Does Past Growth Predict Future Growth? (Property Data Dive)

Experts often tell us that the more a suburb has grown in the past means that suburb is more likely to grow in the future. But is that actually true and does the property data back up this idea:

High Property Growth History is a Red Flag

Select Residential Property

0:00 – Introduction
1:38 – Why the opposite might actually be true
4:45 – What does the data tell us?
9:50 – Last 10 years vs next 10 years
12:15 – Applying this to cities and larger markets
15:00 – Performance of significant urban areas over the last 30 years

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Transcription

Ryan 0:00
Experts often tell us that the more a suburb has grown in the path or a suburb with good growth history means that that’s above is also likely to grow in the future. So does the past predict the future in terms of Southern growth? But is that is that actually true? Are we actually making these decisions based on data? Or someone just told us this and you know, general consensus has just kind of agreed to it and gone along with it. So today, I have with me, Jeremy Shepherd from select residential property, to look at the data behind this and say, okay, does pass growth actually predict future growth? Or could the opposite be true? And I absolutely love Jeremy, that you just take a super data approach to this. And you’re happy to, I guess, come over the top with some, I guess, counterintuitive views on what may be happening here and just provide us with these knowledge bombs of insight. So super excited for this one.

Jeremy 0:56
Yeah. Well, thanks very much for having me. on your show, Ryan. And this is this is a topic that I I get a lot of heated arguments with, with experts about Yeah, so I’m always falling back on what the data says Show me.

Ryan 1:10
What is the premise here that the experts are saying, why why do they think that? If an area has grown Well, in the past, it’s going to grow? Well, in the future? What is their reasoning? Do you think?

Jeremy 1:23
Right question. I actually, it is it is peculiar. Why is it just because it did in the past? Why does that mean it will in the future? Because my initial reaction is, well, if it’s if it’s grown too much in the past, if it’s outperformed, and put a massive gap between itself and you know, its neighboring suburbs? Don’t the neighboring suburbs look more attractive, because they’re now relatively affordable by comparison. And that’s the whole concept of this ripple effect where, you know, you have the ideal suburb, everyone’s buying there, they love it, prices go up too high. And then people look for the next best. So they think, well, it’s not ideal, but it’s it’s close enough. And so that reduces demand for the ideal suburb, because then it’s unaffordable, and increases demand for the next best thing. And that just keeps happening. And it all ripples outwards from, you know, the most affluent, exclusive suburbs.

Ryan 2:26
Right, our saying today, you would you would expect from the data, the opposite to be true that if a suburb has grown significantly in the past, then it’s less likely to see growth in the near to medium term future.

Jeremy 2:39
That’s right. But as as things just balance out,

Ryan 2:41
or Yeah, may not be triggered growth, but my won’t necessarily see more growth in comparison to other suburbs close by.

Jeremy 2:49
Yeah, that’s right. And I do use this. apples and oranges analogy, where picture yourself in a fruit shop 100 years ago, and you can buy an apple for one cent, or orange for two cents. Now, if oranges grew in value at 8% per annum, but apples only grew at 4% per annum, then 100 years later, you’d be spending 50 cents on an apple and $44 for a single orange. It’s It’s ridiculous. It’s still an apple, it’s still an orange. Why would you walk into a fruit shop buy $44, one orange, when you could buy 88 apples for the same price. So what would happen is long before that ridiculous price discrepancy arose. People would think oranges are expensive. What’s an alternative? Yeah, apples there, they seem to be quite affordable. So that reduces demand for oranges. And they have a lower growth rate increases demand for the substitute the apples, so they catch up. So that what’s more likely is you walk into a fruit shop 100 years later, and it’s 50 cents for an apple and $1 for an orange that sort of thing

Ryan 4:02
that makes discrepancy will kind of counterbalance so we’ll kind of try and stay around the same sort of thing. So if you got like in this picture, we’ve got Bondi Beach here. I think this is a very desirable suburb, obviously. But if Bondi grows by significantly too much, then people will look at the outer suburbs surrounding Bondi to say, Okay, I still want to live near bond I maybe won’t be able to get necessarily near it. Where else can I live? Or what are the beaches Could I potentially live at in Sydney that’s not bond dye. And so then maybe bond I won’t grow as much over the coming years while other suburbs catch up, then, you know, Monday could have a run again in the future, and then other suburbs catch up. So let’s jump into the data and have a look at what the data actually

Jeremy 4:44
tells us. Okay, well, I’ll scramble through this come down to my first most important chart. Okay, so this is a chart showing the growth over a 15 year period following a process A 15 year period. So what you can see across the horizontal x axis is the past growth from 1990 to 2005. And every one of these little purple plus signs is a suburb somewhere around Australia

Ryan 5:16
is this and Australia or just in one city.

Jeremy 5:20
It’s it’s all around Australia, but it excludes those suburbs where there was so little transaction volume that the capital growth was was considered unreliable. So it might be only, you know, 500 dwellings for some, for example, in fact, there are an enormous number of localities around Australia, which only have like 50 dwellings. So you know, very rural, very remote places. Yeah. So

Ryan 5:44
those are excluded.

Jeremy 5:46
Yeah, yeah, this is just the reliable data. Okay, and what you can see there is an orange dotted line, there’s not much of an obvious trend, but once mathematically fitted to this scatterplot. That’s, that’s the trend. Past growth is is an indicator of future growth, but not how you would have thought or not least not how many of the experts suggest. So the higher the past growth, the lower the capital growth. So you see, over on the right hand side, these are all the suburbs that from 1990 to 2005, had excellent double digit capital growth

Ryan 6:27
over a 15 year period as well to hold that sort of annual growth for a 15 year period is pretty Yeah,

Jeremy 6:32
that’s, that’s quite extraordinary. Yes. And that over the left hand side, they had very poor growth, all of these suburbs have poor growth over a 15 year period. Now that the suburbs at the top had excellent growth over the following 15 years, the suburbs at the bottom had poor growth over the following 15 years. So

Ryan 6:55
mostly, for people who are struggling to understand this graph, or each every cross is a suburb. And the higher up that crosses on the graph means that you know, in the future, like I say, you know, if we were in 1990, looking forward, is that when it was no 2000 2005, they were in 2005. Looking forward, the dots at the top of the graph are the ones that would have performed better and the dots down the bottom of the ones that would have performed worse.

Jeremy 7:25
Hmm, yeah. So if past growth, high growth is an indicator of future, high growth, and past low growth is an indicator of future low growth, then we would expect a trend line that goes from the bottom left, up to the top right. But instead, as you can see, it’s it’s pretty much the opposite of that. Yeah. Which means if you’ve had some good past growth, you’re more than likely to see some poor future growth and vice versa. Yeah, but it makes sense. That’s nificant. There. That’s right.

Ryan 8:00
Yeah, most of those are clumped in this major circle here between, you know, 4.5, to 10%, in the past, and what 3% to 8%, in the future, most of them are all kind of clumped in there. With no real trend there, if you took out the outliers, or the massive cuts right here.

Jeremy 8:20
I mean, to say that this is a trend is a bit bit of a stretch. So really, what we’re looking at here is, there is no relationship between past growth and future growth. But if you wanted to believe in one, it’s actually the reverse. So

Ryan 8:36
what I will pull from this graph myself, personally, is that if an area has had an extremely good growth, if it’s one of the outliers, you know, clustering insane growth for that 15 year period, then I it looks like there’s less chance of it performing well, or being one of the best performing suburbs in the future 15 years, versus picking something more in the middle that’s, you know, kind of had average growth that could be a high performer. Could be a middle performer. Could be anything, really. But all I can really say from this myself, is that, yeah, the ones that had really significant growth in the past, are less likely to perform, because if you look from 10.5, up to 14.5, you don’t really have any suburbs they’re in the higher, you know, the higher growth in the future.

Jeremy 9:23
Yeah, that’s right. Yeah. And these are, these are extreme sort of figures. But yeah, you’re right. There’s a clump there. But I mean, bear in mind that this, this plot is considering every one of those, those points, so it’s the closest relationship we can get. But there’s a better chart. If you let me just scroll down. And it looks at 10 years, last 10 years in the next 10 years. And this might be an easier one to look at, rather than a scatterplot. So what I’m doing is measuring over any time frame in the past, using like, I think it’s 40 you know, 30 years. Have historical data across Australia, same sort of thing, only reliable, only reliable suburbs. So the blue chart, the blue columns show capital growth over the last 10 years. And the orange columns are the same group as showing the capital growth over the next 10 years. So let’s just have each of

Ryan 10:22
these blue columns would be a group of suburbs that had this similar growth rate. So whether that’s right, or 2%.

Jeremy 10:28
Yeah, so in this blue column, we’ve got all the suburbs around Australia over a 10 year period that had 1% capital growth. How did they then perform over the next 10 years? Well, on average, they had 11% capital growth. Wow. And yeah, it’s extraordinary, isn’t it? So there’s, this is a very clear relationship. This is bear in mind, this is 10 years and 10 years, not 15 and 15. But that’s, that’s making it very clear now. So if you had extremely good capital growth, this is like 15%, you’d be classed in this group here. And then your next 10 years? Well, it’d be pretty lackluster. So it shows very clearly this inverse relationship between past growth and future growth.

Ryan 11:14
And then obviously, there’s going to be outliers in there. So there’ll be some in those groups that will perform better or some that will perform worse. This is just showing the averages. That’s right. Yeah, some

Jeremy 11:23
grouping a whole bunch of suburbs based on their their capital growth.

Ryan 11:27
Yeah, well, this kind of shows, I think this shows pretty clearly that the opposite is true, right? The more someone has grown in the future, the less likely I mean, the more as I was growing in the past, the less likely it is to grow in the future.

Jeremy 11:39
Yeah. And it’s also interesting to note that over the last 30 years, the typical per annum growth rate has been around 6%. And that’s where you can see this, this sort of balance point there. So it all makes sense. It explains the ripple effect, and explains how our property markets balance out. And yeah, if, if some experts in the industry simply looked at some historical data, they would have come to this fairly obvious conclusion.

Ryan 12:10
And pull it together like you can, Jeremy?

Jeremy 12:13
Well, yeah, the problem that I have now is that there’s so many of these people who have maybe written a book, it’s hard for them to go back on what they’ve said, and they have an emotional attachment to their past. opinion. And this is a difficult concept to get across this one.

Ryan 12:33
I think it’s, I don’t know, I think it’s an obvious concept when you actually look at the data and you think about it logically, as you said, with apples and oranges, something because you are comparing similar things, like it’s houses, its dwellings, its places where people live in and maybe bond I or maybe campbelltown, but it’s still houses that people live one say the beach one’s not, but there’s still kind of similar, you know, in what they do. And if you think, okay, one conscious outpaced the other and growth forever, because then you got this huge discrepancy. And you get to a point where people say, Look, I’m not willing to pay that anymore, because I can get something way better elsewhere, for cheaper, which, you know, over the last 10 years, for example, we’ve seen Sydney and Melbourne grow really well. And Brisbane hasn’t. And you see so many people now talking about, well, you know, what can I buy in Brisbane versus what can I buy in Sydney? Maybe I should, Brisbane?

Jeremy 13:27
Yeah. And, and Brisbane is running hot right now. So yeah, all those people that were hanging out for the for the Brisbane boom. Looks like now it’s it’s going to be playing catch up.

Ryan 13:40
Yeah. And so yeah, it’s interesting. This is interesting, because I guess you can apply this on the suburb scale as we have. And I wonder if you could apply this on, like the macro cyclical scale of the different cities as well. Yeah, well,

Jeremy 13:55
I mean, when you think about it, this is obviously suburb level, but a city is just an aggregate of suburbs. So it’ll follow the same trend. And I’ve noticed this again and again with are looking at significant urban areas like Sydney versus Launceston. Launceston in in tazzy is very old city. Sydney, biggest, most expensive city. So people think oh, surely Sydney has has outperformed Launceston. And if you look at the last 10 years, I think it has. If you look at the last 20 years, Launceston is in front, if you look at the last 30 years, Sydney is in front. So again, it comes back to where do you set the finish line for this for this race. They swap the lead and I noticed this a lot with suburbs too. So you see a suburb outperform another suburb but but never over the long term. The other one always seems to catch up and they they cross over when you look at their their growth charts. I’m not sure I might actually have an example of that. I don’t know if you want to bother with this, but this is like a race between all the the significant urban areas around Australia over the last 30 years. So what you would expect to see if a particular property market continues to outperform, let’s say it’s Sydney, then you’d expect after a short period of time, it rises to the top and just extends its lead. But instead what’s happening is, is the cities are changing places as they go through their cycles. They have a boom, they go to the top, they retract or have a correction, like go to the bottom. And you can see Perth at the top there. Now there’s this camera at the top and they’re just continually shuffling over the year now

Ryan 15:47
Perth, Perth, then move down to the bottom obviously had the last five years of negative growth.

Jeremy 15:53
That’s that’s unfortunate. Thanks, Google. Yeah, we love you. You love me, but I wanted to see my chart. Yeah, so I, I find it interesting that, that they can change the lead. So frequently. If if there really was an argument for a particular house a particular suburb, a particular city just continually outperforming, it would very quickly go to the top of that list, and just stay there. And the discrepancy would just become wider and wider and wider. But instead, they just they swapped the lead. And in fact, I think I’ve got another chart, it might be in a different a different presentation, where I was looking at. Yeah, it’s in a different prism. But what I did was I plotted the upper quarter versus the lower quarter, and see whether the gap between both has been expanding over the years. And that would support an argument that certain properties outperform others in the same suburb. But instead, over the last 30 years that has narrowed ever so slightly, it’s narrowed, meaning that, I think because there’s more information available, buyers are able to make more informed decisions. And we’ve got a slightly more efficient market. But it’s certainly an argument against the fact that or the suggestion that certain properties or certain suburbs continued outperform, they just don’t, yeah, they get in front, and then they caught up again.

Ryan 17:28
Yeah. And as I always say, you want to look at multiple different data sources, not just one thing to make your decision. And this is definitely something to look at, you want to look at the history of your city, look at the history of the suburbs, you’re looking at how much have they grown in the past. And as we can see from today’s episode, if they’ve grown less in the past, that can actually be a good indicator. But again, it’s just one indicator, you’re going to want to look at so many different other things like, you know, vacancy rates, and infrastructure. And, you know, we can go on and on about everything that you want to look at. But that’s one indicator to look at to add to your arsenal with everything else to help you make a more informed decision. And if you’re looking at a salary, and you can see, okay, last 10 years, there’s suburbs grown massively. Is it likely to grow massively again in the next 10 years or the next 15 years? You know, chances are, it probably isn’t. So maybe that’s actually a red flag for you. But again, you need to take into account so many different things, and the bigger picture as well. But this is really interesting data very, I guess, counter to what other people are saying. So I really appreciate you Jeremy coming on, and sharing this and giving us this insight because it’s gonna make us all better investors move. Yeah.

Jeremy 18:41
Yeah, I hope so.

Ryan 18:44
Yeah. So me and Jeremy have been doing a series talking about different data points, does it affect capital growth, doesn’t it a lot of this is kind of myth busting and counterintuitive. So go and check out some of the other videos that myself and Jeremy have done so that you can learn more about what actually does predict capital growth and what doesn’t. So check them out, and until next time, stay positive