When it comes to property investment, the market you choose to buy in is one of the most important decisions you’ll make. In the last five years, we have seen markets in Sydney and Melbourne increase by 60 per cent or more, while in mining towns across Australia we have seen property prices fall by the same amount. The difference in returns here can mean a life of financial freedom or one of financial ruin, so it’s critical to get this right.
At Aquila Property Investment, we analyse five key areas to assess a property market’s likely return, and how volatile those returns will be. But first, how do we define a property market?
WHAT IS A PROPERTY MARKET?
I define a property market here as encompassing an entire city or town that is largely independent of other major markets in the country. Within this market there will be numerous sub-markets. A capital city or a major regional centre is considered its own market, while council areas within that city would be considered a sub-market.
In the case of South-East Queensland where we operate, Greater Brisbane is a market, while Logan is a submarket. The Gold Coast, the Sunshine Coast and Toowoomba are independent markets, as they are independent cities outside of (reasonable) commuting distances from Brisbane.
So what do we look for in a property market?
STRONG FUTURE POPULATION GROWTH
This puts pressure on the supply of land and forces the construction of new housing supply. There is an important difference in the projections of population growth in a market compared to a sub-market. In a market, high predicted population growth is a sign of demand - usually net interstate and overseas migration and natural increase. High population growth in a sub-market, however, is a sign of supply - locations within a city that have high projected population growth are the areas that new supply is planned (see our The Truth About Population Growth article for more detail).
In Australia, we are seeing a pronounced trend in population growth towards capital cities, major regional centres linked to capital cites, and lifestyle locations such as coastal towns. Population growth in these areas will put further pressure on the supply of land, and force new construction.
STRONG FUTURE JOBS GROWTH
This ties in with strong population growth, and, means a healthy economy, rising incomes and less risk of a sustained downturn. The more diverse the range of employers within a market, the safer it will be - markets reliant on one or two industries have a high risk of busts. Capital cities and major centres will generally have a wide variety of employers, as well as public sector jobs, which will put a floor under house prices even during lean times.
Larger cities have shorter property cycles and are less volatile. They have more diverse demand drivers and can be less easily oversupplied. This brings steadier returns and reduces your risk.
What’s a large city? Well, Melbourne, Sydney, Brisbane, Perth and Adelaide are all over one million people, and of these cities, only Melbourne has had a period of five years or more where median house prices have not increased (1989-1996). Other major centres include the Gold Coast-Tweed Heads (663,000), Newcastle-Maitland (481,000), and Canberra-Queanbeyan (447,000). Hobart, while significantly smaller (208,000) is also a state capital which lends it greater critical mass in terms of jobs and services than an non-capital city of the same size.
Easy connections to other cities improve a city's economy, increases its attractiveness to future residents and stabilizes its property market. You’re more likely to move to or remain in a city where other cities are accessible, and the more a city is connected to other cities, the less volatile its jobs and property markets are.
A city where you can easily commute by road or public transport to another city will be better connected than one where you can’t. A city with a major airport with many direct flights will be better connected than one that doesn’t. Compare the Gold Coast to Hobart. Even though Hobart is a capital city, the only major city that you can drive to is Launceston, while on the Gold Coast you can drive to Brisbane in 1 hour (2.3 million people) and the Sunshine Coast in 2 hours (325,000). The Gold Coast airport moves over 2 and half times as many people as Hobart and offers many international routes into NZ and Asia. If you compare the Gold Coast to Townsville then the difference is even more stark - the nearest major centre to Townsville is Cairns (4 hour drive) and most flights out of Townsville are to Brisbane.
As a result, the Gold Coast housing market has followed Brisbane closely, with short property cycles (for detached houses anyway). Townsville, on the other hand has had a nine year slump from 2010-2019.
Property markets follow a distinct cycle of peaks and troughs. Buying at a lower point in the cycle reduce risk and gives you greater opportunities for capital gain. There is not one single property cycle for a market however: it can also be broken down into sub-markets and property types.
For example, if you purchased in Sydney two years, ago, you were buying at the peak of the cycle, when supply was scarce and demand was high. Since then, falling confidence and increasing supply have caused a fall of 10%, with more falls likely. If you’d bought eight years ago, at the bottom of the cycle, you’d have enjoyed 70% capital growth, even when factoring in the recent downturn. While timing is not everything (you need to consider the other factors above), it can make a big difference.
BRINGING IT ALL TOGETHER
There are no certain rules that will guarantee success in property investment. However, by applying the rules above to your market selection, you give yourself a strong chance of long-term investment return and a much lower risk of failure. Let’s revisit our examples from the start - Sydney and Melbourne or mining towns. Faced with a choice 5 years ago in which to invest in, if you assessed the markets by future population growth, jobs growth, critical mass, connectivity and timing, you would have hands down gone with Sydney or Melbourne, as they were very solid across all five of these areas. The mining towns were poor in the last three and ended up having population and job losses as well.
It doesn’t mean that you can’t make money out of locations that don’t offer these five elements - of course you can. But the average long-term investor will only purchase a few properties in his/her lifetime, and won’t buy any more if one of them proves to be a disaster. In our view, maximizing your chances of consistent returns, and minimizing the risk of a setback that destroys your financial position, is much more important than chasing investments with a potentially higher growth rate.