What is capital growth?
Capital growth is one of the most exciting parts of property investment because it refers to the increase in your property’s value over time. In simple terms, if you buy a property for $500,000 and later it’s worth $650,000, that $150,000 difference is your capital growth. This growth happens because of factors such as demand, location, and overall market trends. For many investors, it’s a key strategy for building long-term wealth, as the property you own today could be worth significantly more in the future. Understanding how capital growth works and what influences it can help you make informed decisions.
What influences capital growth?
Several factors can affect how much and how quickly a property's value grows. Here are some of the most common influences:
Capital growth vs rental yield
| Capital growth | Rental yield | |
|---|---|---|
| Definition | Increase in property value over time | Income earned from rent as a percentage of property value |
| Focus | Long-term wealth building | Short-term cash flow |
| How it’s realised | When the property is sold or equity is accessed | Through regular rental payments |
| Key influences | Location, market trends, economic conditions | Rental income, vacancy rates, rental prices |
| Risk | Market fluctuations can impact growth | Rental income may not cover expenses |
Why is capital growth important?
Unlike rental yield, capital growth is the wealth that builds in the background while you own the property, even though it comes with risks and market fluctuations.
- Equity access: As your property’s value increases, you gain equity. Banks may let you borrow against your equity, to refinance, buy your next property or fund renovations, although these decisions depend on individual circumstances.
- Wealth building: Capital growth in property can help you build long-term wealth. A property that grows steadily in value can significantly boost your overall wealth, even if the rental returns are modest.
How to access capital growth in your property
Once your property has grown in value, there are several ways you can access that growth.
Tax implications
When you sell a rental property that has grown in value, you may need to pay capital gains tax on your profit. Here’s everything you need to know:
Capital gains tax (CGT): If you sell an investment property for more than you paid, you’ll likely pay CGT on the profit.
Discounts: If you hold property for more than 12 months, you may get a 50% CGT discount (individuals).
Main residence exemption: If the property was your main home (not investment), you may not have to pay CGT at all.
Using equity: If you borrow against your property’s growth instead of selling, you don’t trigger CGT.
The rules depend on your location and whether the property was your main home or an investment. Always check the latest tax information or get professional help to understand your obligations.
Is capital growth in property guaranteed?
No, capital growth is not guaranteed. Property values can rise, fall, or remain steady depending on market conditions, economic factors, and local demand. While property has historically shown long-term growth in many areas, there’s always a degree of risk. That’s why research and understanding market trends are important before making any investment decisions. If you’re ready to take the next step in your investment property journey, our home loan experts are here to make the process easier.
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