property.
While that is correct, it’s not because you pay a cheap price or because you get a bargain.
You make your money when you buy because you buy the right property – one that will be in continuing strong demand by both owner occupiers (who push up property values) and tenants (who will help you pay off your mortgage).
We choose the right property using our 5 Stranded Strategic Approach
1. We only buy a property that would appeal to owner occupiers.
Not that we plan to sell, but because owner occupiers will buy similar properties pushing up local real estate values.
This will be particularly important in 2015 when the percentage of investors in the market is likely to diminish.
2. We only buy a property below its intrinsic value – that’s why we avoid new and off the plan properties that come at a premium price.
3. In an area that has a long history of strong capital growth and that will continue to outperform the averages because of the demographics in the area as I’ve explained above.
4. We would look for a property with a twist – something unique, or special, different or scarce about the property, and finally
5. We would buy a property where we can manufacture capital growth through refurbishment, renovations or redevelopment rather than waiting for the market to deliver me capital growth.
By following our 5 Stranded Strategic Approach, we minimise our clients’ risks and maximise their upside.
Each strand represents a way of making money from property and combining all four is a powerful way of putting the odds in their favour.
If one strand lets us down, we have two or three others supporting our property’s performance.
During a boom everyone is an optimist and expects the good times to last forever, just as we lose our confidence during a downturn.
Our property market behaves cyclically and just as each downturn paves the way for the next boom, each boom sets us up for the next downturn.
What does this mean for you?
Of course…if you want to grow your property portfolio in a more difficult environment this year you’ll need to buy the right type of property.
One that has a level of scarcity, meaning they will be in continuous strong demand by owner occupiers (to keep pushing up the value) and tenants (to help subsidise your mortgage); in the right location (one that has outperformed the long term averages), at the right time in the property cycle (that would be now in many states) and for the right price.
To become a successful investor you will need to surround yourself with a team of independent and unbiased professional advisors (not sales people) – a team of people who are known, proven and trusted, so it is probably appropriate to remind you that in changing times like we are experiencing, no one can help you quite like the independent property investment strategists at Metropole.
Remember the multi award winning team at Metropole have no properties to sell, so their advice is independent and unbiased.
If you’re looking for independent property investment advice to help you become financially independent, including how to get he banks to say yes more often to you, no one can help you quite like the independent property investment strategists at Metropole.
Whether you are a beginner or a seasoned property investor, we would love to help you formulate an investment strategy or do a review of your existing portfolio, and help you take your property investment to the next level.
Please click here to organise a time for a chat. Or call us on 1300 20 30 30.
When you attend our offices in Melbourne, Sydney or Brisbane you will receive a free copy of our latest 2 x DVD program Building Wealth through Property Investment in the new Economy valued at $49.