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Big Investment Bang, Small Bucks, Smart Strategy

Big Investment Bang, Small Bucks, Smart Strategy
January 21, 2020 Simon Pressley

Just in case one can’t tell, I’m an extremely passionate Australian whom has been privileged to spend enough time in most locations – big and small – to appreciate the varied and valued reasons why those who choose to live in each of them are attracted to their respective hometown.

Over the last 20-years, higher returns on investment have been produced in dozens of towns with populations below 50,000 than several capital cities. A regional town with a population of only 23,000 has Australia’s third highest median house price. Other towns with populations as small as 7,000 people have proven to be far less volatile than Australia’s biggest cities.

These facts are just a few examples to highlight the gross inaccuracies with people’s perceptions about Australian locations with smallish population sizes – the lifestyle, the real estate opportunities, the risks.

One-third of our nation’s total population live outside of a capital city. That (more than) eight million people is close to double the population size of New Zealand or Ireland. And it represents about two thirds of the population of each country in Scandinavia.

In other words, an awful lot of Aussies choose not to live in one of our eight concrete jungles!

The Australian town with the third most expensive median house price, the regional New South Wales town of Kiama, is ranked way down at number 100 on the scale of Australia’s largest towns (population 23,000).

The regional Victorian town of Kyabram has a population of only 7,000 people and has been such a consistent property market performer that there’s only been a solitary calendar year over the last 20 that its median house price has declined. Given that Australia’s largest city has produced five calendar years of price declines over the last 20, maybe society would be wise to review its perception of a “safe / volatile property market.”

Truth be known, people probably know more about Star Wars than they do about real Australia and real estate markets.

Plenty of Australian greats weren’t born or raised in capital cities. Sir Robert Menzies (Horsham), Bob Hawke (Bordertown), Sir Donald Bradman (Cootamundra), Paul Hogan (Lightening Ridge), Molly Meldrum (Orbost), Evonne Goolagong-Cawley (Griffith), Cadel Evans (Katherine), Kurt Fearnley (Cowra), and Greg Norman (Mount Isa) are just a few. Qantas airlines was founded in Winton.

City-slickers are particularly oblivious to what life’s really like throughout most of this huge country. With such inaccurate perceptions of life outside of a few capital cities, they can’t possibly appreciate real estate opportunities.

Hands up who could point out Wangaratta on a map of Australia.

Keep your hands up if you knew that, over the last twenty years, a standard house in the north-east Victorian township of Wangaratta (population 29,000 people) produced a higher average annual capital growth rate than a standard Sydney apartment. Hmm, no hands are up!

City-slickers falsely believe that Sydney, Melbourne and Brisbane property markets will always be superior to smaller locations because of their larger population masses.

I’m here to say – yet again – that’s absolute balderdash!

Related article: Population tricks for young players

 

Small On Size, Big On Prospects

One of the most popular research reports that Propertyology has ever produced was a 20-year comparison of Australia’s oldest capital city and Australia’s oldest regional city. Most who read that report were gobsmacked to learn that the property market of our oldest regional city had outperformed that of our oldest capital city. For those who haven’t read it, here it is.

That report prompted me to take things one step further. Given that society has failed so dismally at accurately portraying regional Australia, I want to share (with those who are keen to learn) some more gobsmacking insights about a wide range of smaller Australian locations.

Let’s start with the median house price in townships such as Lismore (population 44,000), Esperance (population 14,300) and Dubbo (population 53,000). They have produced price growth in 17 out of the last 20 calendar years whereas Perth (population 1.96 million) has produced six years of price declines. You tell me, does small actually mean more volatile?

While big city investors struggle with eye-watering mortgages and massive holes in their annual cash flow, a myriad of smaller locations provides investors with cash in their pocket each year along with the capital growth.

Propertyology’s studies of Australian real estate history has taught us that the most volatile property markets are the expensive ones, the locations that lack economic diversity, and/or locations with a big construction industry workforce (they have a tendency to get overstimulated during the good years and create an over-supply which inevitably results in property prices tumbling lower).

Locations with a significantly more affordable buy-in price mean that property investors require smaller deposits. This means buyers are able to enter property markets sooner and can expand their portfolios quicker. It’s a very smart strategy, much the same as what astute share investors do!

With a big body of evidence to prove that small population size doesn’t mean smaller rates of property price growth, when armed with quality research, property investors can take advantage of more opportunities across this great Land Down. They can also (wisely) mitigate potential investment risks through avoiding a heavy concentration in a single market plus stronger cash flows.

This table contains a sample of Australian townships with some interesting facts about their respective real estate markets.

TownVolatilityPopulationCapital growth [20yr avg]Rental yield
Darwin (H)
(U)
148,0005.7%
3.80%
5.2%
6.1%
Alice Springs226,5006.1%6.1%
Katherine510,5004.6%6.5%
Adelaide (H)
(U)
21,300,0007%
6.7%
4.2%
4.9%
Barossa324,8006.0%4.8%
Mount Gambier427,0005.0%5.5%
Port Augusta714,0006.9%6.8%
Port Lincoln514,5006.0%5.1%
Brisbane (H)
(U)
22,390,0007%
4.6%
4%
5.1%
Charters Towers619,0004.9%5.9%
Goondiwindi610,7006.3%4.7%
Gympie651,5006.1%5.1%
Innisfail610,0003.7%6.2%
Longreach63,0004.2%7.7%
Mount Isa719,0004.2%8.0%
Proserpine54,0004.9%6.0%
Yeppoon612,0005.8%5.2%
Warwick212,3005.6%5.4%
Hobart (H)
(U)
2239,0007.8%
7.5%
5%
5.3%
Burnie419,4006.6%5.7%
Launceston367,5007.5%5.4%
Melbourne (H)
(U)
34,900,0007.9%
6.8%
3.1%
3.9%
Ararat711,8005.7%7.3%
Kyabram17,3005.1%5.2%
Mildura255,5005.5%6.0%
Strathbogie210,7007.4%5.0%
Swan Hill420,8005.4%5.1%
Wangaratta329,0006.2%5.2%
Warrnambool435,0005.8%5.3%
Perth (H)
(U)
61,960,0006.7%
6.0%
3.9%
4.7%
Albany538,0005.8%4.7%
Broome817,0004.6%6.4%
Bunbury732,0004.9%5.5%
Busselton539,0006.4%4.0%
Esperance314,3004.8%5.2%
Geraldton739,0005.0%5.9%
Sydney (H)
(U)
55,300,0007%
5.5%
3.1%
3.9%
Armidale430,7006.2%5.2%
Bellingen513,0007.6%3.9%
Dubbo353,0006.3%5.1%
Goulburn230,0008.1%4.5%
Griffith426,9004.8%5.2%
Kempsey429,7006.9%5.2%
Kiama523,0006.9%3.5%
Lismore344,0006.5%5.1%
Narrabri413,3006.0%7.0%
Orange142,0006.4%4.7%
Parkes415,0006.3%6.5%
Wagga Wagga164,9005.9%5.0%
Canberra (H)
(U)
1420,0007.9%
6.3%
4.4%
5.6%

NOTE: Average annual capital growth rate over 20-years ending August 2019. ‘Volatility’ measurement reflects the number of calendar years over the last 20-years that the median house price declined. Data sourced from Core Logic and ABS

Size Does NOT Matter

Our sincere apology to the umpteen other fantastic Australian locations which don’t appear in the table above.

The property markets in some locations were particularly strong in decade just completed, while others were stronger in the previous decade and may therefore have more potential in the decade ahead. The individual years of good and not so good performance isn’t the point.

The relevance of the 20-year average annual price growth statistics in the table above is to provide proof that size doesn’t matter and that smaller locations definitely do produce capital growth.

But don’t expect to regularly read about the property market performance of these lower profile locations in your regular news feed each month. One of the main reasons that Australians are so poorly educated about Australian real estate is that mainstream commentary is typically restricted to the performance of a handful of locations – the bigger cities.

If one really wants to become property market savvy and increase one’s chances of making more informed property investment decisions, a good starting point is to use this statistical evidence to begin to change one’s perceptions of what makes a sound property investment decision.

Related article: Everyone can learn from Sydney’s 30-year history

For example, just two hours north of Melbourne is the municipality of Strathbogie, population 10,700 people. In addition to having a really cool name, Strathbogie’s 7.4 per cent average annual capital growth rate and the 5 per cent rental yield are both superior to Adelaide, Brisbane, Perth and Sydney.

The absolutely beautiful regional city of Armidale, in the New South Wales region of New England, officially boasts Australia’s highest ratio of residents employed within the education sector. The median house price in the picturesque university city is still a very affordable $340,000 yet it has tripled over the last 20 years. In addition to that impressive capital growth, the 5.2 per cent median rental yield is outstanding. Good numbers!

My formal studies of Australian real estate history have revealed proof that all locations – big and small – have produced some really strong years, some particularly weak years, and lots of years when things just plodded along.

One case in point is the small central Queensland township of Yeppoon. Throughout the late 1990s, Yeppoon’s property market was flat and then it produced six consecutive years (2002 to 2007, inclusive) where the lowest annual change in median house price was 17 per cent. Imagine that, 17 per cent being the worst year of capital growth out of six years.

An investor with an open mind to looking past Yeppoon’s small population of 12,000 and the research skill to time an investment well, will have realised 209 per cent capital growth in those six great years. Spreading one’s wings to invest in gems like this provides access to more equity and the opportunity to accelerate retirement planning portfolio building.

Related article: A step-by-step guide to winning Australia’s housing affordability challenge

To this very day, I still see remarks from commentators with blinkers permanently bolted to their noggin downplaying Hobart’s investment credentials because it’s (wait for it) ‘too small’. Wow!

Little would these ill-informed people know that Australia’s 11th largest city is similar in population size to Geelong and Wollongong, and that Hobart’s total return on investment over the last 5 years was streets ahead of every location in Australia, bar none!

Back in 2016, when Hobart’s rate of price growth started strengthening, our blinkered friends tried to cover their tracks by making statements such as, “…the price growth can’t be sustained… the population never increases much… it gets too cold in Tassie…” If any of that rot remotely qualifies as a ‘research’ then the Pope is my Auntie’s niece (that too makes no sense).

Focusing on the fundamentals as opposed to community features and benefits – which are completely useless for investment decisions – affords me the opportunity of properly evaluating locations. Completing that exercise on Hobart and then following through to personally invest there in 2014 resulted in more than 50 per cent capital growth and 35 percent rental growth over the following 5 years. One would have to agree, there’s nothing small about those numbers!

Truth be known, Hobart is only a bee’s bonnet just behind Melbourne for Australia’s highest 20-year average annual capital growth rate. Once rental yield is added to the equation, Hobart is a clear first place for total return on investment over the last two decades.

At the time of writing this report, Hobart’s investment fundamentals are (still) the strongest of every Australian capital city by a country mile.

Here’s a sample of our Propertyology’s buyer’s agency work for one client during 2019

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Ranked 73rd on the scale of Australia’s largest towns, the northern New South Wales town of Byron (population 33,000) officially produced the highest average annual capital growth across all of Australia over the last two decades.

But if you’re thinking that beaches make property prices grow, think again. Alice Springs – located in Australia’s red centre and with a population of 26,000 – has a 20-year average annual capital growth of 6.1 per cent, which is much the same as Gold Coast’s 6.3 per cent and well ahead of Broome (4.5 per cent). Further proof of perceptions versus reality!

The see-and-touch nature of bricks-and-mortar, people’s strong personal biases, and the plethora of gross generalisations which don’t stack up under scrutiny means that the world of property markets is full of naivety and inaccuracies.

One of the biases against real estate investment in locations with smaller populations is from big-city folk who have an (inaccurate) perception that smaller locations represent more risk. The last time I checked, Sydney, Melbourne, Perth and Darwin have each suffered recent downturns that wiped between $50,000 and $150,000 off the value of a standard house. Is that not risky?

There’s risk in every property market. No location has immunity!

Let’s be perfectly clear about one thing. Knowing a neighbourhood (or a city) should not be confused with one knowing its property market credentials. One is a subjective thought, the other is a comprehensive assessment by a trained professional – apples versus emus!

For a lot of people, what they might consider to be a ‘risky location’ is more about their own perceptions, generalisations, naivety and a lack of knowledge, as opposed to cold hard reality and objective research.

Over the past 20 years, the individual calendar year instances that the median house price declined in big cities like Sydney (five times) and Perth (six-times) is more than smaller locations such as Warrnambool (VIC), Mount Gambier (SA), Warwick (QLD), Narrabri (NSW), Esperance (WA) and Alice Springs (NT).

The first base to minimising asset risk is buying one with a lower price tag. Logic suggests that the starting price has a lower height to fall from. The second line of defence is the value and reliability of the income which the asset produces – this determines how much the owner needs to contribute of their own money each year.

With what you’ve now read in this report, do yourself a favour and take another look at the numbers in the table above. Forget the names of the locations for a moment – they’ll just fill one’s head with unhelpful emotions – and focus on the numbers.

Diverse Communities

Another detractor for some people investing in smaller locations is the misunderstanding that they have singular economies and declining populations. They falsely believe that all regional areas are reliant on one industry to survive.

There definitely are some locations that are traditional one-industry towns. And, while they can produce many years of really strong property price growth, their downturns often don’t arrive with advanced notice and can be particularly nasty.

If there were more stories in the media about life in real Australia beyond capital city life, not just the blood-on-the-streets story when a one industry town has a downturn, we’d all have a more accurate perception of life beyond the concrete jungles.

The vast majority of regional locations do have sufficient diversity within their local economy. Not to mention their vibrancy, strong community values and all-round quality lifestyle. Here’s one of many great examples.

Official ABS population data confirms that an increasing number of Australians are relocating away from big cities to some of these wonderful regional communities. Having spent a good amount of time in many of them myself, I can totally understand why.

As proof that Propertyology is just as objective about regional towns as we are about capital cities, we have already invested in fifteen (15) individual Australian towns. Who else has done that?

From our firsthand experiences, we’ve observed the incredible strength in community spirit, these towns have good schools, healthy sporting environments, and some fantastic foodie cultures. Commute times to work are small, air pollution is low, housing is very affordable, and stress levels are much lower. Change those perceptions, folks!

Please think about this: Investing is a financial decision. The best decisional structure begins with an objective analysis of 100 per cent of the options. With Australia’s eight capital cities included, there are 185 individual towns that have a population of 10,000 or more. Any investor who focuses on their hometown is giving themselves a 1 in 185 chance of making the best decision. Is that smart decision-making?

The biggest advantage of investing in strategically chosen smaller locations is that the low purchase price means investors can get their deposit monies into property markets quicker, and cash flows are significantly stronger as well.

This strategy is equally appealing to experienced investors because it’s the best way to take advantage of more opportunities and to diversify the investment capital into multiple affordable locations, minimise concentration risks, as well as manage land taxes.

Related article: Here’s how to analyse, diversify and achieve

Every Australian town (big or small) is just as capable of strong property market performance. They have all performed well before and they all will again. But the specific years that the strongest growth occurs will vary from one town to the next. That’s because each town’s economic conditions and housing supply pipelines will always vary widely from year to year.

Without suggesting whether right now is a good time or not such a good time to invest in them, here’s a short description of several smaller Australian towns to help change some perceptions:

Albany, Western Australia

Albany, Western Australia

Located on the most southern point of Western Australia, Albany was the first ever colonial settlement in WA – established two years ahead of Perth. With great beaches and a natural environment, this delightful regional city’s heritage has an interesting military history, beautiful architecture and agriculture. Quality infrastructure includes the Curtain university campus, deep seaport, an airport with daily flights to Perth, quality retail facilities and plentiful tourist attractions. Albany has a population of 38,000 and its median house price has increased from $130,000 twenty years ago to $400,000 today. Small on size, big on long-term real estate returns!

Burnie, Tasmania

Burnie, Tasmania

21 per cent capital growth over the last 3 years makes Burnie one of the highest ranked property markets in Australia right now – fact! Burnie is the entry point to Tasmania’s beautiful Cradle Mountain, and it boasts the state’s most productive port for distributing a wide range of valuable Tasmanian products (premium agriculture, beverages, forestry products, and natural resources). Construction of a brand-new university will commence in 2020. Given all of this and its median house price of just $280,000, Burnie would have to be Australia’s best-value real estate.

Warragul, Victoria (CC3.0 - Mattinbgn)

CC3.0 – Wikipedia: Mattinbgn

Warragul, Victoria

With a population of circa 16,000 people and located just 100 kilometres south-east of Melbourne, this is a location with a country town feel but with ready access to the big city. Warragul is a major service centre for the shire of Baw Baw and a wonderful community noted for dairy farming, general agriculture and production of gourmet foods. The median house price is an affordable $450,000 and has produced 20-year average annual growth of 7.9 per cent. Conversely, a basic apartment in middle-ring Sydney (population 5.3 million) costs $690,000 and its average annual growth rate is significantly more modest at 5.5 per cent over the same period. I hope this is sinking in!

Gympie, Queensland (CC4.0 - Kerry Raymond)

CC4.0 – Wikipedia: Kerry Raymond

Gympie, Queensland

Located just north of the more well-known Sunshine Coast region, Gympie’s rich history is one of gold fields and heritage buildings. Its 6.1 per cent average annual increase in median house prices over the last two decades is superior to that of an inner-city apartment in the state’s capital. Today, a decent house in the home of the Big Pineapple costs circa $350,000.

Wangaratta, Victoria (CC2.0 Flickr: denisbin)

CC2.0 Flickr: denisbin

Wangaratta, Victoria

Wangaratta has a population of circa 29,000 people and a beneficiary of steady internal migration from other parts of Australia. The region’s economic strengths include gourmet foods, wine, as well as textiles. Wangaratta’s Jazz Festival and its Ovens Craft Beer Festival are both massive annual events – talk about lifestyle! Over the 5-years ending 2005, Wangaratta’s median house price increased by a whopping 107 per cent – now that’s a boom! A good quality house today costs in the vicinity of $300,000. It’s one of dozens of towns that produce good growth for a small price!

Kempsey, NSW (Credit: Kempsey RSL)

Facebook: Kempsey RSL

Kempsey, New South Wales

The hometown of Australian country music legend, Slim Dusty, Kempsey is also famous for its beautiful red cedar timber. The average annual increase in median house price over the past two decades is on par with the likes of Adelaide, Brisbane, Perth and Sydney. The BIG difference of course is that Kempsey’s median house price today is just $360,000. Did someone say ‘affordable housing?’ Kempsey’s gross rental yield of 5.2 per cent blows most capital cities out of the water. Not bad for a town of not quite 30,000 people, is it?

Money Where My Mouth Is

As a nation, Australia really does a terrible job at communicating the many wonders of this truly unique country of ours.

My aim for producing this report, and many others, is to try to adjust the inaccurate perceptions which many Australians have about life, and real estate investment opportunities, beyond our concrete jungles.

The historical evidence proves that these locations do produce good rates of capital growth, they are kinder on the annual cash flow budget than most big cities, and many aren’t anywhere near as volatile as one’s perception might have allowed oneself to believe.

I personally have purchased in multiple Australian locations with populations below 100,000 on the premise that risks are lower (not higher) and the opportunities on offer are as good (if not better) than big cities.

Property investors who allow themselves the chance of testing their perception will realise that (what I call) the ‘small-fish-are-sweater-strategy’ is indeed a very solid one.

Whether a big capital city or a smaller regional town, before investing in any location, one would be wise to first objectively analyse the ins and outs of property market conditions at that time.

Related article: A property investor’s guide to property economics

In spite of the abundance of evidence and logical commentary within this report, one must always expect to see and hear people (including from plenty of so-called “experts”) describing many of these locations as “too small, too volatile and too risky”.

The truth of the matter is that ill-informed statements like these always bring a wry smile to my lips because it highlights why so many people never give themselves a chance of making the best decision possible. They clearly don’t understand the main influences on property market performance and many just don’t want to learn because it suits them to believe whatever they want to believe.

Yet, they’ll think nothing of putting a very large sum of money into one individual asset, with an incredibly large mortgage, and significant year-in-year-out cash outlays.

Propertyology is a Brisbane-based buyers agency and (national) property market research firm. We help everyday people to invest in strategically-chosen locations all over Australia. Like to know more? Contact us here.

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