Does Australian Residential Property really double in value every seven years?

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.

Unfortunately, there is no way to predict the annual growth rate of a property. For most investors, I recommend residential investment property that:

• Is appealing to home owners
• Is in a good location for home owners – near jobs, schools and transport
• Has the right balance of capital growth and cash flow
• Is what buyers demand in the location — not what you think they need.

I also suggest avoiding student and holiday accommodation.

So getting back to our questions:

• Do homes double in value every seven years? Usually not. For this to be true, a property would need to increase in value by nearly 10.3 per cent per year.

• Do homes double in value every 10 years? It’s possible, but it will depend on many factors including the location and type of property.

Although capital growth is important, I believe in getting the fundamentals right. This includes selecting residential property that is appealing to home owners and provides the right cash flow for your situation.

M Kohler and M van der Merwe 2015, ‘Long-run Trends in Housing Price Growth’, RBA Bulletin, September Quarter 2015.

Michael Sloan is the author of two books, The Formula to Successful Property Investing and Cracking the Real Estate Code. He is the co-founder and director of The Successful Investor, a national property advisory firm. With over 20 years in the industry, he has helped hundreds of people safely establish and grow successful property portfolios. Find out more at www.thesuccessfulinvestor.com.au.