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Jeremy Sheppard Blog post by Jeremy Sheppard

Why is Long Term Growth (LTG) a misunderstood indicator?

Hi I’m Jeremy Shepherd and I’m talking about Long Term Growth. This is an indicator that we use in our research to help us uncover top growth locations for our clients to invest in.

 

The Long Term Growth, or LTG for short, is the compound annual growth rate over the last ten years for a property market. So if the LTG is 6% it means that there has been 6% growth each year, compounded over the last ten years.

It’s ironic that it’s called Long Term Growth when ten years is probably a minimum hold period for most property investors – but that’s what the industry’s branded it, so we call it the LTG.

Interpreting the LTG is where it gets tricky so pay attention guys!

I regularly see people interpreting the LTG around the wrong way. What do you think is more important — a high LTG or a low LTG? Well, actually, it turns out that a high LTG represents recent booming, recent high growth, and it’s unlikely that this high growth — this above-average growth — is going to continue into the next few years. So, it’s actually a low LTG that outperforms.

I’ve done some research and found that from five years ago, the LTG high-performers underperformed over the next five years, and the LTG low-performers outperformed. So it’s around the other way — you want a low LTG to forecast future high capital growth, not the other way around.

There can be some problems with this.

For example: an LTG that’s negative or zero, or very low like 1%, could indicate a market with problems and those should be avoided.

The sweet spot seems to be around 3 or 4%; but definitely below the long-term national average growth rate of around about 6%.

This links back to some of the other videos about other metrics I’ve spoken about, such as Market Cycle Timing and Ripple Effect Potential — a market cannot continually have above-average growth forever. Eventually, neighboring markets will be so much more appealing because they are so much more affordable. It can’t carry on forever. There are surges of growth, followed by flat periods of growth; and the LTG is an indicator of that phenomenon. That’s why you need to chase after low LTG markets not high LTG markets.

This is not the only indicator we use — there are heaps of other indicators you need to look at if you’re going to conduct your own research. We certainly do. You can check out all of them in our research page.

Thanks very much for watching. Please leave your comments below:

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