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Small Cities, Super Stars

Many property investors prefer buying in big cities. They believe big cities have more robust economies, thus higher housing demand and better capital growth. However, that may not always be true. In today’s blog, let’s discuss why population size should not limit your investment location choices.

Image for the article - Small Cities, Super Stars

Many property investors prefer buying in big cities.

They believe big cities have more robust economies, thus higher housing demand and better capital growth.

However, that may not always be true. In today’s blog, let’s discuss why population size should not limit your investment location choices.

A trend – Bigger cities are more likely to perform better.

The below charts show how 442 Australian LGAs’ average 1-year / 10-year / 20-year compound annual growth rates (data ending Sep 2021) are distributed by population size (Note: This analysis does not include all LGAs due to a lack of consistent house price data in some).

Image of 634ccb1b8890433721b4b789 1%20Average%20compound%20annual%20growth%20by%20population

From 2020 to 2021, LGAs with smaller populations have performed better than larger ones, which reflects the regional housing boom during the pandemic when regional cities’ housing demand and house prices surged.

However, looking at the middle and right charts, we must admit that bigger cities performed better than smaller ones in the past two decades, especially in the last 10 years (the middle chart). That is, perhaps, where the impression of larger cities performing better is from.

 

However, a trend is not a rule.

The general trend that smaller cities’ average performance is not as good doesn’t mean all small cities grow slower.

Let’s assume that a city with less than 30k residents is small. Some examples of small cities are:

– Armidale NSW (2021 Census population=29,124)

– Devonport TAS (26,150)

– Horsham VIC (20,429)

– …

Now let’s have a closer look at the 10-year growth rates of small and larger cities.

Image of 634ccc205ed7e1713cdea520 2.%20Small%20vs%20Big%2010y%20Growth

From 2011 to 2021, the average annual growth rate of all LGAs was 3.3%. 107 or 40% of the small cities have achieved better growth than average (98 of the 107 LGAs are in regions), while almost half of the largerLGAs didn’t make average.

You see, average numbers can be misleading. If you were scared away by the lower average 10-y growth of small cities, you could have missed as many as 98 small cities with good growth.

 

3 super-star small cities…

Now, instead of just talking numbers, shall we look at some of the small cities you might have missed?

Armidale, NSW

Armidale is the centre city of NSW’s Northern Tablelands region, with a population of 29,124 (2021 Census). It is also the centre of the state’s New England Renewable Energy Zone. Billions of worth of infrastructure projects are revitalising the local economy, leading the unemployment rate to trend down since 2015.

The recovering economy leads to lifted housing demand. Armidale’s rental vacancy rate has been declining since 2016 and is now hovering around an extremely low level of <1%. The super tight rental market has led to a 10.8%rental growth in the past year.

In the sales market, the high housing demand, combined with it slow supply level (1.5% of total house stock are available for sale, compared to the national average of 2%), has led to a 19.5% surge in house price in a year, with houses are selling more than twice as fast as the same time last year. The interest hikes that have caused price falls in big cities seem to have no impact on Armidale’s growth momentum (below chart).

Image of 634ccd042fad8b2668e52b05 3.%20Armidale

Mt Gambier, SA

Mount Gambier is the second largest city in South Australia, with a population of 26,878(2021 Census). It is the centre of a large transport industry due to its central location between Melbourne and Adelaide. Its unemployment rate has now dropped to 3.7%, the lowest over a decade.

Like inArmidale, the thriving local economy has led to high housing demand in MountGambier. Its rental vacancy rate now sits under 0.5%, down from 3.2% back in2015. The rental crisis has pushed weekly rent up by 12.9% in the past year.

In the sales market, supply is at a crisis level – only 0.7% of all houses are available for sale. The tight market has led to a 23.6% annual growth in house prices, and the average time of a for-sale house staying on the market has dropped by more than ¼ in a year (below chart). With such a tight market, it won’t be surprising for Mount Gambier to see further price surges.

Image of 634ccdc76e96410733ccdad2 4.%20Mt%20Gambier

Burnie, TAS

Burnie is one of the major towns in North West Tasmania, with a population of 19,918 (2021 Census). Having Tasmania’s largest seaport,Burnie’s economy has been recovering with support from the Federal and StateGovernments.

Burnie’s house price growth has been accelerating since2018, achieving a 72.9% rise in just four years.

Now the market is still facing high pressure. Its rental vacancy rate has been around 0.1-0.2% for almost two years, leading to a 15.1%rental growth in the past year. In the sales market, only 0.9% of all houses are available for sale, and the average days on market of for-sale houses have more than halved since 12 months ago. The high market pressure has led to a 25.9%annual growth in house prices (below chart).

Image of 634ccdf88155b22052699aa2 5.%20Burnie
An InvestorKit Case Study

Address: 45 Mace Street Montello TAS 7320

2017 Purchase Price: $365k

2021 Bank Valuation: $785k (115% growth in 4 years)

2022 Bank Valuation after Renovation: $1.1m

Weekly Rent: just under $1200/w (gross yield = 5.4%)

This block of four is one ofInvestorKit’s earliest purchases. Its value kept growing with an average 21% annual rate from 2017 to 2021 due to Burnie’s cumulative market pressure. The equity growth has backed multiple other properties and its renovation this year, which lifted the property value further to $1.1m.

 

Market indicators are more reliable than population size.

Data has shown that many small cities can achieve outstanding performance in the house market.It’s a shame that some investors do not see them, misled by average numbers.

One might argue: data says larger cities have a higher chance to perform, why should I go for small?

Smaller city markets differ from larger cities in terms affordability, market cycles, rental yields, and many other aspects. They add diversity to a portfolio and meet requirements that big cities can’t (e.g. small budgets). All we want to say is that you should not let city size limit your options and hold you back on your property investment journey.

So how do you tell if a small city is set for strong growth? – We utilise market indicators.

As you must have noticed from previous sections, we look at data of a city’s economic performance and demand-supply relationship:

– job vacancies

– unemployment rates

– infrastructure investments

– visitor numbers

– internal migration trends

– rental vacancy rates

– number of listings vs. sales

– percentage of available stock on market

– days on market

– new house development

– …

Data is essential in assessing markets and making purchase decisions. InvestorKit is a data-driven buyer’s agency that purchases based on factual data, not just trends.That is how we purchased that Burnie block and hundreds of other outperforming small-city properties for our clients and helped them achieve their investment goals faster – Interested in our data analysis and buyer’s agent service?  Click here and request your 45-min FREE no-obligation consultation today!

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