What Are The Key Drivers Of Capital Growth?
For decades, Australian property investors have seen consistent capital growth across the country. On average, capital growth nationwide has been around 6.8% over the past 25 years.
When looking at the property market as a whole, there are both larger macroeconomic factors that impact property prices all the way down to suburb specific factors. It’s worth assessing all these components when trying to locate areas that are ripe for capital growth.
Economic factors certainly play a role. Interest rates and employment are two of the major factors that influence the economy and property as a whole.
Interest rates along with regulatory changes (macroprudential measures) impact a buyers' ability to access credit. Since the GFC lenders have made borrowing for property far harder than previously.
However, access to credit is often cyclical in nature and is a function of the broader economy and interest rates. Depending on how easy or hard credit is to obtain, short-term capital growth across the nation can be impacted.
Broadly speaking, property prices are a product of supply and demand. Ultimately what this means is that changes in population drive property prices.
On a national level, Australia sees around 300,000 new people entering the country each year. This alone is a reason for prices to continue to rise. Good economic conditions will of course also help, providing a need for more workers and that will see an increase in the population.
Around 70% of new migrants move to Sydney, Melbourne and Brisbane. So those cities will likely be underpinned by strong capital growth based on a steady population increase.
However, if you break down those population moves on a more microscopic level, we can see how capital growth can occur even at the suburb or street level.
State-by-state, jobs are often the biggest factor that drives population numbers and house prices. We saw this in Perth and Darwin during the mining boom.
Supply and demand
While there is always plenty of focus on the demand side of the equation when assessing capital growth, it is also worth looking at supply. Capital growth is more likely to occur in areas that aren’t able to be readily expanded. This is what you might see in some of the older inner-city locations, that have tight restrictions around development and are land-locked.
With steady demand and a lack of new supply coming on board, prices will likely appreciate over time and this is a key factor in capital growth.
Conversely, new housing developments far from the CBD have almost limitless supply potential which can weigh on heavily on the likelihood of capital growth occurring in the short-term.
We also see lifestyle factors that play a big part in supply and demand. For the most part, people like to live near the ocean or in ‘leafy’ suburbs which keeps demand consistently high in these areas.
Often areas start to ‘gentrify’, meaning that the older less desirable homes and shops start making way for newer, more broadly desirable properties. Areas that have previously been cheap and impacted by crime issues, but in good locations are prime candidates for this type of change and the capital growth that comes with it.
One way to measure short-term supply and demand is through vendor discounting. Suburbs that are seeing strong demand will likely have little to no discounting and are candidates for short-term growth.
When determining a location's level of demand, one of the best indicators is the vacancy rate. It has long been suggested that falling vacancy rates are a leading indicator of prices. If an area is becoming more appealing, renters will start moving in and that will in time flow through to buyers wanting to buy, which will likely increase demand and drive short-term growth.
The Federal, State and Local Governments all have a big influence on the potential for capital growth in a given suburb or area.
Improvements to infrastructure and livability can make certain suburbs more appealing. This can come in the form of new urban developments or improved public transport.
At the same time, these changes might also occur alongside changes in zoning, which would allow for higher density living. This can quickly drive capital growth in the short term as demand for development properties will drive up prices.
Smart buyers should keep abreast of changes coming out of State Planning Departments.
With a bit of research and a focus on these factors, you can quickly start identifying areas that are primed for capital growth just around the corner.