When is property value growth "real" value growth? Despite price fluctuations over the last nine years, CoreLogic RP Data has reported that only three capital cities in the country – Sydney, Melbourne and Canberra – have experienced a real increase in dwelling values. How does that work?
When you hear or read about the percentage by which property values grew in a given period, the figure often presented is the nominal growth rate. This is simply the increase in the monetary value of the property. For example, if an $800,000 property grew by 3 per cent over a quarter, its value would then be $824,000.
This is all well and good, but it doesn't factor in the question of whether or not the purchasing power of a dollar has changed over that same quarter too – an important point for property owners. Accounting for inflation (the percentage increase in prices of a specific basket of consumer goods, known as the consumer price index) gives us the real growth figure.
If, for example, inflation was 3 per cent as well, the real growth figure would be zero – the number on the valuation is higher, but you can't buy any more with that $824,000 than you could have with $800,000 three months ago. In terms of purchasing power, the two figures are equivalent.
Since the end of 2008, Melbourne dwellings have increased in real value by 63.5 per cent, according to CoreLogic data. The nominal increase was a far higher 95.3 per cent, so almost a third of that value was gobbled up by increasing prices in the rest of the economy. Melbourne is second only to Sydney, with a real growth rate of 76.5 per cent over the same period. Some cities like Brisbane, Perth and Hobart were unfortunate enough to increase in nominal terms, but decrease in real terms.
Property owners should remember that the value of their homes in nominal terms isn't particularly important for their wealth. What matters is real value, and in this respect, you couldn't have done much better than owning Melbourne real estate over the last nine years.
Melbourne remains one of the best places in the country to purchase a slice of the Australian dream. If you're looking to buy, get in touch with the friendly folk at Ray White Brunswick today.