What is the ‘capital growth rate’? Investment terms explained
You’ll hear investors getting excited over the concept and experts claiming they can get you it, but what exactly is ‘capital growth’? And what is the capital growth rate?
Capital growth is the increase in value of your property, or portfolio of properties, over time. Capital growth usually affects an entire area, although individual properties may be affected to different degrees.
Your capital growth is the amount that your property has increased in value by, or the difference between the purchase price (or market value price) and the current estimated value or prospective selling price. Properties in Australia have been known to more than double in value, however they have also been known to decline in value with steep falls not unheard of.
Usually, strong capital growth suburbs, or areas where the properties have increased in value strongly overall, are called ‘hotspots’ or ‘growth suburbs’. Capital growth suburb lists, and forecasted capital growth lists based on estimations by buyer’s agents, economists and even demographers, are regularly published in a number of media outlets.
When looking at the rate of capital growth, this is usually looked at on a percentage per annum basis. That is, how much capital growth did you achieve or will you achieve on average per year of ownership? As property is a long term investment and does not usually increase in value in the same rate every year, this figure is important for considering whether the property did well overall.
Some years may have achieved a 7% plus capital growth rate, easily putting the property on the path to doubling in 10 years. However, it may have achieved less than 2% for five years of the ownership. This paints a very different picture of the fruitfulness of holding that property. However, do remember that growth compounds.
What counts as a “good” capital growth rate is up for debate. Each investor will consider different figures as worthwhile investments for their portfolio, and of course rental yield is a factor worth considering as well. When considering the holding costs and take rent into account and capital gains tax, then balanced off against the capital gains leftover, this is the figure you can consider your profit.
There are a number of free calculators online that can do the sum for you to show you the capital growth rate over time.
How much capital growth is achievable in a real estate asset can vary dramatically across the country and finding areas that deliver more growth than others is the pastime of many professional investors. For instance, here’s an explanation of how supply and demand can affect capital growth potential. Remember, hindsight is 20/20.
