Understanding and using yearly price growth statistics in an area of interest is critical to making successful property investments decisions.
Property price growth is usually expressed in terms of a percentage i.e., 10% to 25% or more over a period of a year. But, what does this really mean.
Some property agents would have you believe that you will achieve great capital gains in an area with high capital growth.
The problem with this is that capital growth figures are often skewed by new developments in the area of interest.
An area that experiences a lot of new development will have a high capital growth because the cost to build a new property increases over time but it doesn’t mean that older properties will have the same capital growth.
Example;
In Sydney, Australia, a suburb close to the city and on the harbour, Darling Point, experienced apartment capital growth of 68.7% in one year, 2003, but the average the trend has been 9.9% since 1991.
Taking those figures literally means that the average price of apartments in the area has gone up 68.7% i.e., a unit that was $400,000 in 2002 has gone to $675,000 in 2003.
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Does this mean that a unit that I purchased in 2002 in an older building went up by $274,800 in one year?
The answer is no. It only went up 9.9% or about $40,000.
Why?
The reported average price growth, expressed as a percentage, takes into account new apartment sales and re-sales of existing apartments. These figures will not accurately represent what is actually happening in the area and can be misleading.
Building costs have rising substantially over the past few years in Australia and USA as a result of the real estate boom.
In Darling Point, Sydney, several new, luxury apartment blocks had been built and sold during this period and they represented a high than normal percentage of apartments sales. As a result the figures for capital growth in the area were skewed upwards.
Older apartment blocks experienced a modest increase in capital growth, consistent with average capital growth figures of 9.9%.
However, this does present other opportunities!
Advertising and marketing of the new, luxury apartment blocks brought potential buyers into the area.
The opportunity for the investor was to purchase an older apartment, to be re-furbished to the same standard as the new ones creating value and benefiting from higher new apartment prices.
This created a similar apartment but at a lower cost. Buyers looking for the same quality internally could obtain this but at a lower price. The buyer has set expectations of value for price and sees the renovated apartment as great value compared with the new ones.
Thus, advantage has been taken of the marketing and building of the new luxury apartment blocks to create good profit for the investor.
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