How to tell if a property will experience capital growth
Real wealth from real estate is achieved through long-term capital appreciation and the ability to use that equity to build to your asset base through well informed investments, be it an investment property or shares.
Investing in shares has become easier for the masses with apps such as Robinhood however the greatest use of equity by far for Australian property owners is to buy property for investment purposes.
Australians from all walks of life buy investment properties with the hope that it will fund their retirement. Most however wrongly focus on how much rent they will earn when the real wealth will be the capital growth of their property.
To ensure you own the right type of property come retirement, let's look at 6 misconceptions about why property experiences capital growth:
1. Population Growth leads to capital growth
While Australia’s robust population growth underpins the strength of our property markets, as hard closure of international borders due to Covid_19 has shown, this alone does not guarantee capital growth.
It needs to be combined with the affordability of properties and a favourable local property supply and demand ratio.
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2. Invest in a capital city that is experiencing strong capital growth
Over the last decade, Sydney and Melbourne house markets have decoupled from the rest of Australia and outperformed the other capitals.
Don’t make the mistake of assuming that the whole of Sydney or Melbourne act as one “property market.” Instead, there are multiple submarkets based on geography, price point and type of property.
And some locations have grown considerably more than others, meaning you can’t just buy any property in these capitals and assume it will outperform.
3. Buy a big block, it appreciates
Some suburbs will be more popular than others, some areas will have more scarcity than others meaning over time some land will increase in value more.
Property buyers are always keen to know, “where to buy for capital growth”. Is it better to buy regional Australia or in capital cities; and is inner suburbs or the outer suburbs better?
While there are always exceptions, for overall strong, stable long-term growth that outperforms the averages the inner and middle ring suburbs of our major capital cities are the place to invest.
In general, the more established suburbs with better infrastructure, shopping and amenities tend to be close to the CBD and the water and that’s where the wealthy want to and can afford to live. And they’re prepared to pay a premium to live there, pushing up property values.
Another driving force of capital growth in our inner and middle ring suburbs is their gentrification by affluent young families who are prepared to trade space for place. Some are happy to live in townhouses or duplexes on compact blocks, while others are prepared to trade their backyards for balconies to be located close to where the action is.
4. You can predict capital growth
There is no shortage of “experts” trying predict the next growth hotspot. And, of course, you can always buy an online research reports telling you where to invest because boom times are coming.
Not saying that you shouldn’t listen to the experts. You should if they have a proven track record that’s publicly verifiable. You must however understand that the level of accuracy of these predictions and take that into account when buying.
5. You’re likely to get capital growth if you buy a negatively geared property
It’s true that high growth property market, like Sydney, have relatively low yields and are likely to be negatively geared; but many negatively geared properties have experienced minimal capital growth – just look at all those off the plan inner city properties, they are experiencing negative capital growth in some locations.
It’s important to remember, negative gearing is not an investment strategy – it’s just the way a property is financed at a point in time. While you’ll require strong capital growth to make up for the early years of negative cash flow, that’s not a given. It relies on sound property selection.
6. New developments are good news
Many consider the start of a new development or the opening of a new estate as a positive for local capital growth. While they may lead to local population growth, more often than not these developments stifle capital growth.
Large high-rise developments tend to distort the supply and demand ratio and of course the resulting oversupply isn't something we want as property owners.
Similarly, while new housing estates can often represent a short-term boost to the local economy, in general these also lead to local oversupply and a local demographic of young families who tend to stretch themselves financially, meaning these locations will suffer most when interest rates inevitably rise.
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This article via Property Update does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.