Some with vested interests would have us believe that all properties go up in value over time: and so, it doesn’t really matter what you buy. Their message is to buy anything, and it will eventually go up. This is especially true if they are property focused and only have one or two developments to promote.
However, the truth is more complex, and we need to consider a range of conditions.
Areas have different levels of supply and demand for property. If supply is low and demands are high, property prices are more likely to increase over time. If supply is high and demand is low, property prices are more likely to decrease. Conditions in between may offer slower growth than meets our expectations.
Areas have different levels of risk for an investor, with single economy or ‘single horse towns’ having much higher risks than those with a wide diversity of economic sectors. In larger regions, with more diverse economies, the expectation is that four or five of the seven to ten sectors are performing at any one time, supporting property prices growth.
Areas have different levels of infrastructure appeal, such as those in traditional real estate talk with schools, shopping, parks and commercial areas. This can change rapidly with new investment in shopping centres, enhanced access to the area or the creation of undesirable infrastructures such as prisons or changes to flight paths.
As investors or mortgage brokers, we need to understand all of these factors, how they interact and how they can impact future property prices. This will help us to be able to identify suitable opportunities for sustainable property growth that meets our time frames. This gives us far greater confidence that we will have above average opportunity for property price growth*.
A client recently presented with a property they had held for 8 years, and over that time, it had only gone up 1% per annum or 8% in total. This represented a total of $24,000 increased value on this $300,000 property over the eight years.
If they had chosen an average capital growth property growing at 7% per annum, it would have increased in value by $22,000 in the first year alone and by $214,000 over the eight years. You can imagine what the results might have been if they had chosen an above-average capital growth property!
Others have had experiences where the value of their property has actually decreased over time. This is actually not unusual, and some categories of property are more likely to do this*.
*Above average property price growth: As an investor, we need to be confident we are working your capital hard. To do this, we need benchmarks. Forrester Cohen Professional Services uses the RP Data Rismark index reporting average capital growth rates for capital cities or regions.
Above-average property price growth can then be a reference to this reported average and measured impartially.