How long does it take for property values to double?
After all, capital growth is one of the main reasons people invest in residential real estate.
Note: It’s often said that over the long-term the average annual growth rate for well-located capital city properties is around 7%, which should mean properties double in value every 10 years.
But it’s not that simple.
The problem here is that naive investors believe this myth and buy any old property thinking it will double in value in a decade – I guess that's why so many investors fail.
But as with any good myth, there is always partial truth.
Note: So the truth is… some properties do double in value every 7 to 10 years, but many don't!
The rule of 72 states that for a simple way to work out how long it has taken a property or an area to double in value, divide 72 by the annual growth rate.
For example, if you think a property will grow 10% per annum, just divide 72 by 10% and that tells you that it'll take 7.2 years to double.
Australia’s property market is around one year into a new property cycle.
After the COVID-19 pandemic’s cheaper lending and low supply caused buyers to flock to the market and ignite a property price surge to record levels, we experienced a rapid cooldown where prices dropped from their peak in 2022.
But now the property market is in a strong recovery phase and prices will likely continue to rise across the country.
It truly has been a rollercoaster ride.
If nothing else, what the past few years have shown us is that no matter how many times you forecast property prices, it will always be difficult to predict exactly where property prices will be in three months' time, let alone in 7-10 years into the future.
But let's dig deeper…
The following tables show what happened to dwelling prices around Australia through the pandemic up to their peaks and then to date.
|Onset of COVID to previous cycle peak
|Previous cycle peak date
|Previous cycle peak to recent trough
|Recent trough date
|Recent trough to October 2023
|Rest of NSW
|Rest of Vic.
|Rest of Qld
|Rest of SA
|<up 51.9% since onset of COVID>
|Rest of WA
|<up 46.1% since onset of COVID>
|Rest of TAS
The data shows that from the latest trough in January 2023 to today, Sydney housing values are up 11.9%.
Similarly, in Brisbane, housing values are up 12.2% from their January 2023 trough.
The data also reveals that across all cities, values have recovered (and in some cases surpassed) the latest market decline.
But it’s important to remember that there is not one Sydney, Brisbane, or Melbourne property market.
Note: History shows that some properties outperform others with regard to capital growth by 50-100%, meaning there is no reason why strategic property investors who buy an investment-grade property in 2024 will not see the value of that property double within the next seven to 10 years (or one full property cycle).
The problem is… in my mind only around 4% of the properties on the market currently are what I would call "investment-grade".
But let's take a long-term perspective and take a look at what has happened in the past.
Corelogic has done a deep dive into the data for Australian property over a 30-year period from 1992-2022, and the findings are very interesting.
The data shows that the national median dwelling value delivered an annual growth rate of 6.8% during the 30 years to March 2022 - or a total of 382%.
Across each of the past three decades, at a macro level, it was the 1992-2002 period that provided the largest capital gains, with CoreLogic’s national Home Value Index (HVI) rising by 77%.
The middle decade (2002-2012) saw the national HVI rise by 59%, while the most recent decade saw national dwelling values increase by 72%.
The report shows that most regions saw house values rise substantially more than unit values over the 30-year period, which is likely a reflection of the scarcity value of land driving a faster rate of appreciation.
Conversely, the unit sector tends to show higher yields relative to houses.
Across the combined capital cities, house values rose 453% over the 30-year period, substantially higher relative to the unit sector where values rose 307%.
The performance gap is less substantial across the combined regional markets, with house values 314% higher while unit values rose 213% over the same period.
The smaller long-term rate of capital gain might be attributable to lower unit supply levels across regional Australia, along with higher demand for holiday-style units or retirement options.
It’s the old story…who wouldn’t like to buy the home their parents bought for the price they paid?
Of course, a significant trend in the last few decades has been Australia’s adoption of apartment living.
Here’s how apartments have performed in the last decade:
Construction of units in Australia surged over the past decade, although it is well below peak levels.
Of course, there are markets within markets, so by geography, some by price point, 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.
Tips: You need to examine capital growth in a particular suburb, to be more accurate about a particular neighbourhood within a suburb.
Let's look back even further…what happened over the last 40 years.
The REIA stats show that,
- The Melbourne housing market experienced an average compounding property price growth of 8.2%
- The Sydney housing market experienced an average compounding property price growth of 7.9%
- The Brisbane housing market experienced an average compounding property price growth of 7.6%
In other words, well-located properties in Australia's 3 major capital cities have more than doubled in value every 10 years.
And while this long-term growth is impressive, it's important to remember that each state has its own property cycle with years of minimal or no growth followed by periods of strong growth.
Here’s a snapshot of the property cycles within each state in the 43-year period to March 2023 as charted by independent financial commentator Stuart Wemyss of Prosolution Private Clients using ABS statistics.
And looking even deeper into this, not only does each state have its own property cycle - 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 seem 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 as a location will do around 80% of the heavy lifting for your property's capital growth.
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 most people want to live and where there is no land available for release, outperformed the outer suburbs with regard to capital growth.
Research by John Lindeman of Understand Property confirmed that, in general, capital growth is greater in our capital cities than in regional centres.
This means that while the value of well-located properties in our capital cities averaged around 6.8% per annum growth over a 30-year period, overall regional growth has been lower.
Past performance isn’t always the best predictor of the future and clearly, Covid-19 showed us how swiftly things might change.
While predicting housing market outcomes for the next year or so is difficult, forecasting property market performance for the next 30 years is impossible.
But, there are several important trends that are likely to shape housing markets in decades to come.
In particular, Australia has a “business plan” to keep growing its population which will likely reach 40 million people by mid-century.
This plus the ongoing wealth of our nation should underpin the growth in the value of our property markets.
Obviously, our closed international border during the pandemic saw net migration swing sharply negative but that has since rebounded.
Around 475,000 people are expected to have arrived in 2023, with 375,000 predicted in 2024, and another 275,000 in 2025 comprising skilled migrants, international students, and working holidaymakers.
Compared to the usual rate of 235,000 before the pandemic, this means there will be an extra 240,000 people in 2023, 140,000 in 2024, and 40,000 in 2025.
So, from 2020 to 2025, we expect about 125,000 more people to move in than what we would have expected without COVID-19.
Looking ahead to 2024 and 2025, it is expected that the pace of people moving to Australia will slow down.
This is because fewer people will be arriving, and more people will be leaving the country.
Westpac's data show that most of this slowdown will happen because fewer people will be coming to Australia.
Part of this is because the backlog of people who couldn't move due to COVID-19 is clearing up.
But it's also because Australia is changing its migration policies in response to the challenges - such as Australia's rental market crisis and stark undersupply of housing - posed by the pandemic and the reopening of its borders.
The system that we use at Metropole is called our top-down approach (going from the macro to the micro).
And it has helped many clients build substantial property portfolios by identifying properties that do in fact double in value in less than 10 years.
This starts with examining the macro factors affecting our property markets and drills down to the micro level.
Generally, it happens in 6 steps:
- We start by looking at the big picture – the macroeconomic environment.
- Then we look for the right state in which to invest. One that will outperform the Australian market averages because of its economic growth and population growth.
- Then within that state, we look for the suburbs that will outperform with regard to capital growth.
We’ve found some suburbs have 50 to 100% more capital growth than others over a 10-year period. Obviously, those are the suburbs we target. And it’s all about demographics. 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. These are often gentrifying neighbourhoods as well.
- Then we look for the right location within that suburb. Some liveable streets will always outperform others and in those streets, some properties will always be more desirable than others.
- Then within that location, we look for the right property. And finally, we only buy at...
- The right price, but I’m not suggesting a “cheap” property – there will always be cheap properties around in secondary locations. I mean the right property at a good price.
To help our clients buy the right investment property, we follow our 6 Stranded Strategic Approach and only buy a property that…
- Appeals to owner-occupiers: not that we're planning to sell the property, but because owner-occupiers will buy similar properties pushing up local real estate values.
This will be particularly important in the future as the percentage of investors in the market is likely to diminish.
- Is below intrinsic value: that’s why we avoid new and off-the-plan properties that come at a premium price.
- With a high land-to-asset ratio: that doesn’t necessarily mean a large block of land, but one where the land component makes up a significant part of the asset value.
- 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 mentioned above.
- With a twist: something unique, or special, different or scarce about the property, and finally…
- Where they can manufacture capital growth: be it through refurbishment, renovations, or redevelopment rather than waiting for the market to do the heavy lifting as we’re heading into a period of lower capital growth.
By following our 6 Stranded Strategic Approach, you minimise your risks and maximise your upside.
- Also read:198 Sydney suburbs where you can still buy a property for under $1 million
- Also read:Rapid population growth – and its consequences
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:5 ways to value a commercial property in Australia
- Also read:Melbourne property market forecast for 2024
Each strand represents a way of making money from property and combining all six is a powerful way of putting the odds in your favour.
If one strand lets you down, they have two or three others supporting their property’s performance.
When you look at it this way, buying a property strategically takes a lot of time, effort, research, and something most investors never attain – perspective.
What I mean by this is you can gain a lot of knowledge over the Internet or by reading books or magazines but what you can't gain is experience.
It takes many years to develop the perspective to understand what makes an investment-grade property.
Note: There are both macro and micro factors that help determine how long it takes for property prices to double.
The big picture factors are those nationally and globally, such as supply and demand, consumer and business confidence, interest rates and affordability, availability of finance, Government incentives, the cost of renting, and the global economic markets.
On the micro level, it is the economy of each state that can affect the rates at which property prices grow.