Do Sydney and Melbourne have competition for value growth?

Traditional property wisdom dictates that the biggest gains over time can be had in the largest, busiest and most populous regions of a country. In Australia, this has certainly proven true over the last few years, with NSW and Victoria capitals Sydney and Melbourne grabbing all the headlines thanks to their steady increases in real estate value – but could that all be about to change?

When looking at some of the most recent information from CoreLogic RP Data, it’s pretty clear that state capitals are doing well across the board. In fact, over the last 12 months the annual change in capital city home values is an increase of 7.9 per cent. While some might accuse Sydney in particular (at almost 11 per cent) of dragging this figure up, the growth has occurred almost universally. For example, Canberra’s average value has gone up by 7.9 per cent, putting it above the average and hot on the heels of the big two.

With this data in mind, the questions that investors should be asking themselves are: Why capitals are doing so well, and how can they use a home loan and the great performance of smaller cities to make their own property purchases a success?

Capital gains

Before we get into the nitty gritty of investing in property outside of Sydney and Melbourne, it’s worth having a think about why so many capital cities are doing so well at the moment. There are lots of possible reasons to point at, but the most obvious one is that these markets simply have more buyers. As we all know, the first rule of property is that value is based on demand. Demand is based on how many people want something, and the state capitals are by and large the most populous cities in the country. This is with the exception of places like the Gold Coast, which also has a booming property market.

McCrindle reports that more than 66 per cent of Aussies live within the boundaries of Australia’s state capitals, and all of these people need places to live. This means that property owners can expect better rental returns and higher prices when selling.

The downside for those looking for an investment home loan to buy property somewhere like Sydney, is that the prices are high. If Sydney was the only city increasing in average property value, this would present a real challenge, but fortunately cities like Canberra, Brisbane, Adelaide and even Hobart are coming to the rescue.

Go and grow with the flow

When investing in property, it’s critical to look at behaviour – specifically migration patterns and the popularity of certain regions. On a small scale this could mean identifying suburbs on the up, but for the purposes of this article we’ll look at the entire country. The benefit of this approach is that you can more accurately predict long-term performance, and that’s exactly what you want with a property investment.

For capital cities, population growth is a key metric to consider, and while you might be expecting Sydney and Melbourne to lead the pack, data from McCrindle reveals that this isn’t the case. In fact, the largest increases over the last five years have taken place in places like Perth – with a 3 per cent annual increase compared to Sydney’s 1.5 per cent. Perhaps this shouldn’t be surprising. After all, there’s only so many people that can live in a certain area, and Sydney has actually been slowing for a while, with Melbourne expected to claim the title of Australia’s most populous city by 2053.

Total value doesn’t equal total returns

With more people (both from within Australia and abroad) choosing to base themselves in smaller capitals, savvy investors can actually expect properties in places like Canberra to increase in value at an even faster rate over the next few years, while also providing a better return.

Total returns from residential property have gone up across all state capitals by an average of 67.2 per cent over the last five years. However, as we’ve stated in a previous article, this isn’t as simple as more expensive properties resulting in more rental yield. There’s only so much that people can afford to pay in rent, and CoreLogic backs this up, with a recent report stating that “over the past year, total returns have begun to accelerate in Hobart and Canberra.  Although value growth in these two cities has not been as strong as in Sydney and Melbourne, the superior rental returns are resulting in stronger total returns.”

So what are the takeaways here? Well, to put it simply, capital cities are still the best places to invest, but growth is happening everywhere, and not just in the attention-grabbing cities of Sydney and Melbourne. The real lesson is to get in quickly with the help of a mortgage broker before the values increase any further.