Why size doesn’t matter – major cities have not been the top performers for house price growth

October 10, 2019
Hobart City

Time to bust a property myth: the biggest cities aren’t always the best performers when it comes to price growth.

Don’t believe us? Well, check out the most recent data on residential property prices from the Australian Bureau of Statistics, which was released in September.

The ABS found that median house prices in Australia’s smaller capital cities have grown faster over the past 15 years than prices in the bigger capitals.

While Australia’s second-biggest city, Melbourne, recorded the strongest growth in that period, the next three biggest capitals – Sydney, Brisbane and Perth – were at the bottom of the list:

  • Melbourne = 121%
  • Hobart = 118%
  • Darwin = 92%
  • Canberra = 90%
  • Adelaide = 83%
  • Perth = 83%
  • Sydney = 76%
  • Brisbane = 75%

Regional areas can also deliver strong price growth

Another interesting finding from the ABS data was that median house prices in some regional areas also grew faster than prices in big capital cities:

  • Regional Tasmania = 98%
  • Regional Northern Territory = 92%
  • Regional Victoria = 87%
  • Regional Queensland = 83%
  • Regional Western Australia = 77%
  • Regional New South Wales = 72%
  • Regional South Australia = 63%

Yes, it’s true. Over that long 15-year period, small capitals like Hobart and Darwin outperformed international cities like Sydney and Brisbane. And the regional areas of Tasmania and Northern Territory also outperformed Sydney and Brisbane.

Property myth busted.

Supply is just as important as demand

One reason people assume big cities deliver the strongest price growth is because they also have the fastest population growth.

After all, if a capital city increases its population by 50,000 in a given year and a regional location gains only 500 people, that must mean prices in that capital city would grow faster than in the regional location, right?

Not necessarily, for two reasons.

First, the relevant thing is not the numerical increase but the percentage increase. So the capital city might actually be growing more slowly than the regional location in percentage terms (say, 1.2% v 1.8%).

Second, property prices are based not just on demand, but supply as well. So if a capital city adds 50,000 residents but builds enough new properties to house 60,000 people, it will probably experience downwards pressure on prices. Conversely, if a regional location adds 500 residents but builds enough new properties for only 400 people, it will probably experience upwards pressure on prices.

Judge locations on their merits, not their population

The lesson for property investors is that bigger isn’t always better.

Australia is an enormous country with lots of communities, from metro suburbs like Cammeray, St Kilda and West End to regional locations like Bunbury, Launceston and Mount Gambier. So you might find that a property in a regional centre delivers you better long-term returns than a property in the inner ring of one of our major capital cities.

Of course, there are also times when the big cities do lead the pack – as we saw above, Melbourne recorded the strongest house price growth over the 15 years.

So it’s important to keep an open mind and judge a potential investment location on its merits, not its population.

Be thorough. Do you research. Look at locations of different sizes in different states.

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