History has shown that the Australian property market is not one market. There are numerous property markets across the country and markets within those markets. Many people have an opinion on each market and where they recommend investing. Some people will recommend certain areas based upon their experience within that market. However, opinions usually don’t reflect reality can have varying levels of bias. So, to determine what market, you should invest in, it makes more sense to contrast historical data to formulate an educated understanding.
Which Areas Will Be Analysed?
For the sake of this comparison, we will look at all major metro markets across the country (Sydney, Melbourne, Brisbane, Perth, Adelaide, Canberra, Hobart, Darwin). Of course, the country is not limited to metro markets and there are smaller regional areas that could be of value to an investor. However, within this analysis, we will simply look at the major metro markets to determine which area has performed the best over the past 40-50 years.
What Data Will Be Used?
Like how one’s opinion may demonstrate bias; data can also be unreliable and invalid. So, in order to reliable information, we extracted our data from the peer-reviewed article “Housing Prices in Australia: 1970-2003 by Peter Abelson and Demi Chung in conjunction with ABS data from the early 2000s. This way we can aim to take an unbiased view on Australian housing prices from 1970-2020.
The table below outlines the median house price across each metro market over the past 47 years. It is important to note that the data for some cities (Brisbane, Adelaide, Hobart, Darwin were not recorded in 1970 and for this reason, we have started contrasting data from 1973 to include all cities except Darwin who did not have recorded data until 1986 within this report. Finally, the data doesn’t includes growth up to the end of 2020.
Sydney and Melbourne’s growth rate was 8.28% and 8.39% respectively. It is clear to see that these two cities have historically outperformed other metro markets over the past 47 years (ending 2020). Other metro markets typically grew by approximately 7.4-8% per annum. Darwin showed the lowest level of growth, but this did not account for Darwin’s growth between 1973-1986 which could have outperformed other markets substantially and brought its average growth rate higher.
So, that’s it then? Sydney and Melbourne are the best markets to purchase in? Not exactly. When you delve deeper into these markets it becomes clearer what has occurred over time. Each market is cyclical in nature, and this means it has booms and busts over time whilst historically increasing in price. When we cap the end date in 2020 it encompasses growth from 2012-2020 when Sydney and Melbourne both saw extremely high levels of growth. So, what would happen if we compared house prices over a 40-year period from 1973-2013? Would this change the outcome we see in the above table?
So, when we look at historical data at a different point in time (1973-2013) we can see that most metro markets had an average annual growth rate of 8.3-8.65% per annum. Hobart and Canberra were slightly lower with 7.97% and 7.63% growth rate respectively. Darwin again appears to suffer from insufficient data from 1973-1986.
What Does This Mean?
This tells us that each major metro market historically has performed at a very similar annual growth rate over a 40-year period up until 2013. So why the change? As mentioned previously, property markets are typically cyclical with booms and busts over time. From 2012-2017 Sydney and Melbourne saw significant price growth as they went through a boom period. This means the data captured up until 2020 May under-value smaller metro markets as the “big 2” had seen an additional boom period.
What Happens Next?
There are likely two outcomes that can play out moving forward (over the next decade). Firstly, we could see Sydney and Melbourne continue to outperform other metro markets and become even more unaffordable to many buyers. Some believe there has been a shift in the Australian property market within the past decade to support this idea. With Sydney and Melbourne being internationally recognised cities, overseas investors have accelerated price growth and will continue to separate these markets from the rest of the pack. This could take place, however, there is an alternative that could play out…
Each metro market has historically performed at approximately 8.5% price growth per annum (over a 40-year period). Over the 40 years of comparing data, we have typically seen different markets underperform and out-perform throughout this period. What we saw was over time they typically deviated back towards their average annual growth rate. So, a period of low-price growth has usually been followed by a boom and likewise strong price growth has led to suppressed short-term growth. Therefore, it could be conceivable that we would see stronger above-average price growth within many metro markets (in the next few years).
It is important to understand what has played out over time. In doing so, you can make a better informed educated decision based upon data and not opinion. This is how successful investors build wealth over the long term by making educated and informed decisions.
What Does the Data Miss?
The data collated above only compares average price growth across each Australian metro market. What it doesn’t account for is your goals, circumstances, budget, or cash flow. Failing to do so means it doesn’t determine where you as an investor should invest. Your goal may be to focus on cash flow properties and therefore this data doesn’t dictate where you should buy. Alternatively, your budget may be 500k and you are automatically priced out of the higher valued markets so regardless of the data you couldn’t purchase there anyway.
The data also doesn’t consider the holding costs of owning a more expensive property. Property prices and rental yield have an inverse relationship. This means as prices increase, rental yield decreases. Therefore, to hold more property (value-wise) you may be better suited to purchasing two 500k properties over one 1m property. Owning more properties may also allow you to diversify your portfolio across two markets rather than putting all your eggs in one basket.
Finally, the data doesn’t consider the performance of your individual property. You may have purchased a property that has historically performed at 10% per annum despite the market median. So, although one metro market may have historically outperformed another it doesn’t mean you can’t see capital growth in a lower-performing market. If you had purchased a property and got a great deal with value-add potential, you may have seen significant price growth despite the movement of the market. Alternatively, if you had purchased in a high-demand market you may see above-average growth based upon the locality of your purchase.
Many people ask, “where should I purchase?” This question is general in nature and general questions lead to general advice. Instead, numerous other factors need to be accounted for to determine which area suits a particular investor. What is clear, is that historical data shows all metro markets have seen strong levels of capital growth. This may suggest that the time in which you purchase is just as important as where you purchase. So, when someone says “don’t invest there” know that they likely have a recency bias, or their anecdotal view is clouding their judgment. Instead, take a borderless approach to invest and focus on purchasing quality properties that align with your investing goals.