Buyers can no longer bank on values doubling every decade
Custodian managing director James Fitzgerald tells us why not all properties double in value every 10 years, and gives us an insight into the fundamentals behind those that do.
One of the biggest misconceptions I hear of when it comes to property is when people say: “all property doubles in value every 10 years”.
That’s just not true.
While it is true that the value of some properties will double every 10 years – and in fact some properties go up by more than that - not all properties double in value over that period of time.
Understanding whether properties have doubled in value or not comes down to knowing and understanding the difference between property and real estate.
Most people think they are just different words that mean the same thing, but they are not.
The difference between property and real estate is that one increases in value while the other depreciates in value.
Real is the ‘real’ part – the land – whereas property is everything that is built on top of that land, it is effectively the house, the unit, the industrial shed or retail shop.
While most assets will include both elements, the land and building, it’s important to differentiate between them when investing in property.
Understanding how they differ will help you understand what you should be looking for when buying an investment property.
The real estate, that’s the land component, is what drives price growth. Land is a finite resource which is in demand, so therefore it appreciates in value over time.
Whereas the property, the actual building on that land, is the vehicle for generating rental income.
The value of a building depreciates the older it gets as it ages and suffers from wear and tear.
If we look at the Melbourne market, the median house price in 1989 was $130,000.
Today the median house price is about $870,000, meaning that on paper it hasn’t quite doubled in value every 10 years.
Note: this is the median house price – being a house on a block of land, as opposed to townhouse or unit. Units and townhouses, because of their lower land content, have not performed as well.
When comparing property markets from decades ago with today’s market you really need to take into account just how different land sizes and house types were between then and now.
You are not comparing like with like.
The median house in 1989 was very different from the median house that exists in 2021.
Back in 1989 that median house was on a 1,000sq m block of land about 20km from the Melbourne CBD.
Yet, if that house still exists today, which it possibly does and is still on the same size block of land, it would be worth between $1.2 million and $2 million depending on which part of Melbourne it was in.
Either way, it’s worth a lot more than the $870,000 that is Melbourne’s median house price today and more importantly, it has more than doubled in value every 10 years.
But the land component has shrunk in recent decades. There are far fewer properties within that distance of the Melbourne CBD which are still on 1000sqm of land. Block sizes have shrunk, with the average block is now about 450sqm or less (depending on the city).
That’s why it is not realistic to look at the simple mathematics and say property values have doubled in ten years.
Another thing worth noting is that I have not factored in inflation or rental returns in this scenario.
I purposely don’t factor these in because if you were to factor them in you would also need to factor in rental returns, which would actually increase your returns even further.
For example, the same home as above which you bought in 1989 for $130,000 would return you about $700 per week in rent today.
We can’t stop the size and type of properties changing, but when investing it’s important to ensure you are doing so with full knowledge of the realities of what is genuine versus perceived price growth.
The better your real estate investment strategy is – where you buy, what you buy, how much land content you have and how you finance – the better the returns can be.