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%, which would mean properties should double in value every 10 years.
The problem is naive investors believe this myth and buy any old property and think its value will double 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 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 currently cooling from when prices peaked at record levels amid the Covid-19 pandemic as cheaper lending, low supply and a surge in demand caused buyers to flock to the market.
And if nothing else, what the past two 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 chart shows that since peaking, Sydney housing values are down -9%.
Similarly, in Melbourne, housing values are down -5.6% from their peak.
But the data also reveals that across all cities, values are still up from their pre-pandemic levels.
However, there is not one Sydney or Brisbane, or Melbourne property market.
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 2022 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 see what's happened in the past.
According to Corelogic research, nationally the median dwelling value has delivered an annual growth rate of 6.8% over the past 30 years to March 2022 - or a total of 382% during the period.
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 has seen national dwelling values increase by 72%.
The report shows that most regions have seen house values rise substantially more than unit values over the past 30 years, 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 are up 453% over the past 30 years, substantially higher relative to the unit sector where values are 307% higher.
The performance gap is less substantial across the combined regional markets, with house values up 314% since 1992 compared with a 213% rise in unit values.
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:
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.
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.
- Also read:Heat comes out of the housing market as values across Melbourne dip and Sydney slows | Corelogic Home Value Index
- Also read:Home Price Growth Still Strong Over November | Latest Housing Market Stats
- Also read:Boom to bust: What makes property prices rise and fall
- Also read:Latest property price forecasts for 2024 revealed. What’s ahead in our housing markets in the next year or two?
- Also read:Sydney property market forecast for 2024
Independent financial commentator Stuart Wemyss of Prosolution Private Clients has charted ABS statistics going back over 40 years.
- 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 our 3 big 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.
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 the 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 has averaged around 6.8% per annum growth over the last 30 years, overall regional growth has been lower.
Past performance isn’t always the best predictor of the future and clearly, some housing trends are likely to change after many of us lived in a Coronavirus cocoon.
While predicting housing market outcomes for the next year or so is difficult, forecasting property market performance for the next 30 years is impossible.
However, 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 the good news is that since our international border started its staged reopening in November last year, Australia’s migration levels and population have rebounded.
The government noted over one million people have entered Australia, including more than 130,000 international students, 70,000 skilled migrants, and 10,000 working holidaymakers.
The government is projecting population growth to lift to 0.7% in 2021-22 and get to 1.2% in 2022-23.
Underpinning the pick-up is net positive migration of 41 thousand in 2021-22, 180 thousand in 2022-23, and 213 thousand in 2023-24.
In a recent research report, NAB identified 3 interesting themes emerging during the pandemic.
- There has been a large pick-up in net interstate migration into QLD since the pandemic began from NSW and VIC;
- In terms of urban areas, outer-suburban areas near capital cities have seen the greatest growth in population during the pandemic, though many regional areas have actually grown at a slower rate than their pre-pandemic trends;
- Births have recovered from their pandemic lows to be at their highest level ever.
The system that we use at Metropole which has helped many clients build substantial property portfolios by identifying properties that do in fact double in value in less than 10 years uses what I call our top-down approach (going from the macro to the micro).
This starts with examining the macro factors affecting our property markets and drills down to the micro level.
- 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 per cent 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.
We follow our 6 Stranded Strategic Approach and only buy a property:
- That would appeal 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.
- Below intrinsic value – that’s why we avoid new and off-the-plan properties which 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 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.
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 which can affect the rates at which property prices grow.