What is the LTG?
LTG stands for Long Term Growth. The LTG is a measure of the percentage growth a
property market has had on average each year for the last 10 years.
It seems a little odd to call it "long term" when it is only 10 years.
Ten years for many investors is considered a minimum hold period.
Why is the LTG important?
A property market may be in a position where demand exceeds supply. However,
it may be near the end of this period of imbalance. High prices are a tremendous demand dampener.
The LTG can be used by investors to avoid entering a market that might be near the end of its last
surge in price growth. The importance of the LTG is very similar to that of
the MCT.
The LTG is just one of the considerations that can add weight to the potential a property market has to
experience strong growth. It is just another statistic that investors should consider.
But most importantly to consider towards the end of a strong bull run.
Analysing a property market from every angle and seeing positive signs from all of them
will give the investor more confidence about the nature of the market.
The LTG is one of the statistics incorporated into
the DSR+.
How to interpret the LTG
The higher the LTG is above the long term national average (about 6%),
the worse the potential is for immediate capital growth.
The theory is that, long term, a property market cannot keep performing at a growth rate above the long term national average.
Eventually, prices in the suburb get so high compared to other under-performing suburbs,
that buyers start looking at the under-performing suburbs as being affordable or good value for money.
Above average growth can last for 6 months, several years or even a couple of decades in extreme cases.
But eventually, higher prices dampen demand and therefore growth too.
Imagine 100 years ago oranges were worth 2c and apples were worth 1c.
Now also imagine that over the 100 years, oranges grew at 7% and apples only at 5%.
After 100 years a single orange would cost $17 while an apple would cost a little over $1.
Who in their right mind would buy an orange when you could get a few bags of apples for the same price?
And this amazing discrepancy in price occurred with only a 2% growth rate difference.
Walking in to the fruit shop, customers would be disgusted at the outrageous price of oranges and
would instead buy apples. That subdued demand for oranges would result in lower growth.
The increased demand for apples as an affordable alternative would charge the growth rate of apples.
What is more likely is that after 100 years oranges would be $2 and apples would be $1.
In other words, their respective ratios of value would eventually balance out so they experienced the same growth rate.
Only if someone engineered a juicier orange or a shinier apple would the ratio of 2 to 1 alter.
For every year of above average growth that a property market experiences,
it will eventually be followed by a year of below average growth.
It may not swap around each year, or each decade.
But to sustain above average growth long term, a suburb needs continual improvement.
So the LTG is used to protect investors from entering a market that may have just
finished a long period of above average growth and is about to enter into a long period of below average growth.
This also works in reverse. If a suburb has experienced below average growth for a long time,
eventually it will appear to be good value for money compared to other suburbs that have had
average or above average growth for the same period.
So as a general rule, investors will want to enter a property market in which capital growth has
been subdued for a long period and now demand is exceeding supply which may represent the
sudden realisation among buyers that the suburb is under-valued.
Is the LTG reliable?
An accurate LTG requires:
- An accurate value for prices 10 years ago
- An accurate value for prices now
If a market is thinly traded, anomalies may arise in either of the above two estimates. It is not uncommon
to see the median oscillate up and down from month to month by +/- 10%.
However, given the large time frame, an error of 10% for either the start month or the end month
may not be significant. A common total growth over 10 years would be 80% or 6% per annum compounded.
Plus or minus 10% at either the start or end of the ten year period could make the LTG look 25% higher or
lower than it really is. But these cases are rare.
It is easy to check current prices to ensure the quoted typical value is not suffering from statistical anomalies.
But finding accurate data for 10 years ago may not be that easy.
Base data and other sources
Some alternative sources for this kind of data include: