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What type of capital growth can a property investor expect in the future?

As a property investor you’d have to be living under a rock not to know that capital growth has been poor over the last few years. So how does it compare with the past?

According to the RP Data-Rismark Home Value Index, capital city dwelling values have increased at an average annual rate of 2.4% over the past five years; a rate which is below the average annual increase in CPI (2.8% to June 2012).

Since the onset of the Global Financial Crisis (GFC) in 2008, growth in capital city home values has been much more subdued. Apart from the economic factors, the slowdown in capital gains can also be attributed to the fact that consumers have increased their level of savings and have subsequently reduced their levels of spending (particularly for housing).

Over the five years to August 2012, home values across the combined capital cities increased at an average annual rate of just 2.4%.

Over recent years the rate of capital gains in the housing market has been slowing as the cost of purchasing a home has risen.

Breaking down the market performance into five year increments highlights the recent slowdown in value growth.

Between August 1997 and August 2002, capital city home values increased at an average annual rate of 12.0%. This rate of growth slowed to 8.4%pa between August 2002 and August 2007 and has further slowed to 2.4%pa over the most recent five years. These results clearly show that as housing has become more expensive over time and since the onset of the GFC capital gains have significantly slowed.

In every capital city, average annual capital gains in the market have been stronger over the first five years of the past decade than they have been over the most recent five years.

In fact, across each city except Sydney, the rate of average annual growth over the past five years has been less than half that of the previous five years. Further highlighting the slowdown is the fact that over the last decade, every city except Sydney recorded average annual capital gains of more than 6%, while over the past five years the best performing capital city, Darwin, has recorded average annual gains of just 4.6% pa.

As mentioned in the headline, the rate of inflation has been recorded at an average of 2.8% on an annual basis over the past five years. Given this, growth in home values over the past five years has been below the rate of inflation in Brisbane (0.2%pa), Adelaide (2.4%pa), Perth (-0.9% pa) and Hobart (-0.6%pa); while Sydney values have grown in line with inflation.

Across individual capital city housing markets, the table highlights the weaker market conditions prevalent across all capital cities over the past five years.

For houses, capital gains have been lower over the most recent five years that the previous five years across each city. For the unit market, Sydney is the only city that has recorded a superior market performance over the past five years compared to the previous five years.

Over the past decade, Darwin and Perth have been the standout performers for capital gains for houses with this trend largely fuelled by exceptional growth between August 2002 and August 2007. For units, Hobart and Darwin have been the standout performers over the decade with the exceptional growth once again fueled by the performance over the first five years of the decade.

Apartments have outperformed

Another important trend which has emerged over the past five years is the superior capital growth performance of units compared to that of houses.

Across the combined capital cities, units have recorded average annual growth of 3.6% over the past five years compared to 2.2% growth annually for houses.

Across individual capital cities, the unit market performance has outperformed that of detached houses over the past five years in Sydney, Melbourne, Brisbane, Perth and Hobart. This is most likely a response to affordability constraints present in the market and subsequently buyers seeking more affordable alternatives to detached houses.

This data highlights the significant increase in home values over recent years.

The much more subdued growth in home values over the past five years is likely to be a better indication of how capital gains are likely to play out over the coming years rather than the exceptional value growth recorded over the first five years of the past decade.

My thoughts:

In times of lower overall capital growth strategic investors still do well. There will always be areas that outperform the averages. And there will always be opportunities to “manufacture capital growth through renovations and development

Source: RPData

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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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