Key Takeaways
High Land to Asset Ratio
Capital growth comes from the land, not the building. Prioritise properties where the land makes up a significant portion of the total value.
Constrained Supply and High Demand
Look for areas where new construction is limited but demand from owner occupiers is consistently strong and growing. Scarcity is your friend.
Strong and Diverse Local Economy
A robust local economy with multiple industries, job growth, and infrastructure investment attracts people and creates sustained demand for housing.
First, what exactly is capital growth
Capital growth, also known as capital appreciation, is the increase in the value of an asset over time. For property, it is the difference between the price you pay and the higher price you could sell it for in the future.
This growth is driven by demand. When more people want to buy in an area than there are properties available, prices are forced upward. The key is to identify areas where this demand is not just temporary, but sustainable for the long term.
The 3 Key Drivers of Sustainable Capital Growth
These three drivers work together to create the ideal environment for long term property price appreciation.
High Land to Asset Ratio
This is the single most important factor. Buildings depreciate. They get old, require maintenance, and go out of style. Land, on the other hand, is finite. It is the land that appreciates in value, and you want to own as much of it as possible relative to the total cost of your property.
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What it means The Land to Asset Ratio is the percentage of your property's total value that is attributed to the land alone.
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What to look for Aim for properties with a high ratio. A freestanding house on a good sized block will have a much higher ratio than a new unit in a high rise tower, where the land value is split between hundreds of owners.
Example
Imagine two properties, both worth $700,000.
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Property A A house on a 600sqm block. The land is valued at $500,000 and the house at $200,000. The ratio is 500k divided by 700k which equals 71%.
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Property B A new apartment in a large complex. The unit is valued at $650,000 and your share of the land underneath is valued at $50,000. The ratio is 50k divided by 700k which equals 7%.
Property A has overwhelmingly more potential for capital growth because you own the appreciating part of the asset, the land.
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Constrained Supply and High Demand
This is basic economics. When something is desirable and there is not much of it, its value increases.
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Constrained Supply Look for areas where it is difficult to build more housing. This could be due to geography, such as being hemmed in by water, parks, or mountains, or council zoning restrictions that prevent high density development. This scarcity protects existing property values. An endless supply of new land on the urban fringe or an abundance of new high rise apartments will always suppress price growth.
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High Demand Demand is driven by people wanting to live in an area. Look for suburbs with strong owner occupier appeal, meaning people want to live there for the lifestyle, not just invest. These areas are typically close to desirable amenities, have good schools, a strong sense of community, and are aesthetically pleasing.
A Strong and Diverse Local Economy
A property is only worth what someone can afford to pay for it. A strong local economy ensures that people have secure, well paying jobs, giving them the confidence and financial capacity to buy homes.
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What to look for Seek out areas with a diverse range of industries. A town that relies on a single employer or industry, such as mining, is vulnerable to economic shocks. An economy based on multiple pillars, such as healthcare, education, professional services, and technology, is far more resilient.
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Key Indicators Look for signs of a thriving economy, such as significant government and private investment in local infrastructure, such as new hospitals, transport links, or schools, and consistent job growth.
Frequently Asked Questions
While rental yield is important for cash flow, it should not be your primary focus when seeking capital growth. Properties with the highest yields often have the lowest growth potential, for example apartments in oversupplied areas. A balanced approach is best, but growth should lead your strategy.
Property is a long term investment. You should plan to hold an asset for at least 7-10 years to ride out market cycles and allow these fundamental drivers to work their magic.
Trying to time the market is speculative and risky. A far more reliable strategy is to focus on time in the market, buying a high quality asset in a great location and holding it long term.
Disclaimer: The information provided in this blog post is for general informational purposes only and does not constitute financial, investment, or legal advice. Property investment involves risks, and you should seek professional advice from a qualified financial advisor, accountant, or lawyer before making any investment decisions. The examples provided are for illustrative purposes only. All data, including property values and economic indicators, should be independently verified from reliable sources such as the Australian Bureau of Statistics or SQM Research.
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