You’ve probably heard that Australian property values double every seven years. Others say that property doubles every 10 years. Are either of these statements true?
Let’s take a closer look at a hypothetical scenario based on values doubling every seven years. Say someone you know buys an investment property for $500,000 when they have a baby. By the time the child is seven years old, the property is worth $1 million dollars. Following this trend, the property will be worth:
• $2 million at 14 years
• $4 million at 21 years
• $8 million at 28 years.
It looks like a great investment. But if we look at the history of property values, we see that this probably won’t happen for most properties during a seven-year period.
For example, research shows that between January 2006 and January 2016, home values across Australia’s capital cities increased by a total of 72%. Looking closer at the numbers, house values increased by 73.1% while the value of units increased by 64.3% during that time. If we examine the figures in more detail, we find that the 10-year growth varied significantly between capital cities. While average values in Melbourne doubled (100.9%), other results for the 10 years were:
• Sydney – 78 per cent
• Brisbane – 44 per cent
• Adelaide – 41.7 per cent
• Perth – 44.7 per cent
• Hobart – 17.1 per cent
• Darwin – 75.3 per cent
• Canberra – 48.1 per cent
Source: CoreLogic March 2016
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If you bought an investment property in a capital city other than Melbourne, it’s likely that your investment didn’t double in value.
While considering the averages, keep in mind that there isn’t just one market in each capital city. The rate of growth can vary considerably between suburbs, types of property and even in the same street or development.
Also, some periods show higher growth than others. For example, average capital city home values more than doubled between 1996 and 2006, with an average increase in value of 151.7%.
According to RBA research*, Australian housing prices have increased by an average of 7.25% per year since 1980. If you believe that this will be the growth rate of a property, you can expect it to double in value in just under 10 years. If you are a bit more pessimistic and believe that the value of the property will increase by 6% per year, then you can expect it to double in value in 12 years.
An easy way to determine how long it will take an investment to double in value is called the Rule of 72. You calculate this by dividing 72 by the annual growth rate. So in the previous example of 6 per cent expected annual growth, 72 ÷ 6 = 12 years.