There are all kinds of reasons why people may invest in property; rental returns, being able to own a physical asset, and the benefits of positive and negative gearing are just a few.
But for investors, perhaps the most important factor is capital growth. After all, rental income and tax deductions will prove to be of little worth if a property declines in value during your ownership. Understanding capital growth and the factors that drive it is crucial if investors are to reduce risks and maximise the potential of their investment.
The Australian residential housing market has experienced substantial growth recently, expanding by 147 per cent over the past decade and 10.2 per cent in the last two years alone.
This growth has been predominantly driven by 12 key factors which can be broken down into four categories.
Investors should take all of these into consideration when selecting a property in order to maximise investment outcomes.
- Demand drivers
Investors should be aiming for areas where there is likely to be a sustained level of demand coupled with an undersupply of property. Examining building approval rates and population growth can quickly tell you whether the population is expanding faster than new homes are being built.
- Government influences
Government influences, including government grants, infrastructure programs and building and stamp-duty saving incentives, make up the second category of factors that underpin capital growth.
Rules, regulations and grants can change at any time, so can be harder to predict.
- Economic factors
Interest rates and employment and income opportunities in a given area are some of the economic factors that influence capital growth.
Because people tend to live close to their work, areas with strong employment and income opportunities and a high level of economic activity offer greater potential for further capital growth.
- Housing affordability
Since the housing market depends on people being able to afford property, it’s important to look at affordability and demand for different dwelling types.
This category includes analysing wage growth in a particular area, because when people start earning more they have the means to pay a premium for certain areas or property types.
There will always be an element of risk when it comes to investing in property, but understanding and identifying the 12 key driving factors that fall into the above four categories can help predict whether a property will rise or fall in value.
The number one incentive for any property investment should be financial return; not tax deductions, rental income or anything else. This means considering the long-term outlook for a particular area and weighing up all the risks against the potential returns. Avoid exceeding your borrowing capacity simply to secure a property.