There are a lot of myths out there about capital growth, a lot of so called experts telling
you that if you see a certain data point or a certain trend in an area then that means
the area is going to grow. And so there are a lot of misinformation out there and a lot
of myths about capital growth. So today I am going to share with you the 10 myths about
capital growth so you can really understand how to research an area and not make the same
mistakes that a lot of investors make. Hey, I am Ryan from OnProperty.com.au, helping
you find positive cash flow properties and for all of this month we are talking about
suburb research to announce the launch of my new course Advanced Suburb Research which
you can check out at OnProperty.com.au/suburb if you need extra help researching a suburb.
So 10 myths about capital growth. What are we getting wrong when it comes to analyzing
an area in terms of capital growth potential? One major myth that is out there is that population
growth creates capital growth. The thought process goes that as more people move into
an area there is therefore more demand on the properties in those areas and therefore
properties will increase in value. but if you think about it population growth does
not necessarily indicate an increase in demand, it actually indicates an increase in supply.
Let us think about this situation. You have a new job opportunity in a new area that you
have not lived in before and you are going to move to that area. But let us say that
area is completely occupied, there are no properties to live in in that area. Are you
going to move into that area and be homeless for 6 months or a year while you wait for
a property to be built? Or are you going to wait until there are properties available
for you to move to an area? And that is the problem with population growth. People do
not move into an area without actually having a property to move to. Population growth does
indicate that yes there are more people moving to an area but it actually indicates there
is more supply in the area for people to move into so it does not necessarily relate to
capital growth or cause capital growth in an area. It can be correlated which means
you can see similar trends of capital growth and population growth but population likely
is not causing capital growth. The second myth about capital growth is that
income growth creates capital growth. People assume that if the income in an area is growing
therefore capital growth in the area is going to grow. This is another myth because it assumes
that because people are growing in income and growing in the amount of money that they
can borrow, they are actually also growing in stupidity and they are going to pay more
and more for properties in an area than the properties' actual worth. And that is not
actually true and if you consider this again, increasing income of an area means that people
in that area are becoming more wealthy and unless that area is the pinnacle of places
to live, chances are there are higher income earners who will eventually move to other
areas where they can buy a nicer property or live in a nicer area. So again, higher
income - especially if the income is growing in excess of the national average that can
be a good indicator for an area but it is not necessarily going to cause an area to
grow. Again it is correlation compared to causation. The best way to describe it is
in summer ice cream consumption increases and also shark attacks increase. So does ice
cream consumption cause more shark attacks to happen? Absolutely not. So correlation
is the two data points look like they are in the trend together; look like one is potentially
causing the other but that is not actually true. It is not actually the cause so be careful
of correlation when you are doing your research in the suburb.
And another issue with income growth is that it is just collected so sporadically. Once
in every 5 years, they do a census on one night of the year and the income for the area
is then assessed. And income as well is self-defined in the census. So if I am earning $50,000
a year, I might want to look good to the census people for some reason and I might say I earn
$120,000 a year. People can lie on the census so it is not super accurate data and it is
so infrequent that now we are in 2015, if I am going off census data, it is from 2011,
so it is 4 years old. So you are looking at data that is 4 years old, is it going to predict
capital growth for the next year or two? Chances are, probably not.
The third myth about capital growth is that you can accurately predict capital growth.
The best person that I would like to refer to when it comes to capital growth, someone
who really understands the data and understands how data affects capital growth is a guy by
the name of Jeremy Sheppard, who created the tool dsrdata.com.au. He said, "I deal in capital
growth every week. I have examined literally millions of data points and I am still not
game to publish predictions of growth with confidence." If Jeremy is not able to do that
and this is a guy that really understands data, it is not just someone who is trying
to be an expert and say this area is going to grow because there is infrastructure in
the area and all these loose sorts of things; He actually digs down and really understand
it. If he cannot predict growth and has access to millions of data points, how are we as
average people or how are the property marketers who say this is the next best suburb, how
are they accurately going to predicate property growth? So if you ever see someone saying
this area is going to grow by 14% in the next 3 years or 14% per year for the next 3 years,
just take it as estimation. Take it as a prediction and it could be based on false assumptions.
It could be based on the myths of capital growth and could be completely untrue.
The fourth myth about capital growth is that post growth is a predictor of future growth
for an area. They say that if an area has grown well in the past then that area is likely
to grow well in the future. And the problem that I have with this is that even though
again it correlates in some situations, this is not a telltale sign of capital growth.
There are areas that grow really well in the past and then do not grow well in the future.
There are areas that grow slowly in the past and then grow really well into the future.
There are areas that are average and grow average. There are areas that are average
and grow really high. There are areas that are average and then decline. There is everything
from the spectrum that you can imagine in terms of comparing past growth to future growth
that is really not a predictor of capital growth. Definitely past capital growth is
something to look at and comparing the past 10 years growth to the past 3 years and 12
months is very valuable. But it is one data point that you should look at among many data
points. And I will talk more about the different data points inside my course on Advanced Suburb
Research which you can check out at OnProperty.com.au/suburb. But yeah, past growth can be an indicator
but again it is correlation not causation and so there is never a guarantee that that
is going to be the case. You need to do more research. You cannot rely on that one statistic.
The fifth myth about capital growth is that city growth predicts suburb growth. So right
now everyone is talking about Sydney and Melbourne which are both growing extremely well, I think
12% per year, 11% per year or more. So we are always talking about city growth; how
is Sydney growing? How is Brisbane growing? Brisbane is the next hot spot, blah blah blah.
Brisbane is a big place. There are over 2 million people in Brisbane and there is a
heck of a lot of suburbs in Brisbane and some suburbs will perform better than others. I
have heard talk about inner city Brisbane not going to perform so well because there
is going to be an oversupply of developments. However, surrounding suburbs of the inner
city where the majority of houses, they could grow more so than the inner city so just because
a city grows does not necessarily mean that every suburb in that city is also going to
grow. So you need to look at individual suburbs when you are doing your research. take into
account multiple different data points when doing your research into a suburb and do not
just assume that Sydney is growing really well so if I just throw a dart at any suburb
in Sydney, buy any house, then that is going to perform. You really need to do your suburb
research. Sixth myth of capital growth is that capital
cities grow faster than regional areas. I did a video on this and I did some research
into it about a year ago and even though you look at how a city performs compared to the
rural areas in the state as a whole. Each city performed better than its rural state
counterparts. Perth performed better than WA. Sydney performed better than rural New
South Wales. But that does not mean that Sydney has always outperformed regional areas. There
are regional areas that outperform the city of Sydney. And there were situations where
the regional areas of a state outperformed other capital cities like regional areas in
WA outperformed Adelaide or something like that. I cannot remember the statistics so
we would have to go back to that video to have a look. But yeah, sometimes, like if
you look at it as a whole - that is the case of Sydney is going to outperform its rural
regional areas, as a whole, from the past. That is what we have seen. so not necessarily
into the future. We do not necessarily know. But the problem is as an investor, you can
invest into a city and you can invest into an entire state of regional areas. You are
not putting your money into every single town in New South Wales. You are buying property
in one town and there are regional towns that can outperform capital cities. So that is
a myth. The seventh myth about capital growth is that
positive cash flow properties do not grow. Again this is a generalization looking at
positive cash flow properties across multiple areas compared to negatively geared properties
maybe in certain suburbs of capital cities. There are definitely positive cash flow properties
that do grow in value and again it comes down to certain areas that can outperform capital
cities but there are regional centers that might not grow. And so because positive cash
flow properties are found more in regional areas, if we do not use suburb research you
could buy a property that does not grow. So it is very important to do your suburb research
before buying a property especially because you are so limited with positive cash flow
properties as where you can buy. But positive cash flow properties can definitely grow and
if you choose a positive cash flow property in the right area, not only are you getting
the positive cash flow but you are getting the capital growth as well. And just to debunk
this myth further, I run a membership called Property Listings, where I share positive
cash flow properties with my members every single day and I find properties in Sydney
that are positive cash flow. So if you are saying capital cities grow up but positive
cash flow properties do not, What happens when you find a positive cash flow property
in a capital city. If you are assuming that capital cities are growing, the negatively
geared properties around it are growing, well then positive cash flow properties are also
likely to grow. So do not believe that myth about positive cash flow properties and capital
growth. You do need to do your research. Myth number 8, we are on the back end now.
Negatively geared properties are more likely to grow. And this is something that people
say usually to get you to invest in negatively geared properties. They say do not invest
in positive cash flow, you are more likely to get capital growth if you invest in negatively
geared properties. But this is not the case. You could invest in a negatively geared property
in a bad area and it still will not grow. Just because something is negatively geared
or positively geared is not going to affect its capital growth. Capital growth has so
many dynamics that you cannot just say because it is negatively geared it is more likely
to grow than a positive cash flow property. that is just absolutely untrue. I have seen
so many people - friends of mine, buy negatively geared properties. They overpay for the properties,
the properties do not grow as they were promised and they end up having a property 5 years
later that is worth less than what they paid for. So there are a lot of situations where
negatively geared properties do not grow. I guess the reason people say this is because
you have a larger spectrum of properties to look at because the majority of properties
in Australia are negatively geared so if you know how to do your research, but again it
comes down to being able to do your research. If you know how to do your research you have
more suburbs to choose from and you can choose the suburbs with the best chance of capital
growth if you focus on negatively geared whereas with positively geared, you have a limited
spectrum of areas that you can invest in. But again if you do your research, choose
an area that is more likely to grow. You can also get capital growth. So do not believe
people when they say you have to invest in negatively geared to get capital growth because
it is just not true. You can lose money through negative gearing and it can go down in value
as well. Myth number 9, second last one. The best option
is to never sell. This is talking about long term capital growth in investing in property.
They say your best option is to hold on to the property forever and never sell that property.
And I think this myth comes from the fact that people buy a property, it grows and they
sell it. they generally do not do all that much for the money and then 20 years later
they are assessing the situation and they say, I put that property for $100,000, sold
it for $200,000 and now it is worth $1 million. Oh my goodness! I should have just held on
to that property! But This is really a fact that they have not actually invested their
money as well as they should have. You do have cyclical growth in areas like a worm.
Areas go up and they have periods of excessive growth like what we are seeing in Sydney and
Melbourne at the moment. And then they could stagnate or then they can fall and they can
just stay pretty passive for years at a time. And so to not always sell, I mean to never
sell a property is not always the best situation because if you have experienced rapid growth
and it is about to decline or it is stabilizing, you do not see anything happening in the next
5 years, it may be actually better for you to pull that money out, reinvest that money
in an area that has not yet grown excessively but has the opportunity to grow. And so there
is an opportunity course keeping your money in a property; it may be better to get your
money out and reinvest it. Obviously if you get your money out and go and spend it or
do nothing with it and 5 years later the area picks up and you are looking at it 20 years
into the future then maybe you should have held on to it. But that is just because you
did not do what was best with your money over time. So do not feel like you always have
to hold on to a property. There definitely are situations where it is best to sell and
reinvest into a better opportunity but you are going to need to assess that for your
own situation. And the last myth that I have for you today,
myth number 10 is that because I know an area I can tell if it is a good investment. Because
I live in an area, I know the suburb; I know that this area is a good investment because
I want to live here. You do not actually know that. Just because you want to live there,
just because your kids go to school in that suburb or because it is closer to work or
you know the cafes in the area does not mean that the market as a whole, knows all of that
stuff and has the same desires as you so just because you live in an area, that is not a
predictor of capital growth in that area. I have seen a lot of people invest where they
live and have not seen the returns that other parts of the country have. So just because
you live in an area, just because you find it desirable does not mean that more and more
people are going to find that desirable and it is going to create capital growth for you
in the future. So there you have the 10 myths about capital
growth. I will just cover them off again really quickly because we did go through a lot. The
first myth was that population growth creates capital growth, not true. Second myth, income
growth creates capital growth; correlation not causation. Third myth, you can accurately
predict capital growth. Yeah, not really. Number 4 is that past growth is a predictor
of future growth. Number 5 is that city growth predicts suburb growth. No, you need to do
your own research into the suburb. Number 6, capitals of cities grow faster than regional
areas and while we compared this to Sydney versus New South Wales as a whole, we understood
that we are investing in one property in one area and there are regional areas that grow
faster than suburbs in capital cities. Myth number 7 is that positive cash flow properties
do not grow. Definitely not true if you are buying in a good area after doing our research.
Number 8 is negatively geared properties are more likely to grow. Not true, you just have
more bad properties to choose from and more good ones as well obviously. But buying negatively
geared does not guarantee you more growth. Number 9 is that the best option is to never
sell and we discovered that there are some times when it is better to sell and invest
in another opportunity. And number 10, because you live and know an area that is going to
grow or that you can accurately predict its capital growth is just not true.
So there you have 10 myths about capital growth. I hope that you do not make those mistakes
and you hear people saying those things, you can know now that is not actually true and
you know that if you are going to invest in an area you need to go and do research into
that area and discover whether or not that area is going to be a good place to invest
in. And if you need help doing research into an
area then I do have a one-page checklist inside my Advanced Suburb Research Course. This checklist
has all the key data points that you need to look at as well as the trends in the data
points. And I have videos explaining every data point, how to collect it for free. All
the information you will be collecting is available for free online. How to collect
it for free, how to analyze it and how to understand the suburb and how to compare suburbs
so you can choose the best suburb to invest in with the lowest risks and the highest chance
of return for you. It is a super valuable course. I am really proud of this course.
I think it is going to help a lot of people understand how to do suburb research better
and how to compare suburbs to each other and it is going to stop a lot of people investing
in bad areas. And so people are going to get a lot out of this course. I hope you will
too. Go ahead and check it out at OnProperty.com.au/suburb, absolutely awesome course. Do not get suckered
by these myths of capital growth but learn how to do the research yourself. Again that
is OnProperty.com.au/suburb. Until next time, stay positive!