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 which outperformed the Melbourne and Sydney 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 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 through Covid – I'm not sure if this will be a long-term trend or not.
What about affordability?
Over the last year, property values increased strongly around Australia at a time when wages growth was minimal, meaning affordability became more strained as house prices rose faster than the capacity of the typical household to repay a mortgage.
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We know that last year 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.
This can be seen in the following chart from the HIA which calculates affordability for each of the eight capital cities and regional areas on a quarterly basis and takes into account the latest dwelling prices, mortgage interest rates, and wage developments.
However, 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!