Which Does Better: Capital City Or Regional Property?

By Pete Wargent on 11 Sep 2014
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Household debt levels have long since peaked out, and as a result, we do not expect to see any meaningful regional property price growth in real terms.  

Interestingly, mortgage serviceability has improved dramatically in Australia in recent years as lending rates have fallen, so there may be a small window of opportunity for regional property to increase in nominal value before lending rates are normalised, whenever that may be; possibly in 2016.

Household Debt Will Keep Regional Prices Down

So many salaried households, particularly in regional areas, will be tapped out as borrowing rates are eventually normalised, that we do not expect to see regional dwelling prices rising much at all through the next cycle.

There will be regional cities that buck the trend, of course. Gold Coast and Sunshine Coast spring to mind as two possible examples, and there will no doubt be more.

“There is not likely to be too much joy for mining towns in the years ahead.”

A stylised example, which takes into account wages growth and the cost of borrowing, shows that we could see regional nominal prices rise by a small quantum in the coming 18 months, but at the first sign of rate hikes we might expect sentiment to be spooked and momentum halted.

What About Mining Towns?

There won’t be any mining town growth this time around either, as there was from 2003 to 2013 to drag the averages higher.

Quite the opposite in fact. 

Mining capex is well and truly set to hit reverse gear and we do not expect the production phase of the boom to have tangible benefits to housing markets as the construction phase of the mining boom dies away.

“There will be regional cities that buck the trend, of course.”

We expect to see mining construction activity drop off by at least 20 per cent over the next 12 months with potentially significant risks to the downside on that figure.

With the terms of trade having been in virtual freefall, the drop-off in capital expenditure seems increasingly likely to be pulled forward.

There is not likely to be too much joy for mining towns in the years ahead.

About the Author

Pete Wargent used a buy and hold approach to shares, index funds and investment properties to make his first million in his early 30s. He quit his full-time job at 33. He helps others do the same.

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