Do you invest for cash flow or for capital growth?
“We always need to hear both sides of the story” sang Phil Collins, and correct he was.
It’s doubtless confusing for budding property investors given that one section of the property market commentariat instructs you to invest for cash flow or yield in regional properties, arguing that in the future people will shun capital city living in of electing to work from home and live in cheaper regional areas.
And on the other hand, there are those – including myself, in fact – who are adamant that over the long run, the greater capital growth will be sourced at lower risk in the capital cities.
The assured huge population growth in capital cities and a limited supply of land will ultimately drive land values to the very limits of affordability, and at various points in the property cycle, beyond them.
I didn’t arrive at this conclusion by accident by the way, rather that I’ve seen how it all plays out before in Britain when the debt cycle eventually reverses with gusto.
By way of disclosure, I do own some regional properties, but I believe that the core of a property portfolio should be founded upon the specific capital city property types which will be in massive demand regardless of what’s happening to the economy or property markets on a macro level.
When it comes to finance, investment or economics, whenever in doubt about who to believe, always remember W. Edwards Deming’s simple mantra: “In God we trust. All others must bring data.”
Today, let’s look at some demographic shifts. Last week, the ABS Regional Population Growth data reported that in the year to June 2013, Australia’s population increased by a hugely strong 407,000 to 23.1 million, but where exactly did all that growth happen?
The sea change phenomenon is dead
Regular readers of this blog over recent years will know what we’ve long expected to see in terms of population growth trends.
Very specifically, that is, as two-thirds immigration of Australia’s population growth becomes accounted for by immigration and only one third of it occurring through natural growth, the respective populations of our four major capital cities in particular (but not Adelaide) are set to be bursting at the seams with growth.
Cameron Kusher of RP Data was quick off the mark in analysing the recently released figures from the ABS on Regional Population Growth, and the conclusion was crystal clear: “The sea change is well and truly buried”…for now at least.
The population growth is overwhelmingly focused on our four capital cities plus the Gold Coast and Sunshine Coast.
You can read Kusher’s analysis here on Property Update and his two charts copied below summarise it rather well – the capital city population growth growth rate (+2.1%) is miles ahead of the now lagging regional areas (+1.2%), with all four of the major capital cities expanding at a tremendous pace.
Adelaide’s labour market has been declining for the past year and correspondingly the pick-up in population growth has reversed.
Summarily then, the population is growing much faster in the four major capital cities than in the regions – although this is not the case in Adelaide, which we also expected – and not only in absolute terms, but in percentage terms too.
But what does this mean for property investment? Well, not higher prices directly, but intense pressure on land prices in certain popular city areas, and a consistently compounding growth in demand over time.
State level – New South Wales
Take the example of New South Wales and its significant urban areas outside Sydney.[sam id=40 codes=’true’]
Wollongong added 3,000 persons in the year to June 2013 (+1.1%), Newcastle-Maitland +4,800 persons (+1.1%), the Central Coast +2,700 (+0.8%) and Albury +1,300 (+1.5%), all thereby recording population growth rates of well below the national average of 1.8%.
In fact, lower than average population growth rates were also recorded in the the following significant urban areas:
Dubbo, Ballina, Batemans Bay, Bowral-Mittagong, Broken Hill, Coffs Harbour, Forster-Tuncurry, Goulburn, Grafton, Lismore, Lithgow, Muswellbrook, Nelson Bay, Parkes, Port Macquarie, Tamworth, Taree, Ulladulla and Wagga Wagga.
In other words, population growth under-performed the national average everywhere in the state except for a handful of smaller conurbations where tiny growth figures on small populations caused a blip on the chart of 1.8% or above – Bathurst (+700 persons), Cessnock (+600), Orange (+700) – where the absolute population growth figures are so low as to be almost trifling.
Compare this, for example, to Sydney’s blistering population growth of 81,000 in the year to 30 June 2013.
Of course, there are always cases of regional towns and cities around Australia where there exists a population spurt. In 2013, these included Geelong (+2,500), Melton (+2,700), Rockhampton (+1,600), Townsville (+4,200) and Mackay (+2,000).
The aforementioned Queensland hubs of the Gold Coast and Sunshine Coast also feature here, of course.
However, at 2-3 persons per household, it’s naturally more manageable and realistic for a regional city to absorb such levels of population growth via land release and new developments, which in turn may dampen the potential capital growth in existing dwellings.
Ultimately, if you are looking for areas where the population growth is putting massive strain on infrastructure and a limited supply of land then the answer is a no-brainer in my opinion. Here is what happened in the capital cities in the year to June 2013 (click chart):
Together, Greater Sydney (+81,000 or +1.7%) with a population of 4,757,000, and Greater Melbourne (+95,000 or +2.2%) with a population of 4,348,000, are home to two out of every five Australians, with immigrants flocking to these two cities in droves.
Greater Brisbane +45,000 (+2.2%) and Greater Perth +67,500 (+3.5%) also demonstrated exceptionally strong growth.
However, Greater Adelaide’s population growth was comparatively very weak in 2013 at only +13,000 (+1.0%) as was that of Greater Hobart +1,000 (0.5%). For completeness the 2013 growth in Greater Darwin was +3,900 (+3.0%).
As a general rule I don’t listen to the property experts who recommend investing in the southern states or obscure regions since they so often have a vested interest in advising people where to invest. Instead, when trying to project into the future, I simply listen to what the actual data is telling us:
“The proportion of people living in a capital city is projected to increase from 66% in 2013 to 72% in 2053. In 2053, 89% of capital city residents will live in the four largest capital cities.” – very conclusive.
Sydney – a more detailed look
As a significant urban area, Sydney’s population growth accelerated again to 1.8% in 2013 (click above chart).
Meanwhile Greater Sydney accounting for a massive 78% of the state’s population growth in the 12 months to June 2013, with the whole of the rest of the state adding only a meagre 22,300 people in the year.
Where a lot of people tend to misunderstand data (including, on occasions, city planners) is that they assume a growth of 1.8% this year has the same impact as 1.8% a few years hence.
But it isn’t, due to the compounding growth effect (click chart).
In absolute terms, Sydney’s significant urban area population growth is almost scarily strong (click chart).
Since 1991, the city of Sydney has added in total 1,084,000 residents, all of them competing for that narrow strip of land.
One wonders whether the percentage growth rate will be forced to slow as the property cycle moves into its next stage.
For if Greater Sydney continues to grow at its present rate the population will surpass 6 million in only 13 years time, with an infrastructure all set to buckle under the strain.
This is all well and good, but where exactly is the population growing?
Below is the New South Wales map.
We can safely ignore the incongruous, amorphous blob of red on the west of the state since that relates to just a handful of extra persons in Orange.
Indeed, the population growth is so heavily focused on suburban Sydney, that this map is effectively useless and we’ll need to zoom in further.
Here we are again, but now zoomed in to Sydney so we can make some sense of the pink and red population hotspots:
The fastest growth rates in 2013 were recorded in the statistical areas where building completions have been taking off, such as Parramatta-Rosehill, Concord-North Strathfield, Homebush Bay-Silverwater, Kensington-Kingsford and Parklea-Kellyville Ridge.
These aren’t the specific areas I would choose to own property myself due to the new supply coming online, but I do know the one word that the above images being to mind: opportunities.
I know precisely where I’m planning to own property for the next 30-40 years. How ’bout you?