Capital Growth
7 min read
Author: Ed McKnight
Our Resident Economist, with a GradDipEcon and over five years at Opes Partners, is a trusted contributor to NZ Property Investor, Informed Investor, Stuff, Business Desk, and OneRoof.
Reviewed by: Andrew Nicol
Managing Director, 20+ Years' Experience Investing In Property, Author & Host
The perceived wisdom is that properties with more land go up in value faster … more land equals more capital growth.
But is this true? Should investors buy houses with a quarter-acre section rather than a townhouse?
To find out, I talked to CoreLogic’s Nick Goodall to gather data. That way we can decide once and for all whether properties with more land go up in value faster.
Before we get to the numbers, here at Opes Partners we recommend New Builds to property investors.
And generally, New Builds have less land than second-hand (existing) properties.
When we do that, we get paid a fee from the developer. That’s how we keep the lights on.
This means there’s an incentive for me to be biased and say: “Don’t buy a house with lots of land.”
But I’m not going to do that. I’m going to discuss the data with you in a balanced and honest way. That way, you can make the right investment decision for you.
Properties with more land are more expensive.
In Auckland City, the average house with:
So, properties with more land are more valuable.
But properties with more land don’t necessarily go up in value faster.
Since 2016, dwellings with 300 sqm of land (small sections) have increased in value at roughly the same rate as those with 600-899 sqm (larger sections).
During the boom years, properties with 300-599 sqm of land (mid-sized) sections out-performed.
More recently, the growth rates have been very similar.
Christchurch is a similar story. Here, properties with 300-599 sqm (mid-sized) increased faster than properties with more land.
When you pit a big section against a small section, there’s hardly anything in it.
A 600-900 sqm (large) section went up in value only 0.1% faster per year vs a property with 300 sqm (a small section).
These findings are counter to the perceived wisdom we often hear.
Some people will look at this data and think – “This doesn’t make sense. The value is meant to be in the land.”
Or you might think – “But it’s land that goes up in value, not buildings.”
But think about it this way: properties with less land are more affordable.
As property prices increase, demand for smaller-sized properties will likely increase.
Perhaps Kiwis are switching from larger, expensive properties to smaller, more affordable ones.
The other thing is – most people don’t buy a house for the land.
Think about the last time you went to an open home.
Where did you go first? Inside the house or out in the backyard?
If you’re like most people, you go into the house first and spend most of the time there.
The house and the location are the two factors people look for first. The size of the backyard is almost secondary.
It’s all relative. Any dwelling with a larger section will be more expensive. So you’ll get more capital growth in dollar terms, but not necessarily in percentage terms.
Think about it: If a $1,000,000 property gets a 10% return on capital growth, that’s $100,000.
But the same 10% return on a $600,000 property is going to be $60,000.
So, yes, you get more money in absolute dollar terms, but it’s the same in percentage terms.
That’s important to consider because if you buy a more expensive property you will have put more money in.
But the amount of land doesn’t magically make the property a better investment.
Of course I’m not saying land isn’t valuable.
Land is extremely valuable and does increase in value over time – as does the value of the building on it.
However, traditional thinking says that properties with more land go up in value faster.
The data suggests this way of thinking is not correct.
The main takeaway for property buyers is to buy the house that fits their needs.
Don’t pay for more land than you need simply because you think it will be a “good investment”.
There’s not a lot of evidence that buying properties with more land gives you a bigger return.
If you want a big backyard for your kids, that’s great. But, in financial terms, that bigger backyard might not make as much difference as you think.
Our Resident Economist, with a GradDipEcon and over five years at Opes Partners, is a trusted contributor to NZ Property Investor, Informed Investor, Stuff, Business Desk, and OneRoof.
Ed, our Resident Economist, is equipped with a GradDipEcon, a GradCertStratMgmt, BMus, and over five years of experience as Opes Partners' economist. His expertise in economics has led him to contribute articles to reputable publications like NZ Property Investor, Informed Investor, OneRoof, Stuff, and Business Desk. You might have also seen him share his insights on television programs such as The Project and Breakfast.
