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Investing in regional areas remains risky

It came as no surprise to me that the latest RP Data-Rismark Home Value Index  has highlighted the widening gap between the capital city housing markets of Australia’s and those of our regional towns.

If you’ve been following my blogs you would know that I believe that as the movements of property values are largely hinged on the supply and demand equation, investors must stick to areas that have lasting appeal to particularly home buyers and also to tenants.

The inescapable fact is that regional communities generally rely on one or two industries to support their economic wellbeing, making employment prospects and the local economy in general quite tenuous.

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 and infrastructure are most prevalent.

The RP Data-Rismark Home Value Index supports this, indicating that the performance of regional housing markets continues to lag significantly behind that of the capital cities. While house values rose by 4.7% across our capital cities during 2010, regional markets remained almost stagnant, with just 0.9% growth.

According to the report, Western Australia’s Pilbara region was the best performing regional market during the 2010 calendar year, where house values rose by 25.0%.  While in north-west Queensland, values plunged by a significant 49.3% over the year.

The best performing regional centres were primarily located in Victoria and New South Wales, which is not surprising given the strength of the Melbourne and Sydney markets throughout 2010.

While falling values across Queensland’s regional property markets for 2010 reflect the overall softer market conditions in Brisbane and the “poor performing tourism sector”.

It’s a similar story in WA, with Perth’s ailing property market (-1.4% over 2010) replicated in the south west region, where house values declined by 4.3% for the period.

According to the report, a number of factors have been responsible for the overall sluggish performance of Australia’s regional markets including; more willing sellers than buyers, the weak tourism sector that’s been exacerbated by the high Aussie dollar and a decline in the number of retirees seeking a sea and tree change.

It will be much the same in 2011

RP Data-Rismark predicts that 2011 will bring much the same in regard to the performance of the housing markets in regional areas, 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.

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.

This will be a continuing trend as more and more people move away from regional communities to seek employment in our CBD’s, as well as the convenience of things like public transport infrastructure.

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. Not to mention the issue of positive cashflow (if you can achieve it now a days) attracting tax, whereas capital growth does not.

Of course the most important commodity a property investor requires to keep their investments viable is people. Without a large pool of willing homebuyers and tenants, you have less potential purchasers to underpin and drive property prices and you risk longer periods of vacancy.

One of the basic pillars of my investment philosophy is that that property investing is not about speculation, rather it’s about creating a strong asset base made up of housing in areas that are tried and tested, proven performers – providing above average annual growth over the long term.

Based on this premise, it is clear to me that regional real estate is more for speculators and capital city property is better for investors – it’s that simple.



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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 his opinions are regularly featured in the media. Visit Metropole.com.au


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