Investors Ask: Can I expect capital growth?
Q: I’ve recently increased the rent on my investment property and am now achieving a gross yield of 6.8 per cent. When can I expect this rent windfall to be followed by a return in capital gains?
A: While rental and house price growth tend to occur in opposing cycles, there is no direct relationship between the two in all circumstances. Just because you increase the rent on a property does not mean the property will suddenly become worth more.
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House price growth is impacted by a range of economic and other influences. Population growth is one, as is the growth in the median household income, providing more available funds to pay increasing rents when demand is there. In short, an area needs an abundance of demand influences to ensure that vacancies are consistently low, the area grows and thrives and infrastructure continues to support this population growth.
Sometimes, short term demand due to temporary factors puts a false reading on real demand - a large project requiring more labour or the sudden but unsustainable success of a single industry are examples of times when rental accommodation sees greater demand and rents rise as a result. Once the temporary factor goes away, rents return to more normal levels, and this is why an increase in rental yield is not always a reliable factor in determining potential future house price growth.
If the property you have is in an area showing signs of organic growth, has a council supporting that growth through infrastructure provision, a low unemployment rate and a diverse industry base, you can most likely expect to see an increase to your capital value within two years or so of an increase to rents.
Margaret Lomas, founder, Destiny Financial Solutions
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