Should you invest in regional Australia?

Should you invest in regional Australia?

Nerida Conisbee, REA Group Chief Economist

Earlier this decade, regional mining towns seemed like a sure bet. Demand from tenants was strong and capital growth seemed limitless. Joining the abrupt slowdown in mining was the slowdown in housing demand in these towns. For those who invested in the boom times, prices paid at the time now seem unreasonable and it can be difficult to get tenants. For many, getting a deposit together for an AUD$1 million dollar investment in Sydney may be difficult.

The deposit for a good home in Horsham for AUD$245,000 is a lot easier. You do however need to be careful and while Western Australia (WA) mining towns are an extreme example as to what can go wrong, the smaller size of these towns make them far more vulnerable to changes in the market. Walcha in regional NSW has had the strongest increase in house prices, at almost 50% over the past 12 months.

Regional Areas with the strongest increases in prices (Feb 2017)

At the opposite end, the biggest drop has been Port Hedland in WA where prices have dropped by 50%. While both areas have similar median prices, the performance over the past 12 months has been remarkably different.

With such variable performance of regional areas, what should you be considering when investing?

Look for sustained economic growth

Increases in population is the biggest driver of price growth for regional towns and this is almost always driven by jobs growth. The challenge is trying to work out whether economic growth is occurring. For small areas, economic data is often difficult to come by, or otherwise relatively out of date. To mitigate this there are two solutions:

1. Stick to where you know

If you have good knowledge of a regional area or have family and friends in the area, you can get a better idea as to what is driving the economy. Something like a new regional hospital, or a new industry, can make an enormous difference to demand for housing and hence rental growth. Given the relatively small size of some regional economies, even a small change can make a big difference to price growth.

2. Or stick to within commuting distance of a CBD
Regional areas that are within commuting distance of Sydney and Melbourne, in particular, will continue to do well given recent strong price growth in both those cities, as well as concerns about affordability. Unlike regional areas further afield, these areas also benefit from larger, more diverse economies so tend to be more resilient in a downturn.

Stick to within commuting distance of a CBD

Even moderate levels of supply can change the outlook

Even some of the regional economies that are seeing strong economic growth can see declining prices because of high levels of supply. And these levels of supply do not necessarily have to be that large. Orange, in the Central West region of NSW, is seeing solid economic growth and now has an unemployment rate well under the Australian average. Nevertheless, house prices increased by less than 3% over the past 12 months. High levels of supply are considered to be a factor in moderating price growth.

Watch out for speculative behaviour

Investors speculating on a location can lead to a hard downfall in prices when conditions change or if expected jobs growth does not eventuate. The prominence of mining towns in the worst performing regional areas list is not surprising, but it is likely that the big drop in prices would not have been so pronounced if there was not so much speculation. Although not exactly a regional area, a lot of interest in Hobart from interstate and overseas money right now is likely driving prices a lot higher than perhaps the local economy can support.

Doing your research is particularly important in regional areas, particularly if you are looking to buy from offshore, and this can be tough with local level data not always readily available. If you decide to invest in these areas, ensuring you speak to locals and get a thorough understanding of what drives the economy is the next best thing you can do. If you do it right, you can achieve far better capital growth than you may otherwise achieve in capital cities.

DISCLAIMER: The opinion stated in the article is solely of Nerida Conisbee and is not in any form an endorsement or recommendation by Readers are encouraged to seek independent advice prior to making any investments.