If you have read my books you will know why I generally favour well-located capital city investment properties over those located in the more illiquid regional markets.
One of the key reasons is that in a city with a rapidly growing population and labour force, high demand for scarce land close to the city and employment hubs will generally force land prices north over time.
Another key point is that we simply do not believe that household debt levels can or will run much higher from where they are now as a percentage of household disposable income.
Until 2006 rising household debt levels around the developed world pushed dwelling prices higher practically everywhere.
Since that time household debt levels in Australia have plateaued.
So while we see some inner ring locations outperforming – driven higher by demand from investors and international capital – on a national basis it is hard to envisage dwelling prices outperforming household incomes, particularly given that interest rates are now relatively close to the zero bound.
Just as Britain has become a story of London (+39 percent since the peak) versus the rest of the UK (flat since 2007/8), we are seeing a similar story playing out between Australia’s major capitals and the rest of the country.
In a previous blog I discussed how appreciating dwelling prices in Australia have been attributable to both rising land prices and an increase in development and construction costs according to independent research by both the Reserve Bank of Australia and the Australian Bureau of Statistics.
RP Data’s Cameron Kusher took a more detailed look in this excellent piece at what is happening to land prices in Australia right now.
What RP Data found is that capital city land prices have risen by 6 percent in the last year while regional land prices have been flat.
Notably since 2007 the gap between the capital cities and the regional markets is rapidly becoming a gaping gulf.
Source: RP Data
Of course, you can torture any data until it confesses.
I even saw this week someone arguing that Sydney prices have fallen in 2014 (?!) yet clearly anyone who has tried to buy a house in the harbour city will tell you that prices have risen by at least 5 to 10 percent in the year to date.
The important thing to note is the change in composition of sales over time, with the capital cities becoming increasingly dense.
Property owners simply do not care what has happened to some arbitrary median number or calculation; they only care what has happened to the price of their house.
For this reason, RP Data analyses price per square metre to give a clear picture of what is really happening to land prices in Australia.
That is to say, scarce capital city land is increasing in value, while regional markets are flat or declining in real terms.
Of course, as a city dweller I could quite correctly be said to have an inherent bias here. Kusher’s conclusion:
“With the supply of vacant residential land available for purchase limited and the size of land reducing there has been a substantial rise in the cost of land.
Of course the rising cost of land is a key contributor to the rising cost of housing. This is particularly noticeable in capital city markets.”
In particular, take careful note of how regional land prices were pushed dramatically higher by household debt until 2006, but now are declining as households in aggregate are tapped out – even with record low borrowing rates.
Truth be told, I believe that there can be a place for regional property investing, but the ideal time to buy regional is not at the peak of the household debt cycle.
The time to buy in the regions is after a correction, such as we experienced in the UK through 2007-9.
Even in some quality areas of the south-east of England saw prices crashing by 30 percent or more, so clearly there were some great buying opportunities there.
I don’t expect my regional properties to outperform those I own in London or Sydney over the long run, but with a positive cashflow and having experienced a relatively fast 25 percent gain I don’t mind so much.
“Regional economies tend to have a higher unemployment rate, lower wages and fewer employment opportunities than capital cities. While it might be appealing to move to a regional area for more affordable housing the reality is that it isn’t practical for many people.”