Capital City or Regional Property? Don’t fight Gorillas

By:

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

InvestIs 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.

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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?

Concept Of Property Real Estate Investment With Houses Placed On Top Of CoinsOver 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.

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.

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

InvestMoving 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!

READ MORE: Regional affordability deteriorates faster than capital cities

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About

Michael is a director 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. Visit Metropole.com.au


'Capital City or Regional Property? Don’t fight Gorillas' have 6 comments

    Avatar for Michael Yardney

    October 17, 2021 Jason

    I was hoping you’d do a fair comparison and even if you didn’t say the towns, say the numbers, and it would appear over a long term the ‘expert’ is right. You’ve long said not all land is created equal, so what is a fair comparison ? Expert’s town vs Richmond, expert’s town vs Hunters Hill, experts town vs Penrith ? You always say look at the numbers, it appears the expert has done that, but you are trying to compare all regional vs all metro

    Reply

      October 17, 2021 Michael Yardney

      Fair point Jason – that’s the kind of research our research dept at Metropole do every day and that’s the information we supply to our clients

      Reply

    Avatar for Michael Yardney

    October 17, 2021 Marion Pears

    What would be your thoughts about having a mix of property types and locations, some for cashflow (to keep the portfolio afloat) and some for capital growth? A mix of one bedroom and two bedroom units, houses of various sizes, maybe a luxury apartment in an excellent suburb?

    Reply

      October 17, 2021 Michael Yardney

      Marion, diversification is an important part of safeguarding of property investment portfolio.
      However having cash flow properties generally stifles your capital growth. Most beginning and even more experienced investors need to build a substantial asset base and only way to do that is invest in high growth properties.
      The cash flow you will receive from regional properties will not be sufficient to give you increase service ability to buy your next property.
      So I would rather stick with high growth investment grade properties. However diversifying styles of property and locations is important. when you eventually need cash flow properties, I’d be looking at commercial properties

      Reply

        Avatar for Michael Yardney

        October 17, 2021 Andrew Sansome

        We have a substancial amount of blocks of units in regional South Australia providing enough for weekly wage plus paying all associated costs. LVR is 32% so still loans involved, so I think building a decent property base can be done today in a solid regional area without choking on a capital growth / negative geared monster in a city, particularly now with all the bank abreviations to be met will servicing DTI / HEM / LIR ……………….
        Little fish are sweet 🙂

        Reply


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