The current state of the global economy makes it difficult to predict where property prices would be in three months, let alone seven to 10 years into the future. With the economy in the doldrums, is it too optimistic to think that the average Australian median house price, currently around $447,875 could double in value to $895,750 in 2019 and again to $1,791,500 in 14 to 20 years time?
Michael Yardney, director of Metropole Property Investment Strategists says there is no reason why the large majority of investors who make an educated purchase in 2009, will not see the value of that property double within the next seven to 10 years (or one full property cycle).
"In order to examine the factors which have had an impact on property prices doubling every seven to 10 years, you need to look back at history and the longer you look back, the more accurately the seven to 10 rule actually does play out," says Yardney.
Cameron Kusher, research analyst for RP Data says there are plenty of examples where property prices have doubled within a seven to 10 year property cycle. He draws upon the extreme growth achieved in Tamarama, a waterfront suburb 10kms from Sydney's CBD.
"The median house price in Tamarama, for example, has increased from $455,734 in November 1998 to $4.4 million in November 2008. Over this 10 year period (ending November 2008) the suburb averaged an annual growth of 25.45%," says Kusher. "That's a total of 865% growth over last 10 years."
This means the suburb doubled in value about every 3 years during this 10 years time frame.
The rule of 72
For a simple way to work out how long it has taken a property or an area to double in value, divide 72 by the annual growth rate. If you want to know how many times it has doubled over a particular time frame replace the annual rate by the average annual rate over the same time period.
If you think a property will grow 10% per annum, just divide 72 by 10% and that tells you that it'll take 7.2 years to double.
Source: Michael Yardney, director of Metropole Property Investment Strategists
Suburbs grow at varying rates
Although this Tamarama is backed by some very desirable characteristics such as proximity to the CBD, affluent residents and strong demand, its freakish levels of growth cannot be used as a benchmark for each Sydney suburb over the last 10 years.
Sydney as a whole has grown by an average of 6.83% each year for the past 10 years, according to Residex in December last year. While this meant that overall, Sydney property price have taken about 10 years to double in value, individual suburbs have grown at different pace.
Despite being exposed to the same economic factors as Tamarama, suburbs like Liberty Grove in Sydney's west hasn't grown as fast, due to local influences and individual characteristics.
Liberty Grove is located around 17kms from the CBD with no direct access to waterfront and no direct train access into the city.
According to RP Data, Liberty Grove had a median house price of $362,663 ten years ago (November 1998). The suburb has grown an average of 4.20% per year for the last 10 years to reach a median house price of $547,500, as at November 2008.
"We can see that the median house price in Liberty Grove has not yet doubled since 1998. In fact, it is likely to take 17 years in total for this to happen," says Kusher.
Kusher points out that Tamarama's stand out performance have been driven by its advantageous features - ocean views and easy access to the CBD.
"Tamarama is generally a very aspirational market and over the past five to seven years, especially since the 2001 to 2003 property boom and stronger economic times, the values in waterfront suburbs have been driven up substantially," says Kusher.
"The increased demand for waterfront properties over this 10 year period meant that people paid (and continued to pay) top dollar to get a property on the ocean front."
Why the 7-10 year rule doesn't always apply
Margaret Lomas, the founder of Destiny Financial Solutions says there are a large number of growth factors to consider when working out how long it takes property prices to double, and the seven to 10 rule isn't accurate 100% of the time. She saus this is extremely important for investors who may rely on current annual growth rates to predict to viability of a purchase.
According to Lomas, property growth occurs in phases, where some property will double in one ten year period and remain flat in the next.
"If all property prices doubled each and every seven to 10 year cycle, the average block of land in Sydney that was worth 1 pound in 1776 would now be worth around $18 million," says Lomas.
"Yet I have property in my own portfolio which I have had for 10 years which has only gone up by a total of 25% while others in my portfolio I have owned for five years which have gone up by 250%."
Macro, micro influences
Michael Yardney, director of Metropole Property Investment Strategists says there are both macro and micro factors which help determine how long is takes for property prices to double.
The big picture factors are those nationally and globally, such as supply and demand, consumer and business confidence, interest rates and affordability, availability of finance, Government incentives, the cost of renting and the global economic markets.
"On the micro levels, it is the economy of each state which can affect the rates at which property prices grow," Yardney says.
"NSW for instance has been experiencing economic problems for a few years now, so buyers haven't been feeling as confident to invest there. On the other end of things Brisbane and Perth experienced a boom in employment before 2006 which contributed greatly to the price boom during the same year."
Lomas says factors such as population growth, diversity of industry and council commitments to development, can also have a strong impact on how long it take property prices to double.
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