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Tier-2 And Tier-3 Cities Atop The Popularity Scales

Tier-2 And Tier-3 Cities Atop The Popularity Scales
July 17, 2019 Propertyology Head of Research and REIA Hall of Famer, Simon Pressley

If we truly want to evaluate how Australia’s 25 million residents rate every town and city, one needs to measure how many households packed up their belongings and physically moved town. The popularity scales are a measurement of which locations Australian residents were drawn to relocate to and other locations that they chose to move away from.

The proof is in the foot traffic!

Official data confirms that regional Australia is increasingly more desirable for Australians to live in than our big capital cities. And this increased popularity is also driving property prices higher in many non-capital city locations.

Popularity Winners

Last year, the 6,370 Australians whom relocated to the Sunshine Coast (a tier-2 city with total population of 320,000) is more than the 4,266 Australians who relocated to the tier-1 city of Melbourne (Australia’s second largest city, population 4.88 million).

For the 5,559 people who left Adelaide during the year-ending June 2018, a similar combined volume of people moved to Geelong (3,663) and Port Macquarie (1,515).

Tier-3 cities are similarly coming up trumps. The combined sum of people who decided to move town and chose Fraser Coast (1,376 people), Maitland (1,189), Bendigo (980), Ballarat (883), Tweed (829), Scenic Rim (637) and Dubbo (375) is comparable to the 6,659 people who packed their bags and left Australia’s fourth largest city, Perth.

When the ABS released the latest population data last month, most gum-flappers rolled out the usual “… 66 per cent of the 391,000 increase in national population occurred within our capital cities…” From a property market perspective, that data is as useful as a screen door on a submarine.

Thorough analysis of the data confirms that the locations of choice for Australian residents are satellite cities (tier-2 cities on the outer-fringe of capital cities) and major regional cities (tier-3 cities which play the role as a ‘capital city’ for a larger region). Big profile, big price-tag metropolises are failing to attract residents. Fact!

Related article: The rise and rise of satellite cities

Number One on Australia’s Popularity Winners list is the Gold Coast. With a median house price that’s only 60 per cent the cost of Sydney, Gold Coast attracted 7,441 new residents from other parts of Australia last year.

Interstate migration in to Queensland continues to accelerate, contributing 28,668 to the state’s population growth for the year ending June 2018. We need to go back to 2005 for the last time that Queensland saw internal migration figures that high.

But only 10 per cent of Queensland’s internal migration gain chose digs in Brisbane City Council (home to 25 per cent of the state’s total population). Brisbane’s labour market will need to improve for it to be a major beneficiary of Sydney and Melbourne’s housing affordability squeeze.

Melbourne had a few city councils that rated on the popularity winners list. Once again, housing affordability is a common denominator in the likes of Casey, Melton, Hume and Cardinia. Their respective property markets also performed significantly better than Greater-Melbourne’s 10 per cent decline in 2018.

Camden bucked the trend in Sydney, attracting 5,411 new Australian residents to migrate there. I highly doubt that it’s just a coincidence that Camden has one of Sydney’s least expensive median house prices.

Popularity gains also occurred in Dubbo (375 people), Wingecarribee (546), and Ballina (584).

Popularity Losers

Number One on the Popularity Loser’s list is Australia’s biggest city. People are leaving Sydney in their droves.

The 27,434 residents that said sayonara to the Harbour City last year smashed the previous record. That’s enough people to establish an entire township the size of Wangaratta – a regional Victorian city that 138 Australian residents elected to relocate to last year.

The internal migration component of Australia’s latest population data confirms that existing residents are leaving capital cities like Perth (6,659 people), Adelaide (5,559) and Darwin (2,797), where economies aren’t setting the world on fire.

There’s absolutely nothing wrong with the economy of Sydney and Melbourne at the moment – many would argue that if you live in those cities and don’t have a job you aren’t trying very hard. But, whether it’s because of housing affordability pressures and / or being fed up with congestion, plenty of people are choosing to leave.

Of Greater-Sydney’s 43 city council precincts, only eight had a net increase in internal migration. The Sydney locations with the highest volume of Australian residents migrating away were Canterbury-Bankstown (3,970 people), Cumberland (3,714), Randwick (3,232), Georges River (2,842) and Sydney City (2,840).

Overall, Greater-Melbourne had a net gain in population from internal migration of 4,266. But the official data says that 21 out of 27 Melbourne city councils produced a net population loss from internal migration.

The big Popularity Losers in Melbourne were Monash (3,718 people), Brimbank (3,232), Dandenong (2,858), and Whitehorse (2,076).

Related article: Brutal truth about Sydney and Melbourne property markets

The bigger concern for Sydney and Melbourne is what happens when their respective economies weaken and / or the cost of servicing their bigger than average household mortgages increases whenever interest rates go up?

14 out of the 30 biggest Popularity Losers were Sydney city councils, while six were from Melbourne, and five from Perth.

Housing affordability pressures are also affecting Newcastle (837 people relocated away) and Wollongong (349 people lost to internal migration).

The ABS data supports Propertyology’s ongoing commentary wherein we’ve cautioned people not to confuse ‘desire’ (an aspirational lifestyle feature) with ‘demand’ (property price tags within reach of the majority). Beachside Bondi (Waverley LGA) and trendy Balmain and Leichhardt (Inner-West LGA) both appear in Australia’s Top 30 list of Popularity Losers.

Related article: Blue-chip is BS, investing is about smarts not status

The appearance of Salisbury (Adelaide) and Greater-Dandenong (Melbourne) among the Popularity Losers is perhaps a legacy of recent car manufacturing closures in both jurisdictions.

Darwin city council’s representation is certainly a by-product of the Top End recession.

Property Market Stars

While we continue to be bombarded with daily commentary about a property market downturn in a few capital cities, the opposite is happening to real estate prices in various Australian tier-2 and tier-3 cities.

Several years ago, Propertyology increased its focus on various parts of regional Australia because we anticipated improving economic conditions (and tighter housing supply than most big cities) to drive housing demand. In 2017 and 2018, an extra 200,000 jobs were created in alternative locations to the eight capital cities and it’s no coincidence that that’s also where property markets have performed best.

Related article: The Class of 2018 – Australia’s best markets
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Propertyology is currently active in several locations across Australia and our buyers agents are observing the price growth first-hand.

It’s well known that housing is affordable in these tier-2 and tier-3 cities. As an increasing number of people from capital cities grow to appreciate the quality lifestyles offered in these great locations, more and more are voting with their feet.

Other locations that people they are being drawn to include cities like Hobart (1,325 people), Cessnock (1,076), Shoalhaven (993), Bass Coast (871) and Canberra (558). Yes, their respective property markets have performed well, too.

How To Read The Data

Far too much emphasis is placed on the role in which population mass and population growth plays on property price fluctuations. Both of Australia’s two largest cities are currently in the middle of their biggest downturns since the late 1980s – this is occurring at a time when both cities produced their second biggest year ever for population growth.

Of Australia’s total population increase of 391,000 people during the year ending June 2018, overseas migration made the largest contribution (237,225 or 61 per cent). Within the booming population in Sydney and Melbourne, both cities attracted 77,000 extra people through overseas migration last year.

Total Population Growth 92,237 117,199 25,911 10,415 20,141 3,443 8,935 -355
1.80% 2.50% 2.10% 0.80% 1.10% 1.50% 2.20% -0.20%
Overseas Migration 77,089 77,751 4,579 11,495 11,115 1,514 4,795 634
Births / Deaths 43,582 35,182 9,009 4,479 15,685 604 3,582 1,808
Internal Migration -27,434 4,266 13,323 -5,559 -6,659 1,325 558 -2,797
Total Dwellings 1,981,030 2,001,191 854,553 481,979 823,510 88,680 182,110 51,873
Dwelling Sales 79,991 79,505 45,529 27,304 28,276 4,693 8,058 1,861
4.00% 4.00% 5.30% 5.70% 3.40% 5.30% 4.40% 3.60%

Sure, we all need to live somewhere. But there’s no law that says one has to buy a property. Some can’t afford to buy, others prefer to rent, and others just aren’t ready to put down roots. Some live with family and friends, others in accommodation provided by employers, and some university students live on campus.

The vast majority of overseas migrants don’t buy for several years, if at all – they rent! This is especially the case in Australia’s most expensive city.

Other components of population include births – I don’t know of too many babies who buy properties – and deaths – that often adds supply to a market.

At the end of the day, buyer behaviour (not population growth) is what determines fluctuations in real estate prices!

Even if an individual town or city had zero population growth, there will still be between 3 to 5 per cent of dwelling stock that will change hands within a typical year. Depending on the volume of dwellings listed for sale in that year, property prices may still grow.

Related article: Population tricks for new players
Related article: Regions tighten as Sydney vacancy rates reach record high

Buyer behaviour is determined by where they want to live, what they can afford to buy, lifestyle challenges (such as congestion), where they can get suitable employment, and individual stages of their life (first home buyer, expanding family, empty nester, retirement). Other factors include local confidence, buyer incentives (such as grants and stamp duty concessions), and the pursuit of financial independence (investors).

Quick Case Study

Let’s look at Dubbo. That strong regional city plays the role of a mini capital city for the broader Orana region – population 130,000 people. The volume of jobs advertised as at October 2018 was a massive 14.3 per cent higher than two years earlier. Dubbo’s fantastic infrastructure combined with its resilient and growing economy unquestionably played a role in 375 extra Australians choosing to relocate there last year.

Undoubtedly, some of those who relocated to Dubbo would have taken advantage of the affordable housing. The 1,214 houses that sold in 2018 is a 19 per cent increase on the 1,017 which sold in the previous 12 months.

Related article: How Propertyology is helping investors kick goals in regional locations

Still sitting at a very affordable $355,000, Dubbo’s median house price increased by 5.8 per cent in the 2018 calendar year. That’s 15 per cent better than Sydney!

Dubbo rental yields are also an attractive 5 per cent and vacancy rates remain tight (1.3 per cent as at February 2019).

Marching to the Regions

While the average person might move houses every 6-7 years, it’s obviously an even bigger decision for anyone to leave one city for another.

Economic conditions have the biggest influence on internal migration. Two of the best modern-day capital city examples of that is the changing economic fortunes of Perth (from Australia’s strongest to one of our weakest) and Hobart (vice versa).

The reality is that 3 out every 10 Australians already choose to not live in one of our capital cities. The population of regional Australia increased by a further 89,132, to sit at a significant 8,424,137 as at 30 June 2018.

Regional economies are continuing to strengthen. As recently as March, Federal Minister for Cities, Urban Infrastructure and Population, Mr Alan Tudge, reported that there were 60,000 vacant jobs in locations outside of Australia’s big cities that couldn’t be filled by local residents.

The sustained economic strength is such that the government has announced an official change to immigration policy. They will now direct some overseas migrants with specific skills to establish roots in parts of this diverse country that need them most.

When 77,000 overseas migrants move to a city with 5 million people and most of them rent, they have little impact on property prices. But when a few hundred existing Australian residents are drawn to relocate to a regional city with a population of 40,000 to 100,000, the increased buyer activity in such an affordable property market can add significant pressure to prices.

The moral of the story for property investors is to ditch the stereotypes and appreciate that large parts of regional Australia are evolving. Driven by economic development, affordable housing and amazing lifestyles, this evolution will continue to create wonderful investment opportunities.

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