Regional or capital city

Recently a number of clients asked me my thoughts on investing in regional Australia.

Prices there are cheaper and sometimes that’s the only type of property they can afford. Others are attracted by the lure of positive cash flow.

I tend to explain that overall well located properties in capital cities will make better long term investments than regional properties.

Since the movements of property values are largely hinged on the prosperity of the community as well as the supply and demand of properties, savvy investors buy in areas that have continuing strong demand particularly from home buyers (who push prices up) and also from tenants.

Sure in the past Australian’s lived “on the land” but over the last century this tendency has changed and the majority of Australians want to live in and around our capital cities.  And this trend is set to continue as the bulk of new residents who immigrate here gravitate to areas where employment, lifestyle opportunities and infrastructure are most prevalent.

The inescapable fact is that most regional communities rely on one or two industries to support their economic wellbeing, making employment prospects and the local economy in general quite tenuous. It also makes property prices in these areas more volatile.

Regional markets are likely to remain flat over the next few years with a continuing weak tourism sector and “no sign of a significant pick up in ‘sea changer’ volumes”. The only possible exception will be in those areas where the local economy is driven primarily by the resource sector, with higher commodity prices creating increased employment and therefore a greater demand for housing.

While purchasing in regional centres will often provide investors with higher cashflow potential, the trade off will always be less capital growth over the long term and ultimately, it is capital growth that investors require to grow their asset base and create wealth.

Sure regional properties are cheaper, but I’d rather put my money in a 1 bedroom apartment in a great capital city location, than buy a house in most regional areas.

For investors, the take home message is that the most reliable and consistent property markets when it comes to capital growth are found in and around Australia’s capital cities.  The larger populations in these markets will mean less volatility in prices.