By Chan and Naylor | www.chan-naylor.com.au | Submitted 23rd April 2009 The way the taxation system works in Australia is that no tax is payable on an asset that is increasing in value. You only pay tax when you sell the asset and have the cash in your hands. At that point its either called a taxable capital gain or a taxable income. In Australia the property market on average has historically grown by 7-10% per annum. Some years have been negative but on average has grown to a point were property values have doubled every 7-10 years. The property market moves up and down as well as sideways but what has historically occurred is prices on average have moved up with some ups and downs along the way. When the economy gets overheated the Reserve Bank normally applies a brake in the form of increasing interest rates. They do this to dampen demand and put downward pressure on inflation. When the economy is floundering they release the brakes by reducing interest rates thereby reducing cost of debt to stimulate the economy. Governments also assist in these times by increasing taxes ie takes money away from people which has the effect of reducing demand as people have less money to spend and conversely reduces taxes to stimulate demand. This is a simplified explanation but hopefully serves as an illustration. During these periods the property market also follows the pattern. In periods of high demand for property and lower interest rates people buy. For investors this situation is compounded when rental yields are taken into account. We therefore can start to see a picture historically where property prices peak and then start to fall but over time start to grow again to the next peak and so on. This period between peaks (or troughs) is referred to as "The Property Cycle".On average in Australia this time period is between 7 -10 years. To maximise the return on your property purchase requires you to see an increase in value. This can normally be directly linked to time (excluding increases due to renovations, re zoning, particular demand/supply issues etc). There is a saying in Australia, "Everyone who buys a property will be worth a million dollars, they just have to live long enough". It is therefore important to understand the property cycle noting not every geographic region follows the same pattern and to buy accordingly with the right time frame in mind. If you buy at the peak of a cycle and have to sell shortly thereafter you could lose money, or if the property value falls, you might have the right structures in place to enable you to hold the property long enough to see your way through the cycle into profit. It is all about how long your are in the market as opposed to when you entered the market. The shorter your time frame the more your are speculating as opposed to investing. As this analysis is historic and not specific to any particular property any review must take into account the specific property in question to give a specific answer. On future movements many considerations will need to be made and the use of statistical reports as prepared by various property groups may be useful in understanding and estimating future growth. As an example if you purchased a property in say 1999 for $450,000 and the average rate of growth for the 10 years to 2009 was say 7% then the market value in 2009 would be approximately $850,000. If the property value in 2009 was $950k then the average price growth over the 10 years would be approximately 11% pa.
