Over the last 20 years, the property market of Australia’s oldest regional city has outperformed that of Australia’s oldest (and biggest) capital city. Fact!
The many who believe in the myth that investing in capital city real estate presents better potential than buying an investment property in any regional location would be wise to read this case study and broaden their knowledge.
Conscious that most people will be in complete disbelief about the above revelation – we do live in a world that’s littered with wives tales and stereotypes – Propertyology figured that one of the most effective ways to help break down some barriers was to compare the performance of these two great cities – Sydney and Launceston – over the last 20 years.
Could there be a bigger contrast?
One city has a population of 5.2 million and the other is home to 68,000 people. Capital versus regional. New South Wales and Tasmania. Completely different economic profiles. Modern versus traditional.
For the 214 years that it took Launceston’s population to reach 68,000, Sydney’s population increased by that amount in just 9 months last year. But aren’t property markets all about population growth?
Compare the Pair
Sydney and Launceston both have a rich heritage, including that they were both originally founded to accommodate convicts.
In 1788, 753 convicts and 277 free settlers arrived in Sydney. To encourage the establishment of multiple communities, over the following 40 years, the state government granted free parcels of land for people to build homes on. Established primarily for food production, Parramatta was one such community.
As our convict population continued to grow, Hobart became Australia’s second settlement in 1803. A year later, Launceston was established as a penal colony in the state’s north.
Both cities have contrasting attractions. Sydney is a big global city with the iconic Sydney Harbour and world-class amenities. Australia’s largest city boasts a skyline of office towers and high-rise apartments. Sydney hosts year-round major events.
With pristine air and natural scenery, Launceston is an arts and culture haven. The city centre is full of beautiful architecture while the suburbs are predominantly detached houses on quarter acre blocks. Australia’s 34th largest city has a plethora of local wineries and foodie experiences.
Launceston is one of 30 to 40 major regional cities of substance across Australia. As with capital cities, at the right time they all offer great property investment opportunities for those whom are prepared to remove the blinkers in attempt to give themselves a chance of the best possible result.
The great Australian city of Launceston fits Propertyology’s definition of a ‘mini capital city’. It provides essential goods and services to numerous smaller communities within northern Tasmania. It has a multi award-winning airport, a modern hospital, a university, great schools, fantastic restaurants and cafes, and a newly gentrified city heart.
Both Sydney and Launceston have very diverse economies although their respective industry profiles are very different.
Sydney is the nation’s banking and insurance capital and a global tourism attraction.
Launceston has earned an international reputation for its wide variety of premium agricultural products (food and alcoholic beverages) along with having a diverse manufacturing sector. Launceston’s tourism industry is thriving because of its unique local attractions.
Launceston Property Market Outperformed Sydney Over The Last 20 Years
To a large degree, it is irrelevant which locations were the best of yesteryear – one can’t invest today and place an order for past results. The fact that Launceston’s property market performed better than Sydney over the last 20 years should be an important lesson about ignoring property market myths and making objective decisions.
As it is today, Sydney housing was also expensive 20 years ago. The cost of a typical Sydney house has increased from circa $250,000 to just shy of one million dollars over the last two decades. According to official data, Sydney’s median house price has increased by an average of 7.1 per cent per annum over the 20-years ending June 2019.
Launceston’s median house price increased by an average of 7.4 per cent per annum over the 20-years ending June 2019. The current median house price is $325,000. One could today buy a basic house in Launceston’s outer suburbs for circa $300,000 or a character inner-city house for $1,000,000+.
Whether 20 years ago or today, many can’t afford to buy a house in Sydney. Back then or now, one could purchase three Launceston houses for the cost of one Sydney house.
Related article: Small fish are sweeter
In addition to Launceston producing a higher rate of capital growth than Sydney, its 5.4 per cent rental yield is significantly better than Sydney’s 3.1 per cent.
To put some context around the significance of housing entry costs and rental yields, a property investor who purchases a Sydney house at the current median value and median rental yield, using a 10 per cent deposit and investment loan with 4.5 per cent interest rate, will have pre-tax cash flow shortfall of $21,000 per year. The same scenario in Launceston is $2,000 cash flow positive.
Over the last 20 years, both cities have seen downturns, they’ve had two cycles which produced strong growth, and a flat patch which lasted many years. We can say much the same for most locations across Australia.
It’s important to note that the growth years and downturns occurred in completely different years. That’s because local economic and housing supply conditions (the biggest influences on property markets) will always be different from one city to the next.
Over the last couple of years, property market conditions in Sydney and Launceston have been quite a contrast. Sydney’s last real estate boom ended in July 2017 and a large pipeline of new property stock then fuelled a downturn which wiped approximately 20 per cent off Sydney values over the subsequent two years.
Launceston’s real estate prices were flat for several years until early 2018. Today, Launceston is one of the strongest property markets in all of Australia.
As one who personally chooses to objectively analyse the fundamentals of all capital cities and all regional locations, I invested in Launceston myself as recently as February 2018!
Getting A Tenant
Those whom may have only ever lived in a capital city often have a completely inaccurate perception of regional locations. As with each of Australia’s eight capital cities, no two regional cities are the same.
Throughout each city’s history, Sydney and Launceston have both experienced periods of high and low residential vacancy.
Sydney’s last property boom attracted a largely by investors, thereby adding an all-time record volume of new supply to Sydney’s rental pool. Consequently, Sydney vacancy rates have recently climbed to record highs and many landlords have been required to reduce their rent expectations.
At different times, Launceston has also had periods of higher than normal vacancy rates. Over the last couple of years, they’ve hovered at 2 per cent.
Whether one owns an investment property in Sydney, Launceston or any other city in this large and diverse country, it’s inevitable that there’ll be occasions between tenants when no rental income is coming in. One of the benefits of investing in affordable locations is that smaller mortgages and higher rental yields mean lower annual holding costs.
What About Population Growth?
One thing which Launceston and Sydney have in common is a history of struggling to retain their existing resident population – they are perennial losers of population to internal migration each year. The combined sum of Sydney’s net population loss to internal migration over the last 4 years is equivalent to an entire city the size of Launceston.
Related article: Population winners and losers
Propertyology has repeatedly said that population growth is far from the biggest influence on property prices. The Sydney-Launceston population comparison is one of many case studies to prove our point.
While you process the below data, remember that Launceston’s 20-year average annual median house price growth rate was superior to Sydney’s:
- According to official ABS data, from June 2002 to June 2018, Greater-Sydney’s population increased by 1,094,717 people. Launceston’s population increased by a grand sum of just 4,336 people over the same 16-year period;
- In other words, the same total population increase in Australia’s oldest regional city over the last 16 years (or 832 weeks) was produced by Australia’s oldest capital city in just 2.4 weeks of 2018;
- From 2011 to 2017, Launceston’s population declined by 299 people – yes, declined – yet the median house price still increased (by 7.7 per cent). Conversely, Sydney’s higher than normal population growth in 2007 to 2009 (inclusive) only produced a combined 4.3 per cent increase in median house prices.
Blind Freddy can see that there must be other more important pieces to the property puzzle than population growth. One thing is abundantly clear, a city’s bigger population mass has no bearing on property market performance!
Is It Harder To Get A Job In Regional Locations?
Nearly 9 million Australians (and growing) choose to not live in one of this nation’s eight capital cities. They’re not doing that to collect welfare payments. To the contrary, around half of Australia’s total GDP each year is generated by regional Australia.
More and more Australians are gravitating towards the wonderful lifestyles and affordable housing offered by regional cities.
The federal government recently declared a revision of Australia’s immigration policy to direct more skilled labour into the many regional cities that have more jobs than local applicants can fill. Propertyology’s buyer’s agents have helped everyday Aussies invest in several such locations in a variety of states.
Over the years, Propertyology has frequently reported on how economic development and job creation has been the driving force behind property markets in numerous regional cities consistently outperforming capital cities.
Whether they are big or small, no city is immune to economic ups and downs!
In 2010, Sydney had a higher unemployment rate than any other capital city whereas it’s economy today is very strong. Swings and roundabouts!
Similarly, as recently as five years ago, Tasmania had just come out of recession; today it boasts the biggest improvement by any state economy that Australia has seen in decades.
As the above chart shows, sustained growth in job volumes tends to be a precursor to a strengthening local property market. Launceston’s improved economy is the driving force for it today being Australia’s strongest property market.
Are Regional Markets More Risk?
Regional locations that are highly reliant on one particular industry sector do pose greater risks to local property markets. We can say the same about a few capital cities. But, plenty of regional locations have economic diversity.
That said, there’s risk in every single property market. I would argue that cities with the highest cost of housing pose greater risk than locations which are more affordable. Between $100,000 and $180,000 was wiped off the value of standard houses in Sydney and Melbourne over the last two years, not to mention the enormous risks associated with high-rise apartment markets in our biggest cities.
That’s not an isolated incident. Subsequent to Sydney’s previous boom, the median house price in March 2004 was still the same 5 ½ years later.
After shedding 20 per cent of its housing value, recent interest rate cuts and credit policy relaxation has helped to stabilise Sydney’s property market. But Sydney’s underlying fundamentals remain the same. Sydney still has a woppa of a housing supply pipeline, Sydney’s share of overseas migration is likely decline, construction sector job losses are probable, and infrastructure investment is scheduled to reduce in future years. On top of this, history suggests that there’s often 10-years or more between booms so Sydney’s next one is not likely to be any time soon. Beware the interest rate sugar-fix!
Like Sydney, the last 20 years produced two real estate booms for Launceston. It also had lots of other years with (sustainable) single-digit price growth.
Launceston’s property market recently started a strong growth cycle. The boom before that produced a staggering 123 per cent increase in Launceston’s median house price over the 3-years ending 2005.
The combination of a diverse economy, affordable housing and controlled supply reduces volatility within the property market of great regional cities like Launceston.
Both Sydney and Launceston have experienced property market downturns. The lower mortgage cost in Launceston makes real estate more resilient. Launceston’s worst period (courtesy of a state recession) was the 2011 and 2012 calendar years when the median house price declined by a total of $13,650.
Risk or perception?
Over the last 20 years, there were five calendar years when the median house price declined in Sydney (2005, 2006, 2008, 2011, 2018) while there were three occurrences in Launceston (2011, 2012 and 2013).
Propertyology believes that Launceston’s current property market outlook is strong. Recent growth in job advertisements for the region is among the highest in Australia. We also anticipate that Launceston will become a beneficiary of interstate migration in future years.
Launceston’s current momentum is likely to be driven further forward by economic growth in the form of some exciting luxury hotel projects, a world-class new university to be developed on the inner-city fringe, a proposal for a new defence force precinct, and the significant growth of its tourism sector.
Australia’s oldest regional city is just one of many regional wonders.
Let the evidence in this report be a lesson to all property investors that the many stereotypes and generalisations about regional locations are inappropriate.
Most property investors can’t afford a $600,000 to $1,000,000 purchase. And to those who can, it completely defies the golden rule of ‘avoid having all of your eggs in one basket’ and putting everything on black!
If, 20 years ago, one did invest in three Launceston houses for the price of one Sydney house, in addition to accumulating more capital growth they would also have enjoyed a significantly superior cash flow each year. Indeed, an even smarter strategy would have been to purchase those three more affordable houses in a variety of cities across different states, as illustrated below.
Propertyology’s buyer’s agents helps everyday Aussies to build diverse portfolios using the abovementioned strategy. Just within the last five years, we’ve invested in two (2) different capital cities and eight (8) exciting regional cities, one of which is Launceston.
As full-time students of Australian property markets, the specific cities which attract most of our attention varies from year to year.
Don’t be a creature-of-habit investor who grossly limits one’s potential by having all of one’s assets in the same city. That’s akin to a share investor placing all of their hard-earned savings into AMP shares purely because they work for that company. ‘Familiarity’ and ‘fundamentals’ are very different things.
Whether in Launceston or many other regional wonders, it pays to objectively analyse the fundamentals of regional locations just as much as capital cities. Two decades of evidence shows that every location is capable of strong capital growth. Well chosen affordable locations also offer the added benefit of high yields, making it kinder on the household budget.
Propertyology is Australia’s premier property market analyst and award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.