There are lots of loud voices advocating big cities as the best places for investors to target, as I wrote in my Property Observer column in September.
Indeed, they say, the big cities are the only places to invest. Some even suggest you’re crazy to buy anywhere else.
These people have one thing in common: they have businesses that benefit if you follow their advice. This is the loudest noise in real estate – the voice of vested interests.
Apart from the ethical issues of seeking to benefit from giving tainted advice, it’s foolish to have such hardline attitudes.
Nothing is that black and white in real estate. Situations are always evolving, and the best opportunities at a given point in time can be found in myriad places: a regional city, a seaside town with an important export port, an outer suburb boosted by new transport infrastructure, an inner-city area with an evolving university-hospital precinct.
But, generally speaking, I have no doubt that many of the best opportunities for long-term capital growth with solid yields are found outside the big cities.
Regional Australia is the most under-rated option for investors. Investor surveys that asked people where they expect to find the best capital growth always rank the regions last, behind popular choices like inner-city suburbs and sea change icons.
It emphasises how misinformed the average punter is and how little homework they do. These choices contradict all the research evidence. I suspect “research” for most investors consists of absorbing media sound bytes – which means they have their heads crammed with negativity and misinformation.
To put things in simplistic terms, this is what the research shows: outer suburbs outperform the inner-city, hill change out-does sea change, and the city v. country clash is usually won by country.
There are plenty of exceptions you could find, but those are the general rules of thumb that emerge from research.
To compare city and country, let’s look at New South Wales. Sydney property professionals tend to gag at any suggestion of going west of Parramatta to buy real estate. If it’s not the beaches, the inner city or the north shore, you’re a nutter.
This is despite the miserable capital growth performance of Sydney over the past decade. There are very few suburbs anywhere in Sydney that have managed a long-term average even as low as 6% a year. There are none with double-digit averages.
Among the so-called “better” areas that have delivered only 3% or 4% a year to property owners are Manly, Balmain, Palm Beach, Vaucluse, Gordon, French’s Forest, Sutherland … it’s a very long list.
Doing only marginally better, with averages around 5% a year, are places like North Sydney, Leichhardt, Bondi, Randwick and Cronulla. At growth rates like these, you’d be better off leaving your money in the bank.
Regional NSW, however, is full of cities and towns with double-digit growth rates for the past 10 years. Among them are Muswellbrook, Singleton, Lismore, Casino, Branxton, Greta, Gunnedah and Glen Innes.
A second-tier list of places with growth rates around 9% to 9.5% includes Goulburn, Wagga Wagga and Murwillumbah, all of them out-performing any Sydney suburb you care to nominate.
One of the best has been humble Broken Hill, which has averaged 13% per year over the past decade.
Melbourne overall has been a better performer than Sydney, but the same city v. country pattern applies. If you want a double-digit growth rate long-term, you have to head bush.
Consider the suburbs of Melbourne’s inner south-east, much beloved by property professionals and local media who see auction activity there as the barometer of all things real estate. Toorak, the standard bearer for everyone who loves pretentious property, has a Sydney-esque growth average of 4.9%.
Others, like Armadale, Brighton and St Kilda, are a little better, averaging in the 5% to 6% range.
Some, including Balwyn, Canterbury and Malvern, has touched the intoxicating heights of 8%.
Compare that to workaday Gippsland towns like Traralgon, Churchill, Maffra and Sale, which have averaged 11-12% over the past 10 years.
Portland, down in the far south-west, has been chugging along unnoticed (except by city people who love to fish) with a growth average of 10% a year.
Scattered around the regional areas of Victoria are plenty with double-digit averages: Woodend, Kyneton, Camperdown and Barwon Heads among them.
I’ve heard it said that regional areas are risky because their economies are based on a single major industry like agriculture or mining.
For many regional cities, this is untrue. There’s nothing one-dimensional about Orange, Tamworth and Dubbo in NSW, or Ballarat, Bendigo and Warrnambool in Victoria. Their great strength is the diversity of their economic base, along with their affordability.
For Terry's updated outlook sign up for the free webinar on Thursday, December 6 at 12.30pm on Regions versus capital cities - where to invest in 2013?