Where will I get the best capital growth on my property investment?

Capital growth refers to the increase in the value of your property over time,  you buy something for half a million dollars and then 10 years later, it's worth a million dollars. In residential real estate, it's where the money is made. As discussed earlier, yield is part of the property investment equation but particularly in residential real estate, capital growth is just as (if not more) important.

When considering the growth prospects of a property, it helps to begin by identifying what drives property growth in general.

First and foremost, the forces of demand and supply, in other words people wanting houses and the availability of houses. Demand includes the existing population and the new population arriving or departing. Supply covers both existing houses and new houses being built. Naturally, demographics play a big part in the supply and demand equation, and capital growth potential.

In Tasmania, for example, the lack of any population growth negatively impacted property prices. Across the decade June 1992-September 2002, Tasmania's population experienced consistent net migration losses every quarter as people left the state.

Property prices in Hobart, particularly when compared to capital cities in Australia such as Melbourne and Sydney, experienced modest growth.

In 1996, Hobart's median house price was $112, 000 in 1996. Five years later this had risen minimally, to $120,300 in 2001.

The Gold Coast City is an example of the other end of the spectrum as far as migration patterns, with population increases of 3.7% per annum for the five years leading up to June 2006, compared to the average annual growth rate for Australia overall of 1.3%.

The demand for housing is strong, but as intelligent investors, we wouldn't stop our analysis of the region here, because supply needs to be considered as well. The Gold Coast area is rife with developers, building real estate to meet this demand, and it all depends on how the scales are tipped.

If you were considering an investment in the Gold Coast area you'd want to find how both demand and supply are affecting prices, and are likely to affect them in future. Whenever the balance goes out of sync either way you will have either a positive or negative change in prices.

Inflation in the building industry is another factor which can put upward pressure on house prices and result in capital growth. Demand and supply can be static, but if the cost of building a house goes up then so do house prices overall. As builders? salaries and materials become more expensive, the price of building one house goes up, and it makes that house more expensive. This price rise spreads to every other house around, even if they were built for less.

Another factor which impacts property prices, and therefore capital growth, is money supply. Interest rates affect money supply, the more they drop, the more money banks will lend based on the way their formulas work internally. The invention and engineering of financial products also affects money supply. Not long ago, no one would have dreamt of lending you more than 80% to help you buy a property, but times have changed, and on the whole it has become much easier to borrow.

All capital growth can be explained by supply and demand, inflation, and/or the supply of money. So if you're looking at a property that has doubled in value, it's doubled for one, two or all three of these reasons.

On the other hand, you could have had dropping interest rates, finance product innovation and an increase in supply of money, just fewer people to buy houses, so prices don't move, as happened in Tasmania.

And by the way, if you'd done your homework, and kept your Tasmanian investment a bit longer, you'd be enjoying the fruits of your labour, with a reduction in the number of people leaving the state which has resulted in high capital growth and a median house price of $277,000 in 2006.