Capital growth is the increase in value of a property over time.
Whilst Property Investors would love to find the ‘holy grail’ of properties that generate both capital growth and high rental yield; these are hard to find. Resulting in a choice of investment preference directed to achieving capital growth over the long term or generating cash flow via high rental yields.
All property investments carry some risk and there are no guarantees regarding expected level of growth or that that a selected property will increase in value over a set time.
Successful investors know that research (e.g. property type, suburb, market, demographics) is critical to minimise risk of choosing a poor performing property
The capital growth strategy is popular with investors, with real wealth generated overt time. Well selected properties generate equity, enabling investors to increase their property portfolio.
You may have heard something along the lines of “it’s not timing the market, but time in the market that’s important”. In other words, trying to pick when to enter the market might see you sitting on the sidelines for a long time. Unless you were lucky enough to be in exactly the right place at the right time; capital growth is something you look for over the medium – long term.
Depending on the type of property, cash flow may be manufactured, e.g. renovating. Capital growth on the other hand cannot be generated and is dependent on the market.
There are numerous variables and indicators for a potential capital growth property. No one factor should be considered in isolation. The following covers some of the main influencers on capital growth over time.
Supply / Demand
Local area population increasing = increased demand for property = increased likelihood of capital growth
Oversupply of available properties = reduced likelihood of capital growth
Limited or no available land to cater for an increasing population / demand = likelihood for capital growth
Infrastructure / Amenities
Enhancements to an area such as major highway, schools, hospitals, shopping centres, transport can increase the desirability of a location = increased population growth = increased employment = capital growth
Surrounding Suburbs (ripple effect)
Capital growth often starts at / close to the city centre and transfers like a wave outwardly over time. Neighbouring suburbs experience capital growth = good prediction of capital growth spots
Rising income levels = increased spending in a location = increased local amenities = increased desirability = capital growth
Average Days on Market / Auction Clearance Rates
Properties sold in a short time frame and / or high auction clearance rates = strong market demand (e.g. capital growth)
Rising Weekly Rents
Rising rent payments = increased demand / desirability of a suburb = increased capital growth
Stage of Property Cycle
Understanding the chosen markets’ stage of the property cycle can assist in building quicker capital growth by buying at the bottom or in a rising market and not at the ‘peak’
Past performance of a location can assist in predicting future capital growth