What's behind property capital growth?

There’s no avoiding the news that Australia is in one of the longest and lowest low interest rate environments it’s ever experienced. As Tim Lawless, head of research at CoreLogic RP Data, has noted, the lowering of the cash rate to a record 2.25 percent back in February has brought interest rates to a level not seen since 1968, making home loans particularly affordable.

In what is good news for property investors, these lower interest rates are also helping to push up property prices. 

“With mortgage rates potentially moving even lower later this year, it stands to reason that home values will continue to move higher to new historic highs,” Mr Lawless said in the April 7 statement. 

However, as separate CoreLogic RP Data research has unearthed, it’s mostly Sydney and Melbourne that have seen this extensive growth. So what’s the truth — do low rates stimulate property capital growth or don’t they?

In fact, low interest rates are only one element that help stimulate capital growth in houses. Here are a few more of the key drivers of increasing home values you’ll want to keep in mind if you’re planning on doing a home loan comparison for investment purposes.

Employment opportunities

It’s no surprise Melbourne and Sydney are seeing such tremendous growth — just look at their job numbers. According to RP Data figures, Melbourne has created 3511 jobs a month since the start of 2009, while the Harbour City has created 3045 jobs a month in the same period. From the close of 2008, these cities have seen a 51.8 and 56.9 percent increase in property values, respectively. By contrast, Brisbane’s rate is a far lower 1090 a month, corresponding with its 8.6 percent increase in values. 

The fact is people need to work to live, and no matter how desirable a location is, if there aren’t job opportunities around, you’d be hard-pressed to find swarms of buyers scrambling for property. Generally, if an area is teeming with businesses looking to hire, it’s a good sign for local home values.

Population growth

Again, if we look at how much the cities of Melbourne and Sydney have grown in population in the last few years, it’s not hard to see why their home values have increased. The Australian Bureau of Statistics tells us New South Wales, for instance, grew by 103,200 between 2012 and 2013 alone, 78 percent of which took place in Sydney. Victoria grew by the similarly high number of 106,800 in the same period, 89 percent of which took place in Melbourne. 

Capital growth tends to happen in high population areas for a simple reason. More people in an area, whether through birth or migration, also means more people needing shelter. At the same time, this population influx tilts the balance of supply and demand toward the latter, so there are lots of buyers competing for a comparatively smaller amount of properties.

Liveability

This might seem at first like an intangible, slightly airy-fairy value. But in fact, liveability is made up of several different elements, some of them definitely quantifiable and others less easy to put your finger on. 

One aspect of liveability is having the necessary infrastructure and amenities that allow for easy travel, accessibility of essential services, and the fulfilment of some of the more basic human pleasures. Think bus services, train systems, highways, schools, shops or health care facilities. All of these facilities are critical to a great quality of life in modern-day Australia, and the closer a property is to them, the more likely buyers are to crack open the home loan calculator and pay more for it. 

There are also the more intangible aspects of liveability — namely whether an area is a vibrant, exciting and interesting place to live. Properties in areas with lots of entertainment options (cinemas, musical venues, special events), or filled with cafes and eateries tend to go up in value faster than those in locations lacking the spice of life.

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