Continuing our series on ‘knowing the cycle’, this week we will look at the relevance of past growth on future growth in residential property.
Often, somebody unfamiliar with the core economics of property investing will mistake the past (or recent) growth of a particular market as an indicator of future growth. Funnily enough, this is one of the key ingredients to what we refer to as the ‘herd mentality’. It is no coincidence that price growth and an increase in purchasing activity tend to come hand in hand.
All property markets will operate differently depending on a wide range of variables that make the research process intensive, yet of the 130+ variables that are considered before approving a project for our clients to invest in, not a single one indicates past growth as a precursor for future growth.
So what is it that past growth actually indicates?
Quite simply, recent high growth means that a purchaser is likely now paying a hefty premium in that market, compared to the purchaser who accessed the market at the bottom of the cycle.
Two recent examples of this include our Sydney and Darwin investors who accessed the market when it didn’t ‘look very attractive at face value’. Those people then reaped the fruits of the high levels of growth that occurred after their purchase.
In summary, those that purchase after growth are effectively rewarding the investors who accessed the market at the bottom of the cycle. For this reason, it is obviously quite important not to base all of your decisions around whether the area has experienced past growth or not, rather the fundamentals within the Blue Wealth research model that establish the foundations of future growth.