I'm Jeremy Sheepard. >> And I'm Daniel. >> We use data to expose deceitful property experts and their marketing BS. This is the expert busting series. >> Welcome to episode 10 of the expert busting series, property growth history and why past growth doesn't equal future growth. Jez, let's jump in.
>> Yeah. So there are some uh property investment professionals out there, let's call them experts for one of a better word, who will examine the growth history of a property to see if that property has outperformed. Their belief is that if it has outperformed in the past, it will outperform again into the future. However, data suggests the complete opposite is true. And we're going to show you some of that data. >> Let's have let's start with back testing.
>> Yeah. So many professionals in their research will back test a property by looking up its past growth to see if it's a proven long-term outperformer. So what they do is they check the price that the property sold for during its history and then they'll calculate the compound annual growth rate. Now, if the compound annual growth rate was low, like the example on the left there of 3%. Then they might discredit that property. If it's at least 6%, they might consider it to be worth buying.
Uh they'd preferably want something higher than that. And they think that the uh higher the past growth, the better, but it's actually the other way around. Uh the higher the past growth, the more likely the future growth will be poor. And it is quite ironic that they call it back testing because all they had to do was test that this works and they would see it actually doesn't work. Um so kind of kind of funny in that respect but the uh professionals who cling to this belief uh think there is something inherently special about a property with a good growth history uh and they believe those special features will continue to deliver above average growth into the future. But >> sorry, you wanted to interject >> or did you want to talk about a bit more about this back testing >> or how you calculate it?
Yeah. Can you take uh take us through how it's calculated? >> Yeah. So, we've got slides for just in case anyone's listening to this so you can view what we're seeing on the screen. But let's start with 123 Smith Street. So, let's say January 1980 it sold for 56,000.
Then 11 years after sold for 120,000 and then 13 years after that sold again for 120,000. So for that first period I had capital growth of around what 64,000 the first 11 years and then the following 13 years it had zero growth. But this percentage that we've got on the screen it's got 3.1 4% peranom growth. So that's from the 56,000 at the start to 120,000 in uh 2004. So over that 24 year period growing at at 3% peranom which is quite poor. >> Now and another example is we got 56 Jones circuit 1993 was worth 142,000 and at 2014 was worth 505.
that compounding rate is 6% peranom quite good again I don't know what the national growth rate through that period was in recent times it's around that sort of 6 to 7% peranom but this is what back testing um firms will use to say hey this is how properties performed what they don't factor in here is what if a property's been extended or renovated or potentially subdivided it's just to say hey it has grown at 6% it's going to grow 6% % moving forward. We've got confidence that it's going to do so. >> Yeah. So, that's couple of good points there that you uh made there. You don't know what's happened to that property in that period of time. So, apart from it just being a uh a terrible conclusion to draw, um you've also got those anomalies.
But, um the other thing is whatever features that a property has, uh they don't dictate capital growth. So they determine price but they don't determine growth. Growth as we know is a function of supply and demand. But what is demand a function of? Many of them will assume that it is a function of the features of the property. Is it open plan?
Does it face north? Is it on a big block or is it on a sloping block? Those sorts of things. But um I'll give you an example. Let's let's have a fictitious property. Let's call it property A.
And this property has all the magical features, all the desirable features you could ever possibly want. Let's say it's close to the CBD, uh, but it's got space. It's on 4,000 square meters, but it's close to CBD. In fact, it overlooks the harbor. Overlooks the harbor on one side, the beach on the other. It's got 10 bedrooms, four bathrooms.
It's got a tennis court, uh, helipad. It's got all the features that anyone could ever want. We'll call that property A. Now, if property A has all these features, you would assume that it would outperform property zed, which is nowhere near the CBD. It's on 400 square meters. It's got uh it's got nothing on it except a rusty shed.
>> Mhm. >> And uh and it's a sloping 400 square meters and it's sandy >> and the nearest shop is a 10-minute drive away. Okay. So, I'm trying to make it absolutely featureless. Okay. Now, demand, and let me just clarify what demand is.
Demand is not wishful thinking. Demand is holding up your ping-pong bat at auction, making a counter offer. You know, a 10-year-old boy might want a Ferrari, but that's not demand because they're not about to dump a duffel bag full of cash on a a dealer's desk and start negotiating over price. So, it's putting your hand up at auction. It's making a counter offer. That kind of demand the kind of demand that pushes prices up.
Is that demand a function of features? It's not a function of features alone. It's a function of features and price. Let's say property A had a price tag of $150 million. >> Now, how much demand is there for it? There might be only a handful of Australians uh or anyone in the world that would actually demand a property like that.
So very little demand despite it having all the wonderful features. Now if you put a price tag on property zed of $150. I'm sure there would be some people who just buy it for for a laugh because it's so cheap. So demand is a function of features and price, not a function of features alone. So you cannot look at a property and say it's got this, it's got this, it's got this, therefore it will have continual demand into the future because the price changes and nothing subdues capital growth like an increase in price. So yeah, uh property features simply do not uh dictate demand.
Uh if you move on to the next chart, this is all just uh theoretical what we've been talking about. >> Um the proof is in the pudding. So here's a chart showing the relationship between past growth and future growth. And in this case, it's 10 years past growth versus 20 years future growth. Uh now this takes a bit of explaining. So to come up with this chart, what I did was I looked for any 30-year period in some historical data which I've got which stretches back 45 years, but I'm just looking for any 30-year period.
So it could have been from 30 years ago uh to now or it could have been from 35 years ago to 5 years ago. Could have been from 40 years ago to 10 years ago. So any 30-year period. Uh, and then I split that 30-year period up into two sections, a 10-year period and a 20-year period. So, the first section, the 10-year period, I'm calling that past growth. And the second section of 20 years, I'm calling that future growth.
>> Mhm. >> Then, for each suburb, I calculated its 10-year growth and its following 20-year growth. That's why I needed a 30-year period. And then, what I did was I uh grouped the suburbs together. according to the 10-year growth. So, if they had very similar 10-year growth, they're in the same group.
And they're actually a thousand groups. That that chart actually has a thousand of those little white markers there. >> So, is that a thousand suburbs or cuz there's more than >> it's a thousand groups. So, yeah, I've put together a bunch of suburbs that all had very similar growth for the first 10 year period. >> Okay. So it might have been down to you know one decimal place accuracy of that capital growth and then they were all grouped.
So it could have been 3.15 3.16 3 whatever and still I've got a thousand uh groups. >> So one outlier that I see there or there's actually two. If we go to the far right, you've got a market or a bunch of markets here that have had a past growth of close to, let's call it 18 19% peranom for 10 years. >> Pretty good. >> So really great growth. Really great.
Then the following 20 years, it's growing at around 5 and a half%. So still pretty good. you've had this massive amount of growth and you're still continuing to get but you could have sold out of that market and gone to another market that's had superior growth. >> Well, so yeah, the the chart's supposed to show the relationship between past growth, which is along the horizontal uh x-axis down the bottom there. Uh so that one you're looking at on the uh bottom right that had around about 19% growth 19% peranom for 10 years which is fantastic. That's a lot more than doubling in just those 10 years.
But then over the next 20 years that's measured on the left vertical yaxis. That's the future growth after that 10 year period. And you can see, yeah, it's only had five and a half percent. So if there was a relationship between past growth and future growth, meaning if past growth equals future growth or is even similar to it, those white markers would be spread out from the bottom left to the top right. Instead, they are spread from the top left to the bottom right. meaning that there is an inverse relationship between past growth and future growth.
So if we look at another one of those outliers, the one at the very top, well, I was going to pick that one. Yeah, the one at the right at the top there. So that had uh over the last 20 years of growth had um nine what is that 9.3% peranom >> but it actually had negative growth for the first 10 years. So that vertical white line there, that represents zero growth. So over the first 10 years, zero growth. So anything to the left of that line had negative percent peranom growth for a period of 10 years.
>> Is that for houses that we're looking at? >> Yes, this is houses. >> Isn't that wild? Like you look at that thinking if you looked at it, let's say you've gone to a buyers agent, they've >> they're >> not including markets that have had like this negative growth in the prior years and the amount of future growth, but it's like it's quite linear, isn't it? You can sort of see that there's a quite strong relationship based on the data that you want to maybe target markets that haven't had significant growth potentially, but that's factored into the algorithm, right, with the MCT score. >> Yeah.
Yeah. Yeah. So that uh dotted line is the line of best fit >> through those points >> and that shows the general trend that is the relationship between 10 year past growth and 20 year future growth. So you can see that uh there is the complete opposite of what these fake experts tell you when they do their back testing and they're looking for a property that has had some high past growth. uh they are looking at future very poor growth. You should actually be looking at the complete opposite.
But some people are going to say, "Well, Jeremy, that's just um 10 years of past growth and then 20 years of future growth. What about other combinations?" So, I charted those as well. So, uh, I'm repeating the same concept here in this next chart, but this time it's with a 20-year growth period to begin with, followed by a 10-year growth period. So, this is an investor looking back at 20 years of historical growth to choose a market to invest in. Uh, as with the previous chart, uh, the past performance is plotted horizontally along the x-axis. future growth uh from the investor's perspective is plotted up the vertical yaxis and you can see that the same inverse relationship appears.
The higher the past growth, the worse the future growth and like with the previous chart uh there is once again uh an obvious trend that's plotted there by that um that dotted line. I think for me it's about there's a clear representation here that trading I think is going to be very popular going into the future because you can sell out. You can get the growth. Look, you might have that one property that you want just to be stable. You forget about it, set and forget, >> but then maybe that second or third property you might I wouldn't say gamble, but you might want to be a bit more active with it. Buy in, buy out of a market.
So >> yeah, that's a good point. that that is great evidence of if you try to outperform uh you're not going to be able to do that holding longterm. You're going to have to buy for a shorter period of time. Once it's had its good run, sell. Uh so yeah, I did one more um one more combination of these growth growth periods. This chart is 15 years of past growth and then 15 years of growth that followed.
So future growth. So this is an investor looking back over 15 years of historical growth to choose where to buy. And again you can see the same inverse relationship. Past growth needs to be lower lower than average to increase the chances of outperforming into the future. So if long-term past growth continued into the long-term future then the trend line would start in the bottom left rise to the top right instead. Once again, it's the complete opposite of what the fake experts are trying to tell you.
And there's another way to look at this, which is the next chart, one of my favorites. Uh, so this chart shows the inverse relationship between past growth and future growth. It's in a different way. Uh, so the data for this chart were averaged over thousands of Australian property markets covering the last uh 35 years. It was from 1990 to 2025. And what I did was I looked for any 20-year period of growth for any property market within the last 35 years.
So it could have been one suburbs growth from 1990 to 2010 or the same suburb, but growth from 2000 to 2020. So I'm looking for all 20-year growth periods. And that's for all suburbs. And then I split that 20 years of growth up into two periods. The first decade and the second decade. And the first decade is in turquoise.
The second decade is in purple. And I've called the first decade past growth and the second decade future growth. So I'm pretending again I'm an investor and I'm looking backwards at the last 10 years of past growth and I'm making a decision where to buy based on that past growth. Then I'm testing that by rolling time forward to see what happened over the next decade to see how my decision would have played out. Now I can't plot each case because there are hundreds of thousands of them. So again I group them and the grouping was based on the first decade of growth.
So all the suburbs with the best kind of growth over the first decade will appear on the right side of the chart. and the suburbs that had poor growth over the first decade will appear on the left side of the chart. Uh so looking at an example over the bottom left corner of the chart you can see the shortest turquoise bar. That bar represents the growth of a group of suburbs that had very small growth over a 10-year period and it's a bit less than uh 1% peranom. roof pretty poor, effectively flat. But those exact same suburbs then had growth over the next 10 years of about 10% peranom.
That's the purple line right next to uh it's the tallest purple line. So over to the far right, let's look at another example. The tallest turquoise bar uh it's around 14%. Uh that's the median growth of a group of suburbs that had spectacular growth over their first decade. Uh but the purple bar right beside it shows that their second decade of growth was really poor. I think that's around about 3%.
So the turquoise bars are the first decade of growth and that's for a group group of suburbs. um that's over their first decade and the purple bars represent the growth of the exact same suburbs but over their next 10 years. And so what the chart clearly shows is this inverse correlation between past growth and future growth. So when past growth was poor left of chart then future growth turned out to be excellent. And if past growth was excellent, right off chart, then future growth turned out to be poor. And there were over a quarter of a million observations that went into these calculations.
And uh the relationship is yeah, remarkably consistent. So no property, suburb or city can continue to outperform the average growth rate over the truly long term. And there is a very logical reason why this pattern appears so clearly in the data. And if you go to the next slide, Dammo, >> before moving on to the next slide, I think it's important to factor in because there's going to be markets over, let's say, the last 3 to 5 years >> that have had significant growth, but over the 10 years there still look like that it's actually been still slow. So there still might be movement. If you're only looking at the last three years that you don't want to just cut suburbs out just because of that because even if they've grown by 50% they still might have a lot more to go.
>> Yeah. Yeah. That's right. There's no consistency in how much is too much or how long. Yeah. This was just picking like 10 10 years and 10 years.
>> All right. So the best way that I have found to explain why this uh phenomenon occurs is with an apple the apples and oranges analogy. Uh and there is another episode in the expert busting series on this and it's called the apples and oranges episode. Uh it'll be number 11. Uh so rather than repeat that whole one, I'll just quickly summarize it. So if a property has continued above average growth over a long period of time, the effect of compounding makes those properties absurdly expensive uh compared to similar alternatives and that subdues demand for the expensive properties and it increases demand for the alternative which are probably a lot cheaper.
So after a long period of above average growth, higher prices uh subdue that demand. Uh so the outperformers of the recent past become underperformers for the immediate future and at the same time buyers they start hunting around for cheaper options and that of course increases demand for the underperformers of the recent past turning them into the new outperformers of the immediate future. So over the long term this phenomenon uh results in a tendency I use the word tendency a tendency for all property markets to grow at uh at similar rates. >> What's the point? >> Yeah. What's the point?
>> So I guess if longterm if everything longterm grows the same, why not just grab a dart, throw a dart and hope for the best? >> Yeah. So that's that's a very good question. Um the answer is because they don't grow at the same rate over the short term. So they may grow at this roughly the same rate over the long term but they don't over the short term. And as investors uh we want to capitalize on that period when one market is in high demand.
And then once it's run out of puff, it's had its surge, it's starting to plateau, that's when we want to move our investment dollars to the next hot market. And that's um this whole what you mentioned earlier short-term short-term investing. I mean when I say short-term it could be could be as long as 5 years but it might be only as short as say two years. Um and we've actually got um I think there's a an episode number 12 in this series called short-term growth. So you can have a look at that. Uh it's about why property investors should focus on short-term growth rather than long-term.
>> It's tricky because you need to do and we've we do this like should I sell analysis. So it's a matter of like in the slide you've got because you don't want to hold longterm. There's nothing wrong with holding longterm because when you do sell the big >> factor I would say would have to be capital gain. So depending on when you sell is going to be a key part. So, if you're working a job, you've already got a taxable income and then you sell for a massive capital gain. It might not might not be viable to sell at that time.
Let's say you take a year off or you're going into closer to retirement with super, you may want to sell down when your taxable income is going to be a lot lower from your employment income. So, it's a matter of >> you got to do your numbers still. So if there's been significant growth, it might not be worth selling because you got all the exit fees, all the re-entry fees, and it just becomes too expensive. So maybe that asset you might hold on to. So it's just scenario by scenario. >> Yeah.
I And on that I've got a property, the first property I ever bought actually. Um I've sold other properties, but u for whatever reason I kept this one and whenever I do that should I sell analysis on it, it always comes up as >> hold. >> Don't sell. Yeah. No. And that's simply because it's doubled in value a couple of times now.
And the capital gains tax liability would crunch into uh the the opportunity cost that I'm missing out on uh is smaller than the capital gains tax, the reallocation of equity costs. But then there are other properties that I've only owned for a short period of time and yeah, that's they uh quite often will come up as a sell. >> So there you go. >> Yeah. Okay. So there are a couple of other problems with this uh approach of gauging a property's future growth potential based on its past growth.
Um the growth that you calculate may have been misleadingly high due to capital injection such as recent rena um an extension maybe the addition of a granny flat or even a total knockdown and rebuild. And all of those things can artificially inflate the calculated growth of the property. Or it could be the other way around. Some of these you mentioned earlier, uh you could reject a property believing it have poor capital growth in the past, but your calculation might have been skewed for one of these reasons on the right. Uh you know, uninterested sellers or distressed sellers or or a subdivision. Um so all of these can artificially deflate the calculated growth of the property.
Uh it can be misleading looking at an individual property. Much more reliable to look at the suburbs past growth uh because of the larger sample size more properties. Um anyway the back testing of property's growth is is unreliable even if you flip the advice of the experts because of these um these eight situations here. So why do the experts why do they utilize this approach? Is it because they're uninformed or they just >> I I think that's it. Yeah.
I think that they they came up with a theory. Oh, if it's if it's had good growth in the past, it'll have good growth in the future. And then they don't back test it. >> They calculate [clears throat] the past growth, but they don't calculate the future growth to see whether that theory held true. And it is quite tricky. I mean, you look at the the charts that I just showed.
Uh, first of all, you need to have some >> some analysis skills. You need to have access to the data. And then you need to have the time and the the interest in in finding out whether whether this this thing works or not, whether this past growth equals future growth. So, I think it's a lot easier to just spin some marketing BS rather than find out the truth. So, what if a buyer's agent, let's say they buy eastern suburbs of Sydney, they've got a budget and they say, "Look, I'm going to buy a one-bedroom unit um in Bondi, one of the big suburbs in the world, very well renowned." Fantastic growth moving forward. It's always going to have that demand, Jeremy.
Like, I'm buying in a unit in Bondi because it's longterm it's been fantastic and it's continuing long long term. it's going to be a fantastic performer. What would you say to that comment? >> Well, I would say that's where did you get this idea that it's uh in continually high demand? Because if it is in continually high demand, why has it not had continually high capital growth? Why does it have flat periods and even retractions?
>> I think that's the biggest thing. These markets do have flat periods where you're seeing sort of at the moment as of let's say of recording October 2025 that you know Darwin's moving certain pockets of Melbourne are really moving and outperforming those Sydney eastern suburb markets. You can't argue that, can you? >> Yeah, that's right. You can't argue with historical data. That's that's the facts.
Yeah. >> Conclusion. So growth history can help but lower is better. >> That's right. Yeah. It can be used to predict future growth but not in the way that many industry professionals unfortunately believe.
So an examination of the historical data shows that uh investors should be after lowass growth not highass growth. Um so yeah take the take the fake experts advice and then turn it upside down. I >> is there a formula for it? Like is there a sweet spot that you should be targeting? So, okay, my property has had 10% growth peranom for the last 10 years. Is it time for me to sell or let's say I'm looking to buy now my first investment or my next investment.
Should I be looking at let's say the long-term growth rate over the last 10 years peranom should I be targeting something that's lower or should I just focus on the algorithm to, you know, just go for the algorithm? cuz it's easy to pick certain metrics and go okay well I'm going to invest here because it's only had 1% capital growth the last 10 years peranom or do you look at the DSR algorithm and go okay well I'll follow that that should be my first >> yeah so you can't just rely on uh long-term growth it's a single metric it's very handy it definitely shows as you've seen in these charts >> it shows a relationship to capital growth but it's not the be all and end all so you can have a property market that has had excellent capital growth over the last 10 years, but it's still got three or four more years to run. Or it could run out of puff after six, seven, eight years. So looking at its long-term growth is just one thing you can look at. And there's nothing magical about 10 years. Uh in fact, the market cycle timing looks at a range of different years, not just um 10 specifically, which is just a single metric, the long-term growth, LTG for short.
But the algorithm will look at um other metrics like uh other demand metrics, you know, things like how fast properties sell, >> days on market, that sort of thing, discounting, online search interest, all of those sorts of things. And then it will combine uh all this history of above average growth with the current nature of supply and demand in our market. Is this market starting to cool off? um there's very good reason why it should be cooling off because it's had such tremendous [music] growth over the last 8 years, 11 years, 15 years, whatever it happens to be. >> So yeah, you do need to look at holistic sort of approach the whole algo, not an individual metric. Well, yeah, so I hope this has helped.
Um there are a lot of uh fake experts out there trying to gather your ear. Um take everything they say with a grain of salt. have a healthy level of skepticism and seek out the the truth. Look for facts rather than fluff. >> That wraps up episode 10 of the expert busting series. Join us next time for EBS number 11, apples and oranges and the ripple effect.
Why long-term [music] outperformance is a myth. Bye for now and thanks for watching.