Capital growth can determine whether a property is a sound investment or not.
We explore exactly what capital growth is, how it makes property investors money and the state of capital growth in the Perth property market.
What is capital growth?
Capital growth, also known simply as property price growth, is the increase in the market value of a property over time. Along with yield, it is one of the ways an investment property can provide an income.
Capital growth is often observed (and measured) across an entire suburb or area, but individual properties can be impacted to varying degrees. There are many factors that contribute to an area’s capital growth, but ultimately it is driven by simple demand and supply: the demand of people who want to live in the area and the supply of properties available, which causes prices to rise over time.
Capital growth is a long-term investment strategy, usually assessed as a percentage calculated on a per annum basis. Sometimes you’ll hear it talked about as a compound annual growth rate, which takes into account the number of years you are measuring the growth, as properties (and areas) can experience price growth inconsistently, growing or falling at different rates each year.
What is considered a ‘good’ capital growth rate comes down to the individual investor. Each property investor will consider different figures as worthwhile investments.
Why should investors care about capital growth?
Investors hoping for capital growth may take a chance on a suburb predicted to have good price growth over the coming years.
Capital growth is one way that property investors can build wealth through real estate over the long term. Investors usually make money through capital growth over the long term, or rental income (also known as yield) each week or month, or a combination of the two over time.
Capital growth can lead to your property being worth more and, over time, you may be able to sell it and make a profit, or use any equity as leverage to buy more investment properties.
Investors also need to pay attention to capital growth for another reason. If you do sell an investment property, the amount of capital growth it has experienced is taken into account when calculating capital gains tax.
What impacts capital growth?
Although it depends on what and where you buy, historically Australian real estate has seen steady growth over the long term. It has even been known to more than double in value, as we saw here in Perth between 2001 and 2005. However, there is no guarantee that property will gain in value over any given period, and properties in Australia have also been known to experience a decline, or even a steep fall, in value.
While there will always be unforeseen events that may affect property prices, undertaking thorough research before you invest can help identify areas ripe for capital growth. Things to consider include:
- the last 20 years of capital growth trends (as well as those of neighbouring suburbs)
- the average days on market for a property
- auction clearance rates
- any planned infrastructure development
- increases in average income levels
- population growth
- rising rental prices
- whether you plan to undertake any renovations that could add the property’s value.
Which Perth suburbs offer the best capital growth for property investors?
Since 2000, Perth’s median house price has almost tripled.
The resources boom saw the median house price double between 2001 and 2005, and by 2006 Perth was the second most expensive capital city in Australia. Following the GFC and the slowing of the mining boom, the years from 2007 to 2013 were more volatile.
After two years of growth in 2014 and 2015, an economic slowdown and low population growth have seen annual declines in Perth’s median house and unit prices since 2016.
Although it was forecast to be a recovery year for Perth property prices, 2020 turned out to be unsettled, with a COVID-led 2.2% drop in the median house price earlier in the year. Since then, however, signs have been positive, with both values and housing market activity starting to track higher.
According to data from CoreLogic, the following suburbs experienced the biggest rise in median house prices in 2020:
- Wannanup – increased by 17.2%
- Lakelands – increased by 12.2%
- Medina – increased by 9.8%
- Alkimos – increased by 9.1%
- Two Rocks – increased by 7.8%
And for units, the biggest gains in median prices in 2020 were seen in:
- Mount Pleasant – increased by 20.2%
- Ascot – increased by 16.3%
- Burswood – increased by 14.2%
- Cloverdale – increased by 13.1%
- North Coogee – increased by 12.7%
Looking at 10-year data from REIWA, the best capital growth in Perth between 2009 and 2019 was in:
|1. South Perth||$995,000||$1,350,000||35.7%|
|7. Mount Pleasant||$925,000||$1,175,000||27.0%|
|8. Wembley Downs||$870,000||$1,100,000||26.4%|
|9. South Guildford||$410,000||$517,500||26.2%|
|10. Shenton Park||$900,000||$1,125,000||25.0%|
What does the future hold for capital growth in Perth?
Perth, together with Darwin, currently has the lowest median house price of Australia’s capital cities. Perth rents rose an extraordinary 8.2% in the year to November 2020, and this is likely to lead to an increase in property investment activity in 2021. Affordable property prices, together with historically low-interest rates, improving economic conditions and ongoing government stimulus are likely to support Perth property price growth in 2021.
If you’re thinking of investing in Perth property, contact our expert team today.