Calculating Growth

There are many investors who invest in property solely for the growth. They are not concerned with making a rental profit (sometimes happy to make a rental loss!) but with making an above average gain on their initial investment. Annual capital growth (ACG) can be determined by:

Basically it’s how much your property has gone up by in a year of ownership. For future years ACG is:

In simple terms it’s the difference between the value of the property now and one year ago.

Understanding +/- Growth

Understanding why property prices rise and then fall is very important if we want to make money! It is property prices that drive yield, not the other way round, hence what affects property prices is everything. Property prices are volatile and rents are stable. Experts call the rise and fall in property prices the boom-bust cycle. The boom-bust cycle will be directly related to:

This is because property is:

So a full understanding of the limited nature of land and the dynamics of the economy will enable you to see where we are in relation to the boom-bust cycle.

Certain principles need to be explained before we enter the boom-bust cycle.

Principle	Description
Land is in limited supply	No matter what we do there is nothing to increase the supply of land more than the surface area of the UK. Undeveloped land belongs predominantly to the aristocracy or local councils. The ‘super rich’ land owners such as earls, barons and dukes own land that they have inherited from their ancestors. Local councils own land that was passed down through the Magna Carta in 1066.
	London is not going to get any bigger. What we have is what we’ve got. Due to this fact it will always attract the speculator. Massive profits can be made by simply holding on to a piece of land and holding out until the surrounding land gets developed.
The population is growing	A growing population means that there are more ideas, inventions and businesses, hence more is produced which causes a pressure on land requirements to locate all the people and their businesses. Overall land values have to increase.
Increase in land values causes an increase in development of land sites	A land owner will happily hold on to a piece of land as there is no cost to them to do so. If land values rise due to the overall state of the economy rising then they will be tempted to sell. Then either the land owner sells, at a profit, to a developer who then develops on the land or the land owner decides to develop it themselves.
An increase in development of land causes an increase in infrastructure	As development occurs more services are required for the developed areas such as train stations, better road links, schools etc. This causes the overall land values to increase further.
Due to the rise in land values saving increases	Considering that money can only be spent or reinvested the general public become attracted to the returns to be had from property developments and hence they save. This results in people spending less on the high street and hence consumption falls.
The fall in consumption is hidden by the feel-good factor	Because home owners have experienced an increase in the value of their home they use this security to borrow and spend it on the high street. This increase in borrowing to spend is greater than the amount saved to invest (mentioned above) thus overall consumption increases.
A trade deficit occurs as a result of the rise of consumption	Imports exceed exports to cope with the rate of consumption. This causes a deficit and hence the government must raise rates to attract outside investment to finance the deficit.
As rates rise the returns from property look less attractive	The whole boom is due to property looking attractive to speculative investors because of capital growth. If rates rise property price growth stabilises and thus expected growth is no longer factored into the overall return.

If the availability of land was not restricted then real prices would fluctuate like this:


However, the availability of land to be developed is restricted due to speculation, thus prices fluctuate like this:


You can see that real prices rise and fall to a greater degree and over a shorter period of time.