Understanding property growth, markets and being strategic

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.History always leaves cluesI’m 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.Below I have set out a few examples of property growth both for individual properties and markets.Individual examples of property growthThe 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. – 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 for an example of a house in Carlton that I cited in another blog that also illustrated this concept.<< Chart - click here >>I appreciate that this data isn’t statistically significant, because it’s 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.Example of state-based growthThe 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.<< Chart - click here >>Understanding the market and its performanceWhen assessing an investment property’s 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 – 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’t enjoyed much capital growth, it is possible that you have a perfect (investment-grade) asset, but you just haven’t held it long enough yet. That is, no growth is a market-wide phenomenon, not asset-specific.But you can’t 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 My new book is available for pre-order now: Pre-ordering the book will help me get it into bookstores. So please do me a favour - please consider pre-ordering now - links and pre-order bonus are available here: https://prosolution.com.au/book-preorder-bonus Do you have a question for the podcast? Email us at [email protected]. If you're interested in working with our team and me, discover how we can work together here: https://prosolution.com.au/family-office-servicesIf this episode resonated with you, please leave a rating on your favourite podcast platform. Subscribe to my weekly blog: https://prosolution.com.au/stay-connected IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.