Property values to double?

The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has made significant gains this year on the back of heavy investments made in blue-chip stocks. Recent turbulence in the mining industry and overseas markets has left many investors wondering whether the share market has run its race, and whether now may be the time to take their profits and seek gains elsewhere.

The solution that those investors are looking for may have been answered by RP Data, which released results suggesting that the value of Australian properties are set to soar. According to the results, a total of 263 suburbs in Australia have recorded an average annual growth rate of above 7.2% over the past five years – 68 of which are located in Melbourne. Should this rate continue, investors are given the opportunity to more than double their money in a period of 10 years.

Currently, interest rates are sitting at record lows, with some, such as National Australia Bank (ASX: NAB), anticipating a further rate cut in May (in fact, in January, NAB said that Australians could expect three interest rate cuts to occur this year). These low interest rates should encourage homebuyers and investors alike, enabling them to invest more at a lesser rate.

However, buyers are also urged to do their research before diving into any purchases. Whilst the Reserve Bank of Australia (RBA) is arguing that the housing boom is over and will not return, investors who buy the right property in the right location, at the right time and right price, stand to make significant gains. As with the share market, the value of an investment is only the amount that someone is willing to pay for it. As such, properties with scarce features should hold a margin of safety for investors.

The news doesn’t appear so ideal for renters, however. RP Data’s results also showed a 7.2% increase in the average annual rent growth over the past five years in 792 suburbs across Australia. This result can be attributed to the growing property value, and demand for temporary accommodation for mining employees.

Foolish takeaway

With rising house prices, shares in property developers such as Peet Limited (ASX: PET), Stockland (ASX: SGP) and Mirvac Group (ASX: MGR) can be expected to remain steady and will likely only see gains if property prices rise significantly, due to the companies’ large exposure in the new homes market.

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More reading

The Motley Fool’s purpose is to help the world invest, better.  Click here now  for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned in this article.

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