CAPITAL GROWTH

Apr 11, 2017
Michael Matusik

Measurement again.  But here, I am talking about capital growth.

A statistic recently caught my eye.  There is a backstory, but I won’t bore you with it.

Except to say that it is an increasingly common one, in that a lot of people really want to believe this stuff.

Apparently, unit + townhouse prices in Bellbird Park, a suburb in Ipswich, in Brisbane’s west, grew by 93% over the last 12 months.

Well, the BS meter was pinging like there was no tomorrow.

This is what has become known as ‘suburb growth’, and many think that it refers to the actual capital growth of properties within a particular suburb.   Some even describe these results as ‘capital gains’.

These results are based on the change in median (or sometimes average) property prices between two time periods.  It doesn’t measure capital growth or capital gains at all – far from it.

What such figures measure is the change in the type of property sold between the two time frames.  These results are often influenced by the age of the properties – new stock versus much older resales; development sites; quality and location of the housing itself; renovation activity; out of line sales (such as divorces) and sometimes sales that haven’t even occurred in the suburb at all.

Access to this type of information is quick these days and it is free.

But the only way to have some real understanding of capital growth is to investigate resales.

And when you do that for units + townhouses in Bellbird Park, you find that 14 properties resold during 2016, with annual average capital growth of just 1.5%.  The median capital growth per annum was just 1.1%.

A far cry from 93%!

Of the 14 resales, six sold for a loss on resale.  The best annual capital growth on a unit/townhouse resale in Bellbird Park was 9.4% last year and the worst result was a -4.5% annual loss.

Most properties of this nature, in the area, saw little capital growth if they were held for less than ten years.  Most resold for a loss if held for less than five years and the best results were for properties bought in the late 1990s/early 2000s.

So, just like when measuring the vacancy rate, I think we need a standard industry measure to better judge capital growth.  Other investment classes have such checks and balances and it is time that the property industry had likewise.

And for mine, it must be based on resale analysis – the same property – excluding those with major renovations – selling over time.

But this takes time, therefore costs money and, well, many won’t like what they will hear.

Using a change in median or even average prices is okay as a broad indicator and when enough sales take place to render the results some meaning.  There, we are talking about whole cities or major regions and not suburbs or even postcodes.

We use such when we do our outlook reports; but this tool is to understand market direction and momentum – not capital growth and especially not capital gains.

Go here to see our reports and save heaps when you buy them all in one hit.  Our new Capital Cities Market Outlook Report was released last week.

And for the record

Capital gain is the term used to describe the profit on the sale of the property, once all expenses have been deducted.  Capital Gains Tax (CGT) is applicable to capital gains on investment properties purchased on or after September 20, 1985, but does not apply to your principal place of residence in most instances.

The tax you pay is based on the sale price minus the cost involved in acquiring and holding the property and any gain is included in your assessable income in the financial year you sell the property.  There are, however, some exemptions for paying CGT.

Capital growth is the increase in value of the same property over time.  The supply and demand in an area impacts the capital growth.  If there is high demand from buyers and limited supply, the prices are likely to rise.  But such growth must be measured accurately.

Keen to hear your thoughts.

Until next time,

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Michael Matusik

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