The Truth About Capital Growth Statistics
Capital growth statistics aren’t as perfect as some investor are led to believe. We show you why capital growth stats are flawed and how you can still use them as a part of your suburb research
People tend to have a fixation with capital growth trends of an area as well as hot spotting and trying to find the right suburb that’s going to have the right capital growth. But sometimes, capital growth trends that you read online or in magazines can actually be misleading. So, today, I have with me Ben Everingham from Pumped on Property, my buyer’s agent of choice, to talk about how the data can be misrepresented as well as some things that you guys can do to better prepare yourself and to know more about an area before you invest.
Ryan: Hey, Ben. Thanks for coming in today.
Ben: Good day, Ryan. Thanks for having me.
Ryan: I actually said, “Thanks for coming in.” but, I’m actually in Ben’s office right now.
Ben: Thanks for coming here, bro.
Ryan: I just moved to the Sunny Coast. Ben finally convinced me to move up here from the Gold Coast. But at this time, we have bad internet, so we couldn’t do it over the phone. So, I had to come in person.
Ben: The one spot on the coast without NBN.
Ryan: Yeah, so, 3-6 months, man, and we’ll be back with our 2 heads on the screen. Oh, I’m spilling tea.
Okay, back to the topic. So, capital growth can be misrepresented because, generally, the way capital growth is measured in an area is based on what sales occurred in a month, how much were those properties sold for and let’s average them out or look for the median in those properties. But, what can happen over time is you can have anomalies that happen in an area.
Let’s just use a super extreme example and let’s say you’ve got an area where a property sell for $200,000 each on average. Pretty low. Some dude comes in and builds these mansions that are worth $1 million each and sells a whole bunch of them all in one month. And then, all of a sudden, you’ve gone from $200,000 to an average of $500,000
Ryan: Yeah. And so, you can say, “Oh, look! The capital growth in this area is huge because properties have quadrupled in value. But really –
Whoa! I’m pressing the button.
Ben: Whoa! We’re losing you again! I just got a standing desk and it’s epic. But, it’s also dangerous for anyone that hasn’t used it before.
Ryan: This is the funniest episode ever.
Yeah, so, that’s a really extreme example and generally doesn’t happen like that. There’s extreme cases where that has happened. But, yeah, new entries to the market as well as high-end properties being sold and low-end properties not during a certain month. There’s a whole bunch of different things that can actually throw the data out and actually make it look like there’s capital growth happening in the area when really, all those $200,000 properties, they’re all still worth the same amount and they haven’t actually grown.
Ben: Can I jump in on that? Because there’s a heap of things that heavily skew the data. Like, a beach side suburb with non-beach front properties, for example. In a city, properties where there’s premium pockets and then there’s main roads. Differences can be $1 million between a shitty road and a premium road. Streets with housing commission and in adverse, a street without housing commission. Houses on schools.
There’s so many things that dramatically throw out the data because when something that doesn’t represent the most owner-occupier pillar in the market, everything else from that is going to be thrown off because of that product.
Ryan: Yup. Basically, the concept that we want to get across to you guys is that capital growth data, while we both still use it every single day to look at different areas and it’s still an important part of our research, it’s not the be-all-and-end-all that sometimes people think it is.
Ben: 100%. People put too much emphasis on it. I used to do it myself where I’d look at the properties that I bought about every 3 months and look at the quarterly growth data. Now, I know better. I don’t waste my time.
Ryan: So, really, now it comes down to helping you guys to – there’s some things that you can do to better research an area other than capital growth. I just think, still on the topic of capital growth, me and Ben are probably pretty similar in that. Well, you talk about how you look at capital growth because you explain it better than me.
Ben: Yeah. I look at capital growth as one indicator in a series of probably 31, 32 indicators that I look at before I even start jumping on realestate.com and checking out a property. It’s important, but can be over emphasized if it’s the only indicator that you’re tracking.
What I look at, which kind of contradicts what we’ve just talked about and we were having a laugh about this a second ago. But, I still do look at the 10-year capital growth rates and go, “Well, if I want to buy in a suburb that’s got an average annual capital growth rate of at least 10%, oh sorry, 10%? Find me that suburb and I’ll buy. Sorry, 5%. 5% average annual capital growth rate. For example, Sydney. It’s important for me as an investor to know that historically, that suburb has performed over a period of time.
While the numbers might be significantly skewed, it’s still important to understand that. And then, I like to look at the 12-month growth personally and I like to see that growth to be a little bit above the average. But then, I like to look at the 3-year growth and without over complicating this, the 3-year growth to be slightly below the 10-year average.
That combination of doing those little things means a number of things to me which I’m not going to go into today because it’s going to confuse the hell out of everyone. And Ryan’s looking at me going –
Ryan: No, no, no. But basically, yeah, you’re looking for an area that has consistent steady growth over the years that hasn’t grown significantly over the last 3 years because you haven’t missed out on the best opportunities, but that started to pick up in the last 12 months so hopefully you can catch the upper trend there.
Ben: Why didn’t I say that? I used 400 words to say what you just said in 20.
Ryan: So, we still look at capital growth and I do the same as well as try to avoid suburbs that have clear devastating capital growth trends where properties have gone from worth $1 million down to like $400,000 like mining towns that used to be really hotspots, but now aren’t any more.
There are still uses for it, but once you’ve gone through and looked at capital growth, narrowed your suburbs down, there’s more that you need to do. I think the easiest thing that people can do who are just everyday investors and who may not have access to all the data that we have access to, is to go to dsrdata.com.au and look at the DSR score there.
Which is a score out of 100. They do the work for you and they look at a variety of different things. Like, vacancy rates, days on market, discounts on properties and they kind of put it into this one figure about how much demand there is in the area over supply. So that’s a really interesting one to look at. But, again, that’s just one out of other things that you probably should look at.
Another one would be vacancy rates.
Ben: I think vacancy rates are obviously important. You know, wanting it to be below 2%. The number one thing that I personally spend most of my time looking at these days, once I’ve got to that suburb level, is the sales history data. And there’s a number of places online where you can find this for free, onthehouse.com.au. You can also find on realestate.com.au – is really picking up their game with that.
Ryan: Yeah, they’ve got heaps of sold stuff now.
Ben: You know, it used to be 10% of the properties in there were listed with their price. Now, it’s probably 50%, 60% of the properties that are sold in the suburb. If there’s a couple of hundred properties sold in the suburb per year and you’re getting 50% of the data, it’s a pretty decent portion size to be able to accurately look at certain things.
The reason I like the sales data is because you could have seen a property listed online for $500,000. Then you go in the data, and this happens all the time, and it’s like, that sold for $420,000, what’s up? And then I’ll go and find some other properties that, in my mind, were comparable and you’ll be kind of looking and going, in a lot of suburbs around Australia right now, the illusion that stuff is selling really quickly and very high. But, in fact, when you look at the actual data and what it’s selling for and tracking that full lifecycle, prices can be more affordable than you expect. That’s got to do with average vendor discounting, which is another indicator that DSR score looks for and we look for as well.
Some suburbs in Sydney and Melbourne right now have an average vendor discount of 10%, 15%, 20%. Which means on $1 million property that’s listed on realestate.com, at a 20% discount, you’re buying for $800,000. That’s a trap for people that don’t know the marketplace. These little things, like understanding these types of indicators can really help with future performance of properties.
Ryan: Yeah. And just because an area has good capital growth doesn’t mean any property you buy in that area is going to be good. If an area is growing, that’s great. We want an area that’s growing because we want to ride that growth. But, we also want to buy the right property at the right price. Ideally, slightly under market value. And so, as Ben was saying, going through the previous sales history and actually looking. Because, at the moment, computers can’t do it.
They can’t understand that a 3-bedroom house, 2 that are the same size, but one is just painted white and looks fresh even though it’s not newly renovated and one’s got pink walls and holes in the walls and stuff and why that was cheaper. Computers can’t do that yet. So, by going through and looking at all of the properties that are similar to the price range that you are looking at, that’s how you really understand, okay, what are properties valued for in this market and what should I be trying to achieve.
Ben: And that’s really important, the statement you just made. Let’s pretend you can find the 3-bedroom, 1-bathroom unrenovated, pink ugly home. And you know that if you paint it white, you know there’s a $30,000 difference in price. But, doing that work is only going to cost you $10,000, that’s a much more accurate predictor of what something could be worth rather than looking at a number that may or may not be right and going, “Well, it’s 5% capital growth per year in this suburb.”
I think the guys at The Property Couch said it best when they said that 70% of the heavy lifting is done through the suburb you buy in and timing the market. But that leaves a 30% return over a 10-year period based on these specific things around buying the right property at the right price in the right street with the right sorts of things that owner occupiers are looking for.
Ryan: I think realistically, even if 70% of the heavy lifting is done, to be able to understand the data enough that you can actually accurately purchase in the exact right area is really difficult. Even all the RP data and stuff got heaps of stuff wrong in the last couple of years.
I think for most people, it’s unrealistic to get that correct. We do our best, yes. But the stuff you can control is buying a property where you can create growth or where you can create positive cash flow and make money that way. Looking for those opportunities. Or, you can buy under market value, that’s something that you can do as an investor.
Ben: I just finished a book on the weekend. It’s the new Tony Robbins book. And regardless of what you think about Tony, the book was called, “Unbreakable” or “Unbroken”, I think it was called, sorry. It was basically a condensed version of that behemoth money book that he wrote last year. Cut down for people like me that don’t want to read the 7,000 pages that he wrote.
Ryan: TL; DR?
Ben: Yeah. He’s kind of talked about a number of things related to the stock market that I think are relevant to the property market. One of the major things was he went and interviewed the top 10 hedge fund managers in the world over the last 50 years based on their performance in the market over time. The number one consistency between them all was it’s about time in the market, not timing the market.
So many people I talk to are holding out for the bottom or freaking about the top. You don’t want to buy at the top and you don’t want to buy on the slide. But, time in the market, if you’re looking at property the way that you should, which is 10, 15, 20-year returns, who cares what happens in 12 months? Seriously, get over it.
The only people that care about it are the people writing about because they’ve got to sell ads and papers to do it. But, what does it matter if the property goes down 10% in 1 year and then up 20% the next year? As a long term investor, it should just be the trend over a 10-year period of time. I think that’s what a lot of investors freak out about. You’re never going to time the market perfectly. If you probably missed the best 2 years in the last 20 years in the property market, you’ve probably missed out on 40% growth just by being out of the market for 2 years. So, get real about this stuff a little bit as well.
Ryan: Yeah. To sum it up, I feel like we went out on a [inaudible 12:23] there. We just get so passionate talking to you guys about this stuff.
Ben: I’m actually stoked about this. I’m [inaudible 12:29] about this one.
Ryan: So capital growth trend, while we use them and while they are very helpful, they shouldn’t be considered canon and 100% accurate. You should take them with a grain of salt and do a lot of other research as well. As well as focusing on the things that you can actually do as an investor to make a difference on your property or to make a difference on the way that you invest.
So, don’t focus too much on what you can’t control. Do your best there, to try and time the market, but as Ben said, being in the market for longer as well as purchasing properties where you can actually have an influence on how much they’re worth. I think that’s where most people are going to get the most value.
Ryan: Sweet! That’s it for today, guys. Until next time, stay positive. Peace!