Forums / Property Investing / Help Needed! / When choosing suburb, why consider past growth rates?

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  • Profile photo of echelon6echelon6
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    This is one thing I don't understand, it's in many experts' lists of things to check. But from what i know about financial theory and how markets work, the property market is definitely not weak-form efficient, meaning that past performance data gives no predictive power of future performance.

    So why are people telling others to look at the past growth rate of suburbs? If I'm choosing between two suburbs, why would I prefer one with a 7.5% long term growth rate over the other, with a 5.5% long term growth rate?

    Profile photo of Jacqui MiddletonJacqui Middleton
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    Because the expected extra value growth in the first year alone is 2%.  That's $2000 per $100k of starting value.  So a house worth $500k at the start of the year you would expect it to grow an extra $10k in the first year in the 7.5% growth suburb.  That might not sound that interesting, but when you think about the fact that over the years you are talking about compounding interest, the difference becomes enormous. 

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of CatalystCatalyst
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    I get where you are coming from. Lots of reports of projected CG just mirror what's happened in the past and this isn't always correct as there are many influentials.

    It's not just the long term growth you look at.
    For example if the next suburb over had a high CG over the last 2 years but your target suburb hasn't maybe it's due for a correction so might be a good place to buy.

    Profile photo of Scott No MatesScott No Mates
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    There ‘s a lot to be said about ‘price relativity’, that is, two adjoining suburbs will be very similar but one may be slightly more expensive. It will always remain so but the price will still be x% above its neighbour.

    Growth will still occur, prices will be skewed by development, new land releases or catastrophic events etc which will have a flow-on effect albeit short-term.

    Profile photo of echelon6echelon6
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    JacM wrote:
    Because the expected extra value growth in the first year alone is 2%.  That's $2000 per $100k of starting value.  So a house worth $500k at the start of the year you would expect it to grow an extra $10k in the first year in the 7.5% growth suburb.  That might not sound that interesting, but when you think about the fact that over the years you are talking about compounding interest, the difference becomes enormous. 

    sorry not sure what you mean – could you elaborate?

    Profile photo of ten_burnerten_burner
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    Hi echelon6,

    I believe the reason we look at historic growth figures, is because whats the alternative ? guess the future…the next best thing unless you have a crystal ball (realestate agents seem to have one lol) has to be to look at the past and this can give us a better indication of where that suburb might be headed in the future,

    again I wouldnt look at just growth figures to built a picture of whats going on in the area, I would use it in conjunction with surrounding suburb price information, major works projects in the area, population growth or decline, to give me a better understanding of whats happening

    Profile photo of Scott No MatesScott No Mates
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    re: jacm

    the point being is growth in suburb 1 would be $37.5k after yr1 but only $27.5k in the other.

    Profile photo of Josh AthertonJosh Atherton
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    Past performance is something to look at with a grain of salt. None-the less it is still an important part of conducting a due-diligence. This does not mean that if it has had poor growth in the past than so it will be in the future or vice-versa. However it can actually mean the opposite.

    When looking at past performance of a suburb, it can help you identify any growth patterns, then you have grounds to asses why or how those growth patterns occurred. It can also be a good indicator of the publics perception with that suburb. If good growth has occurred than you could make an initial conclusion that it is a favoured suburb over its neighbours. This helps you to know that this is now a good question to investigate as to why this is or is not the case.

    If the suburb boomed then it will give you the guidance to investigate as to why, and what drivers caused this boom. What were the demographics before or after, and does the suburb have any more of these drivers in the region planned for the future. Or, does any of the neighbouring suburbs that may not have followed trend show correlating signs pre any boom or once again vice-versa.

    Also it will help give you an indication to the buying behaviour and or patterns of that area. Are they slow and steady, or sporadic and more susceptible to general economic conditions.

    As I said, past performance is in no way in indicator for the future, but if you use past performance to help identify trends etc than it is a vital tool that should not be overlooked.

    Profile photo of echelon6echelon6
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    Thanks for the good replies, much appreciated

    Profile photo of Jacqui MiddletonJacqui Middleton
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    echelon6 wrote:
    JacM wrote:
    Because the expected extra value growth in the first year alone is 2%.  That's $2000 per $100k of starting value.  So a house worth $500k at the start of the year you would expect it to grow an extra $10k in the first year in the 7.5% growth suburb.  That might not sound that interesting, but when you think about the fact that over the years you are talking about compounding interest, the difference becomes enormous. 

    sorry not sure what you mean – could you elaborate?

    Sure can.

    Example 1:
    Let's say you buy a house worth $500k which grows at 5.5% per year.  After 1 year its value would be $500k x 1.055 = $527,500.  After 2 years its value would be $527500 x 1.055 = $556,512.50.

    Example 2:
    Let's say you buy a house worth $500k which grows at 7.5% per year.  After 1 year its value would be $500k x 1.075 = $537,500.  After 2 years its value would be $527500 x 1.075 = $577,812.50.

    Can you see how the property that grows in value at 7.5% is worth more money faster than the property that grows at only 5.5%?
    After the first year, house in example 2 is worth $10k more than house in example 1.  After the second year, the difference is more than $10k.  And the difference in their respective values becomes bigger and bigger each year.  This is because you are calculating a percentage increase upon a percentage increase, upon a percentage increase, upon a percentage increase etc.  This is known as a compounding effect.  

    As others have pointed out, past growth is not a guarantee that the same thing will happen in the future in your chosen suburb, but it is a bit of an indicator, and can be related to the desirability of the area.  If a property grows in 40% in value this year, it will certainly not mean it will do so again next year.  It simply means that suddenly a bunch of people decided they really wanted to live in the area (for whatever reason – maybe the town got a new train station and made it easier to live there or something) and when more people are competing to buy things, the sellers can put the prices up and take advantage.

    All this said, there is no point owning a place that you "think" will give you amazing capital growth if the rental yield falls way short of paying all the expenses and you find yourself forking out hundreds of dollars per week just to hang onto the property.  There is a balance  

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
    Email Me | Phone Me

    VIC Buyers' Agents for investors, home buyers & SMSFs.

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