Capital City or Regional Property? Don’t fight Gorillas

Key takeaways

The argument about whether it's better to invest in regional Australia or a big capital city is a long-standing one, but on average capital cities have outperformed regional Australia over the last 40 years.

Over the last year as property values have increased strongly around Australia, affordability has become more strained and capital city properties are likely to once again outperform regional properties.

As affordability starts to hit those with lower incomes, I would only invest in capital cities where there will be greater economic growth, leading to higher-paying jobs growth.

It's a long-standing argument, isn't it?

Is it better to invest in regional Australia or in a big capital city?

Only this morning I listened to a podcast where one so-called "expert" mentioned a raft of regional towns that outperformed the Melbourne, Sydney and Brisbane property market over the last decade, and I'm sure statistically he is right.

But that's not a fair comparison.

You can’t compare a town of, say 200-300,000 people to a large city of 5 million people like Sydney or Melbourne.

However, the following chart from APM Capital shows that on average capital cities have strongly outperformed regional Australia over the last 40 years.

But then again, this is not a fair comparison.

Obviously, you're not buying the Sydney property market – you're buying an individual property in that market and hopefully one that will outperform because of its location.

I was astounded that this same "expert" explained how he is unbiased, and he's prepared to help his clients invest anywhere in Australia.

Yet he then explained that he never buys a property worth over $500,000, which clearly means he is biased – he has already eliminated virtually every property in any of our capital cities from his search.

There is no doubt that regional Australia has benefited from changing housing needs during Covid – but this trend has since reversed

What about affordability?

Over the last year, property values increased strongly around many parts of Australia at a time when wages growth was far from strong, meaning affordability became more strained as house prices rose faster than the capacity of the typical household to repay a mortgage.

We know that during the Covid years regional Australian property values grew stronger than capital city values, but this trend has since been reversed.

Moving forward capital city properties are likely to once again outperform as regional affordability becomes more strained than in capital cities.

I don't like fighting Gorillas — I don’t fight the big trends.

Moving forward as affordability starts to hit those with lower incomes, and in general, wages in our capital cities are higher than in regional locations, I would only be investing in the capital cities where there will be greater economic growth, leading to higher-paying jobs growth, which will eventually lead to population growth.

But importantly the people taking up these new higher-paying jobs will have the affordability to pay more for their properties or to rent properties.

In both instances, this will lead to continual capital growth.

Don't fight gorillas.

Go with the big trends - you're less likely to get it wrong!

About Michael Yardney Michael is the founder of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.