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Understanding Capital Growth as an Investment Strategy

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Property Investment Is Underpinned By Capital Growth

Property investment is not a quick fix.
For this, you’d be better off playing the pokies and hoping that your symbols all line up ……

Property investment is all about ‘capital growth’ and understanding that in order to build wealth, a long term financial investment is required. As booming property prices in Sydney show no signs of slowing down in 2017, capital growth through property investment is certainly one type of opportunity that remains the safer and more profitable option for increasing wealth in the long term.

How much capital growth can you expect on a property investment?

Investment properties are a long-term financial solution to building wealth. There are several strategies which can be implemented when building a property portfolio, but there is no denying that focusing on capital growth is paramount to ensure long-term success. Capital growth refers to the increase in value of a property portfolio over a period of time. Historically, particularly in Melbourne and Sydney, we have seen periods whereby property owners in Australia have seen their capital growth double in a short amount of time. In years preceding that, capital growth was negative due to the larger economic climate. So, how much capital growth can you expect on an investment property?

Know the property cycle

It’s important to acknowledge that the property market is cyclical, and as a property owner you will experience the market go through various highs and lows. Understanding the property cycle and how it can affect property value, yields and demand is key for an investor. Capital growth will largely depend on the location of your purchase. The Australian market is made up of many submarkets. The capital growth of your property will depend on where the market in question sits in the property cycle.

Below is an indication of quarterly capital growth from September 2010 to September 2015 across Melbourne, Brisbane and Sydney. The unique capital growth rates make it clear that each market is vastly different.

Capital Growth 2010_2015

High yield vs. Capital Growth

Depending on your strategy, some investors may choose to prioritise high yield instead of capital growth. This is beneficial for a multi-property portfolio which may not hold an investment for a long period of time. The below table indicates the difference in value over a 20 year period.

High Yield vs Capital Growth

From the above table, you can see the highest opportunity for long term investors lies within the capital growth strategy. However, should you choose to hold onto properties only in the short or mid term a high yield strategy may be preferable.

Supply and Demand

There are two factors which will contribute to the short and long-term growth of a property: supply and demand. If demand is high relative to supply, property prices will rise, meaning capital growth will therefore also increase. In Sydney and Melbourne in particular, we’ve seen demand soar in recent years which is reflected in the average selling price in both capital cities as buyers began to compete against one another to secure a purchase.

As a property investor, finding a location that has the right supply and demand ratio is key to determine the potential for strong capital growth. Being able to decipher these market factors will make the difference between a good investment purchase, and a great one.

Investing in property is an important financial decision, which is why at Sandcastle Finance we recommend seeking the right advice before committing to a purchase. This will allow you to set out your goals and put strategies in place to meet these goals.

Contact Sally Prowse today on (02) 9401 0274 to discuss your potential investing opportunities.