March 28, 2022

Why a Capital vs. Regional City Mindset Will Hold your Investing Success Back?

Will you only invest in properties in capital cities?

Ask this question to your friends who are based in capital cities, you’ll find many of their answers are “Yes”. They have this strong belief that capital cities grow better than regional ones, but is that true?

We believe this capital vs. regional mindset is not healthy for an investor and will hold your success back, while an open mind which accepts both capital and regional cities will help you achieve your investment goals faster.

Why? Here are 3 reasons.

1. You get to choose from a much bigger pool.

Australia’s population is highly concentrated to the capital cities. According to ABS, circa 68% of Australian residents and 2/3 of residential properties are in the 8 Greater Capital City regions. This makes many think that there are few people and few houses in regional Australia, thus no proper market.

Hmmm… that would be true if you distribute the rest of the population and houses evenly to the regional areas, including the vast outback. However, the fact is, out of the 8.3 million regional residents, 5 million live in 43 cities with a population larger than 50k. Around 1/5 of the country’s total residential properties are in these 43 regional cities.

Many people might argue that the regional markets are not as active due to their smaller population.

Well, data shows that the regional markets are as active as, if not more than, the capital cities.

Here we use relativity of population and the number of sales as an indicator of market activity. The below two charts show the population and number of sales make-up (capital cities/regions) of each state. Just at a glance, we can see that with just 32% of the country’s population, regional Australia has 37% of house transactions happening there – seems more active than capital cities.

Now we put the two sets of data together and calculate the number of sales per capita(below table). Unsurprisingly, all regional areas, except in WA and NT, have a higher per-capita sales number than their capital cities.

You may wonder if the regional markets have become more active just during the pandemic, when many capital residents moved out to regions? The below chart tells the answer – No. While the capital to regional population ratio has been stable (below left chart), the regional markets’ number of sales has been taking an increasing proportion in the national total sale volume since 2014 (below right chart). COVID didn’t disturb the trend significantly.

Knowing that the regional markets are even more active than the capital city markets, why should we give up on the 43 (at least) potential markets and reduce our chances of success?

 

2. Capital cities don’t necessarily grow faster.

One reason why people don’t buy regional is they believe capital city markets always grow better than regional markets.

Is that so?

Let’s use the most expensive city and its state as an example. The below chart shows the median house price growth of Greater Sydney and regional NSW in the last 15 years up to the end of 2021.


The 15 years have been broken into three5-y terms. Sydney’s growth journey is obviously bumpier. Although it grew much faster than the rest of the state during 2011-2016, it didn’t perform as well before and after that term.

Meanwhile, the regional NSW didn’t have dramatic short-term growth (until 2020), but has been gaining strength gradually, and finally achieved an even higher long-term growth (176%) than the capital city (160%).

In the short-term, Capital cities don’t always outperform regions either. Greater Sydney’s house price has grown by 27% in the past year, while, just to mention a few, the Orange region has grown by 39%,the Southern Highlands has grown by 36%, Shoal haven by 34%, and Coffs Harbour by 29%.

Surprising, isn’t it? We thought Sydney wast he fastest growing region in the country, but how come it loses to regions?

It’s the work of relativity.

·     The relativity in price –

Sydney, or any other capital city, gives the impression of growing faster because it’s more expensive than its regional counterparts. If a $1m house grows to $2m, we would think it’s super strong growth; If a $300k house grows to $600k, we wouldn’t think the growth is too impressive. However, the growth rates of the two houses are the same!

·     The relativity in demand and supply –

When you think capital cities have higher demand, always remember they have higher supply as well; and although regional areas don’t create huge demand, they don’t have a huge number of house supply either. When examining market pressure and growth potential, we always look at demand or supply together.

While Sydney loses its 15y-growth battle to regional NSW, Adelaide wins against regional SA (below chart). So, both capital cities and regions have their fast-growing periods and slumps, which form their growth cycles. A city grows because of a mix of factors such as its position in the growth cycle, market pressure, affordability, economic activity, etc. It’s never fair to attribute fast growth merely to its location.

3. You don’t buy a “capital city” when you buy in one – It’s all about local market.

When people think of buying in a capital city, they think they would receive a package of “Capital City Bonus” and the house will be growing at the same pace as the greater capital city average, wherever the house is.

However, you won’t think if you look at each subregion’s growing rate. Let’s again talk about Greater Sydney, which achieved a high 27% growth in a year. Curious about some of its well-known sub regions’ growth?

·     Manly: 45%

·     Eastern Suburbs: 29%

·     Central Coast (Gosford and Wyong): 28%

·     Blue Mountains: 22%

·     Sydney Inner City: 19%

·     Blacktown: 17%

Some have grown faster than Greater Sydney, some are slower.

The capital cities are too big to be considered as one single market. When you buy a house in it, you’re more buying in the local market than buying in the greater city.

To make it easier, I’ll show you the market trends of two local markets: Wyong and Blacktown. The below charts show the sales and rental market indicator trends over the last 15 months.

In the sales market, while both regions have their number of sales (demand) grow strongly, the number of for-sale listings(supply) in Wyong has been staying at a low level, but that of Blacktown has been increasing since early last year. The shortage in supply in Wyong has led to the region’s steeper decline in sale days on market and stronger price growth compared to Blacktown.

In the rental market, vacancy rate in Wyong has been much lower than Blacktown, indicating much higher market pressure and leading to a much faster growth in median rent level, which would further increase Wyong’s attractiveness in the sales market.

Both in Greater Sydney region, Wyong and Blacktown have experienced totally different market pressure levels and growth journeys.

The reason why property markets are localised is because people’s life is localised. If you live more than 10km away from the CBD, eg. North Ryde, Sydney (as shown in the below image), it’s highly likely that you’re not going to the city centre every day, or even not every week. Because you get everything necessary for everyday life from a circa 5km radius circle from home (below map): You may be going to work in Macquarie Park, shopping and enjoying all types of services in Macquarie Centre, playing golf in North Ryde Golf Club, BBQing with friends on the bank of Lane Cove River…

North Ryde is only 15km from Sydney CBD, what if you live in Wyong? Do you consider yourself living in Central Coast orSydney?

When life and property markets are localised, you don’t buy in a capital/regional city, you buy in the local market. Then why care so much about capital or regional?

 

In a nutshell, it makes no sense to have a capital vs. regional mindset when investing in properties, because if yes, you could be missing out tens of decent-sized and active regional markets, you could be risking slower growth, and you could be ending up with a property that doesn’t have much to do with the capital city. This mindset could seriously hold your investing success back.

We’re not trying to persuade you to give up buying in capital cities. As long as the local market is enjoying good economic growth momentum (check out this blog about local economy) and rising market pressure, it could be worth investing, no matter where it is.

And how do we examine the local economy and market pressure? InvestorKit is a buyers’ agency devoted to analysing local economic and house market data to identify your next investment location. Just give us a signal here and let us answer your questions with a 45-min FREE no-obligation consultation!

DISCLAIMER: Contents of this document are of general nature only and should not be relied upon solely when making an investment decision. InvestorKit nor any of its directors, associates, staff, or associated companies bear any liability from any action derived from the contents of this email. One should always seek third-party investment information from relevant parties such as legal, finance, and accountancy enquiries.

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