Understanding capital growth is your secret weapon in the Sydney property market
You’ve heard the phrase ‘knowledge is power’, right? Well, it’s never more true than in real estate. The more you know, the more empowered you are to make better property decisions, and in the current market conditions, that extra knowledge will put you ahead of the property-hunting pack.
Yes, the market felt a little crazy when everyone was paying over the odds to secure a property, and house prices rocketed. But there was safety in numbers. Everyone was paying more, and there was a buyer for almost any property. Now, with so much stock available and less demand, it’s harder to tell what price you should be paying.
Not that we miss those days, of course! But the current market needs a very different strategy, and understanding capital growth is critical.
If you only take away one thing from reading this article, I want it to be this: Most property buyers focus on how much they will make when they sell a property. However, capital growth tells us that you make your money when you buy.
That’s why we take the time to do an in-depth Capital Growth Assessment before we even begin to consider buying a property for our clients. So, let’s get back to basics to understand capital growth.
Essentially, capital growth refers to the increase in the value of a property over time. So, if you bought a property for $500k and sold it five years later for $600k, the capital growth is $100k.
Capital growth is often discussed in the media hand in hand with the median price for the suburb you have bought in. It’s used to indicate the average cost of property and, therefore, the market's movement.
However, focusing too much on the median price is where buyers can go wrong. In Sydney, the median price inevitably rises over time, tricking you into thinking property will increase in value.
However, the median price is only the halfway point, so half of all properties outperform the median price growth, and half are falling short. In buying a property that’s underperforming the median price growth, you’re potentially missing out on hundreds of thousands of dollars of capital growth.
Let’s plug in some numbers and imaginary people: John and Jane both bought properties for $1m. They both sell two years later when the median price has risen to $1.3m. John chose an underperforming property and sold it for $1.2m. Because she did her research before buying, Jane sold for $1.4m.
It all comes back to property selection and properly evaluating capital growth.
So, how can you evaluate capital growth potential when looking at properties to buy?
Firstly, capital growth assessments have nothing to do with your brief. You have to leave your wishlist at the door and look at each property without emotion. You can’t attribute any extra value to a property because it has your dream kitchen or added storage. We’re simply looking to see if it’s a good investment.
We’re looking at both micro (meaning the property itself) and macro, which includes everything in the neighbourhood. When there is an excess of stock, buyers have the power of choice and quality properties in good areas win out. The properties that aren’t up to scratch will continue to lose value and fail to keep up with the median price growth.
Some things that negatively impact capital growth are properties on main roads, tight and inflexible floor plans, narrow frontages, a poor level of finishes throughout, bad parking options or strata teams with a poor history of success.
On the flip side, properties that do well will be on a quiet street, close to amenities, and walkable to nearby attractions and green space. They will have a private outdoor area, excellent transport links and little to no development nearby.
Of course, we dive a lot deeper when performing our Capital Growth Assessments, but this gives you an idea of what you can look out for at the beginning of your property search.
Please reach out to my team if you would like to know more about the impact of capital growth on your property search.