The very premise of investing carries risk and your returns will be relative to the risk you take on. Importantly, when it comes to property, values aren’t linear. Property prices move based on several factors, so you may not always experience years where your property goes up in value. Your property experiencing negative growth for a period isn’t anything too drastic to worry about if you have a long-term strategy and sound financial planning in place.
What’s the average growth of the property market?
Properties can sometimes go down in value; however, history has proven that over a term of 7-10 years, the property will increase in value when the purchase is made in an area with sustained capital growth. This highlights the importance of getting your purchase decision right when you initially invest.
While you may find a cheaper property and get into the market faster by buying a property in a less sought-after location, it’s a riskier decision than being patient and buying in a reliable, blue-chip area. As Warren Buffett says, he buys stocks like he buys groceries. When he invests, he focuses on buying stock in blue-chip companies.
What influences property values?
Several factors influence property values from macro factors such as interest rates and the broader economy to localised, micro factors. One of the key localised factors that affect property values is property market performance in your local area. If your property is in a low-demand area, you’re naturally going to experience slower capital growth and be exposed to a higher risk that your property value will decline.
The population and demographics of an area will also have a significant impact on property values. For example, if your investment property is a multi-bedroom home in an area that’s popular with young families, you can expect this sort of property to be more likely to outperform compared to apartments in the area. The opposite may also apply if your property is in an area that’s popular amongst younger people who prefer the convenience of apartment living.
Local employment and access to employment are crucial when it comes to property prices. If your property is in an area with easy access to the CBD or sustainable long-term employment opportunities, the area will naturally be in higher demand than less connected areas with fewer employment opportunities. In contrast, regions with seasonal work or volatile cycles of boom and bust expose investors to a higher risk of declining property values. The rapid declines in property values following the 2011/12 mining boom is a good example of what happens to property values when a key regional industry slows.
How do I minimise my risk?
To minimise your risk when it comes to property investing, make sure your property ticks the essential boxes in terms of factors that affect property value. These things include location, infrastructure, population and demographics and the specific features of the property. These features include size, aesthetics and amenity such as air conditioning and an entertaining outdoor area.
While there are factors across the market that all investors need to be aware of, each investor will still have their unique strategy and goals. Make sure you consult your accountant, financial adviser and other professionals before you make any big property decisions.
We advise our clients to get a balance of capital growth and rental yield. If you are thinking about buying an investment property please speak to us first so we can assess the current rental return and desirability of the property for great quality tenants.
