{"id":14388,"date":"2019-04-18T12:00:01","date_gmt":"2019-04-18T02:00:01","guid":{"rendered":"https:\/\/www.prosolution.com.au\/?p=14388"},"modified":"2019-05-13T17:19:42","modified_gmt":"2019-05-13T07:19:42","slug":"understanding-property-growth","status":"publish","type":"post","link":"https:\/\/wealthcoach.com.au\/stage\/understanding-property-growth\/","title":{"rendered":"Understanding property growth, markets and being strategic"},"content":{"rendered":"

Understanding how property growth behaves is critical when making buy, hold or sell investment decisions. Unfortunately, I have seen lots of people make terrible decisions based on misinformation or misunderstanding. Therefore, if you are a property investor, you must understand this concept. And if you are an investor with a low asset base, you can use this knowledge to your advantage.<\/p>\n

History always leaves clues<\/h3>\n

I\u2019m a big proponent of evidence-based investing because it removes a lot of risk. Evidenced-based investing involves only adopting methodologies, approaches or investing in assets where there is overwhelming evidence that demonstrates it works. No throwing darts. Only invest in sure-things.<\/p>\n

Below I have set out a few examples of property growth both for individual properties and markets.<\/p>\n

Individual examples of property growth<\/h4>\n

The chart below (click to enlarge) sets out the sales of an apartment in Richmond, Victoria between 1985 and 2019. As you can see, there was very little growth between 1985 and 1997 and very strong growth between 1997 and 2010. The average growth over the whole 25 years period averages out at over 8.8% p.a. \u2013 which is pretty respectable. This is a very good example of how property behaves i.e. it grows in cycles lasting 5 to 10 years followed by a flat cycle. Click here<\/a> for an example of a house in Carlton that I cited in another blog that also illustrated this concept.<\/p>\n

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I appreciate that this data isn\u2019t statistically significant, because it\u2019s only a couple of properties. However, after 17 years of looking at property growth on almost a daily basis, I can assure you that this growth is indicative of how the vast majority of investment-grade property behaves over long period of time.<\/p>\n

Example of state-based growth<\/h4>\n

The chart below (click to enlarge) sets out the distribution of median house price growth since 1980. You will notice that a growth cycle typically lasts 7 to 10 years. And a growth phase is typically followed by a period of (7-10 years) of little growth. The average growth rate over the past 38 years of each capital city ranges between 7.30% and 7.96% p.a. That is, in the long-run, there is not a large variation.<\/p>\n

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Understanding the market and its performance<\/h3>\n

When assessing an investment property\u2019s historical performance, it is important to ascertain whether it is due to asset-specific or market-wide influences. For example, I know that investment-grade apartments in Melbourne have not performed well over the past 7 to 10 years \u2013 as perfectly depicted by the Leslie Street chart above. Therefore, investors must consider this when assessing the performance of their assets. For example, if you purchased a quality apartment in Melbourne 5 years ago and haven\u2019t enjoyed much capital growth, it is possible that you have a perfect<\/em> (investment-grade) asset, but you just haven\u2019t held it long enough yet. That is, no growth is a market-wide phenomenon, not asset-specific.<\/p>\n

But you can\u2019t have blind faith in the headline numbers. You must understand what has driven performance. Using investment-grade apartments in Melbourne as an example, these are some of the things I would consider when looking at recent growth and forming a view on future growth:<\/p>\n