Property values in many Australian locations have taken off in an era of record-low interest rates and high population growth. If you own property in the South East region of the country, you’re most likely a lot wealthier on paper than you were 10 years ago. But has your property value doubled and if so over what time-frame?
The Rule of 72 is a simple way to determine how long an investment will take to double. The rule is used for estimating one of two things:
- the time it takes for a single amount of money to double with a known interest rate, or
- the rate of interest you need to earn for an amount to double within a known time period.
The rule states that an investment will double when the number 72 is equal to the Per Annum Rate of Return (RoR) multiplied by the number of years (Y). The formula can be shown as 72 = (RoR) x (Y).
When interest is compounded annually, a single amount will double in each of the following situations:
Using this rule, the concept that property values double every 10 years requires an average annual growth rate of 7.2%. Average rates higher than 7.2% will double faster with rates below 7.2% taking longer.
Recent data from CoreLogic has revealed the proportion of properties that are now worth more than double what they were initially purchased for 10 years ago.
Source: CoreLogic
The data shows that nearly half of property owners in Sydney and Melbourne have seen their property double in value since 2007. 10 years ago this was true for 37% of Sydney properties, 38% in Melbourne and 45% nationally.
Of the remaining properties that didn’t double in value there were some that actually declined in value.
Source: CoreLogic
Across the country 3.4% of properties are worth at least 10% less than they were 10 years ago, the highest portion of these coming in Darwin, Perth and Regional areas.
Taking a balanced view of this data, the key distinction is that property does have the ability to double in value over 10 years, but to say that it’s a given is not so simple. Identifying the right location and the right property within that location will be the major factor in determining your investments performance over the long term. By using leverage and borrowing to invest, you could see your equity in that property appreciate at an even great rate.
