There are three ways to make money in real estate:

• Capital growth – buy a house and wait for it to go up in value.
• Instant equity – renovate a property to increase its value or buy the property for less than it’s worth.
• Cashflow – buy a property that earns more in rent than the property costs to hold.

Most investors aim for a mix of all three. But, generally, most of your gains will come from capital growth.

That leads to the question: which property should I buy to maximise the property’s growth?

Like any investment, there are no guarantees – but data does give us some clues about the type of properties that will maximise our returns.

Where should I buy for the best capital growth?

A common myth in property investment circles is that the main centres tend to go up in value faster than regions with a smaller population.

Not true.

Apart from the West Coast, there’s been no material difference between the capital growth seen in smaller regions, like Northland, compared to the larger centres, like Auckland.

However, that doesn’t mean you should just buy any house, anywhere. Because while there might not be a significant difference between regions, there is a big difference between suburbs.

For instance, from 2000-21, the average value in Auckland suburb Westmere went up by 9.05 per cent per year.

Over the same period, house values in Albany – another Auckland suburb – increased by just 6.25 per cent.

Because those growth rates compound, a property in Albany would have seen about 65 per cent less capital growth than Westmere over that period.

Choose your suburbs carefully when purchasing a property. Focus on facts rather than feelings.

What about timing the cycle?

Whenever you compare the different regions, you need to be careful of drawing hard and fast conclusions.

For instance, over the last 21 years, house prices in the Tararua district have appreciated at 11.35 per cent, according to data from the Real Estate Institute of New Zealand, a faster rate than Wellington City, where house values went up by 7.5 per cent annually.

There are three ways investors can interpret this:

House prices go up faster in Tararua. So, I should see more capital growth if I invest there.

1. House values have already boomed in Tararua, so I expect the market there to peter out, so I should expect there to be less capital growth there in the short to medium term.
2. House prices in Tararua were particularly low at the start of this time. That could mean the high capital growth represents a ‘catch up’. So, there may be the same opportunity in Tararua as elsewhere for capital growth.
3. There’s no obvious answer based on the data we’ve looked at so far. That’s where considering each district’s property cycle is essential.

The chart below compares Tararua house prices with house prices across the country. It suggests that Tararua house prices are 24 per cent above their long-term average, compared to the rest of the country.

Personally, that would make me nervous, because it suggests that Tararua is nearing the top of its property cycle. There are investment opportunities elsewhere.

That’s because house prices in each region will go up at different times.

Auckland can be booming while Wellington is flat. House prices can boom in Gisborne while Taranaki house prices slide.

You might crunch this sort of data yourself or work with a company like Opes Partners, who will crunch the data for you and find properties within your target regions.

What sort of property should I buy?

Another common myth in property – and there are many of them – is that standalone houses with lots of land get more capital growth.

We haven’t seen that in the data.

Yes, over the long term, apartments have grown in value more slowly than other property types – and I expect that will continue.

But, when running the numbers, we’ve found no statistically significant difference between the capital growth that properties with more than 50 square metres of land get, based on land size alone.

The jury is also out on whether standalone houses always get more capital growth than townhouses.

A few issues ago in this magazine, Informed Investor economist Ed McKnight wrote an article showing townhouses got more capital growth in some areas. In others, standalone houses have come out on top.

But there is a discernible trend when it comes to capital growth and the number of bedrooms a property has.

One-bedroom properties have consistently achieved a lower capital growth rate than properties with two or more bedrooms. Above that, it doesn’t seem to matter much.

What else should I look out for?

Finally, the price you pay for the investment property at the start will naturally have an impact on the capital growth you get.

If you overpay for a property then, all other things being equal, you’ll achieve a lower capital growth rate than a property where you buy under what someone would consider the market value.