Capital Growth, What Causes it to Happen?

Property investing gives us two main benefits: cashflow (for passive income) and capital growth (for wealth creation). In my opinion, focuses only on one of the benefits causes investors to buy incorrect type of asset. For example, those who focus mainly on cashflow might purchase a super high-yielding high-risk property such as regional property.

On the contrary, those who focus solely on capital growth might purchase an expensive property that generates super low yield, which in itself is also a high risk simply because the holding cost is very expensive. All it takes is just either the owner's (or the tenant's) financial circumstance to change, and the owner can very well be forced to sell his/her investment property early.

In this opportunity however, I want to talk specifically about capital growth, and what causes it to happen. The main cause of capital growth is obviously very simple: buyers who are willing to pay more than the previous buyers. Think about it. For example, in 1990 a seller might sell a property for $90k and someone was willing to pay for it. In 2020, that buyer now sells the same property for $900k and someone is willing to buy it. Thus, the price becomes $900k.

It always baffles me what causes this to happen. Why would someone pay 10x more for the exact same property that is now arguably older. What causes this demand? Is it really the location? I have seen properties or areas that are not close to a lot of things or within good school zones, and yet the capital growth is still very strong. From my observation, what drives up demand is really one thing and one thing only: PERCEPTION.

Someone wants to buy in a particular area is all due to the perception. The reality is, most people are followers. How many times have I heard (when I go to a BBQ or friends/families gatherings and we start to talk about property) my friends and families would say things like, "I heard this suburb or that suburb is good...I heard it will be a new growing area", etc? It is obviously easier to just copy and follow other people rather than carving our own path, isn't it? And just like that, one would buy in that area. Now, imagine if I am the seller of one of the properties in that currently-talked-about-hyped suburb, I can easily increase my price and people will still buy.

So, what can change someone's perception? Obviously many things contribute. Every income demography has a different perception of various areas/suburbs. A First Home Buyer would not look into the expensive suburbs because they know they might not be able to afford it (for now). A young family might be looking to buy in areas with good schools for their kids. A downsizer/retiree might look onto areas that have strong community feel to keep them entertained, etc.

Therefore, the answer is not always that simple. If I can draw few observations, few things that can change someone's perception (thus, drive demand) are:

1. Income. As one earns more, he/she will have a different perception towards certain suburbs that he/she did not consider previously.

2. Community. People want to be close to their friends and families, and one would do whatever they can to be able to buy in certain suburbs because to this.

3. Personal needs. A young family would certainly want to buy in good school catchments. The same suburb will not be looked at by downsizer/retiree simply because it does not suit their need.

4. Media and marketing. As much as I hate saying this, but like I said, most people are followers, and they can easily be swayed by media and marketing. Why do you think a certain suburb/location suddenly become a hotspot? Isn't it because of the marketing and how often that area/suburb is talked about everyday? When big news media outlet or TV breakfast shows report on certain suburbs, I can almost guarantee you that people would suddenly look into them.

CONCLUSION

Location, location, location seems to always be the key mantra in buying property with potential capital growth. However, in my opinion, "location" is really only an effect of a cause. The cause itself is actually perception. When one can change one's perception, then one can profit from capital growth. Therefore, maybe, if we can cater for the 4 items above, we can change one's perception, thus building demands.

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