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 the truth is…some do and some don’t!
So if what happened in the past happens again over the next decade these figures suggest that 50% of properties will not double in value over the next decade and 50% will grow in value more quickly. That’s how averages work.
However we are now in lower inflationary times with lower interest rates and lower wages growth, so in my mind, its unlikely we’ll see the same level of p price growth moving forward as we saw over the last few year.
But let’s dig deeper…
There’s been a lot of fuss recently about the Sydney property market which has lost a little ground over the last few months, yet in reality it’s just experiencing a soft landing after a number of years of unsustainable capital growth.
And it’s much the same for the Melbourne property market.
So lets take a long term perspective and see what’s happened in the past.
According to Corelogic research reported by Aussie, nationally the median house value has delivered an annual growth rate of 6.8% over the last 25 years and have risen in value by 412%, from $111,524 to $459,900 over the past quarter of a century.
Apartments delivered an annual growth rate of 5.9% and have increased in value by $392,000 (+316%) since 1993.
In 1993 the median house value across Australia was just $111,524 and interesting apartments showed a slightly higher median value, at $123,840.
It’s the old story…who wouldn’t like to buy the home their parents bought for the price they paid?
Source: Corelogic and Aussie
But as always growth rates were diverse with average rates of growth over the last 25 years being:
Source: Corelogic and Aussie
Of course a significant trend in the last few decades has been Australian’s adoption of apartment living.
Here’s how apartments have been performing:
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.
It’s also important 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 as 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.
This means that while the value of well located properties in our capital cities have averaged around 6.8% growth over the last quarter of a century, overall regional growth has been lower.
So what’s ahead?
While past performance isn’t always the best predictor of the future, and housing trends are likely to change with a shift to smaller housing since more of us will be trading back yards for balconies and courtyards; if property prices were to rise in the future at the same rate as over the past twenty five years, here’s what Aussie’s report forecasts:
Source: Aussie and CoreLogic Median values have been extrapolated based on applying the annual compounding growth in median values over the past twenty five years to current median house and unit values.
Yes, it’s hard to believe that the median house in Sydney’s value could be $6.35 million and $5.82 million in Melbourne.
Obviously these are simple extrapolations and don’t, in fact can’t, account for the many economic, demographic and political variables that will play out over the next quarter of a century.
However Australia has a “business plan” to keep growing its population.
This plus the ongoing wealth of our nation should underpin the growth in value of our property markets.
With Australia’s current annual population growth of 1.4 percent this adds around 340,000 people to our population each year.
While this may not sound like much, we’re adding the equivalent of one new Darwin every 20 weeks or a new Tasmania is stuffed into our capital cities every 18 months.
Sydney is growing much faster than the national averages and will add almost two million people to its population by 2037, which is the equivalent of adding a new Perth into Sydney.
Of course Melbourne is Australia’s fastest-growing city, growing 18% faster than Sydney.
At this rate Melbourne is set to overtake Sydney as Australia’s biggest city sometime in the 2030’s
How do you outperform the market averages?
The 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):
This starts with examining the macro factors affecting our property markets and drills down to the micro level.
- I start by looking at the big picture – the macro-economic environment.
- Then I 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, I look for the suburbs that will outperform with regards 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.
In general these are the more affluent inner and middle ring suburbs of our big capital cities
These suburbs tend to be areas where more owner-occupiers want to live because of lifestyle choices and where the locals can afford to and will be prepared to pay a premium to live because they have higher disposable incomes.
- Then I 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 I look for the right property. And finally, I 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.
So how do they know which is the right property to buy?
I follow my 6 Stranded Strategic Approach and only buy a property:
- That would appeal to owner occupiers.
Not that I plan 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 I’d 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 my 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.
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.
Subscribe & don’t miss a single episode of michael yardney’s podcast
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
Need help listening to michael yardney’s podcast from your phone or tablet?
We have created easy to follow instructions for you whether you're on iPhone / iPad or an Android device.
Prefer to subscribe via email?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.