Go west for long-term growth

This week an Uber driver let me in on a secret … that there is one golden rule when it comes to property — it doubles in value every seven years. Perhaps he has been very lucky with his investments, but, to my knowledge, almost nowhere has doubled in value over the past seven years.

To achieve a doubling of value, you would have to have been extremely timely with your purchase, have bought in exactly the right area, and sold at the right time. The one region that most recently saw a doubling of value in a seven-year time period was Ryde in Sydney, and that was for houses only.

Between 2010 and 2017, house prices doubled in suburbs contained within the area of Ryde, Sydney. But, if you didn’t sell in 2017, your home would have lost 23 per cent of its value just two years later. So much about property is timing.

It’s a difficult time for our property market right now, but over the long term, there are areas that have outperformed. Given that past performance is rarely indicative of future performance, looking at why these areas did so well is more relevant than seeing them as future winners. Furthermore, looking at regions provides enough of a sample size to avoid the many pitfalls of using median prices at a suburb level.

The list of regions that saw the greatest growth over the past five and 10 years shows that Sydney was the strongest performer over the past decade. Over the past five years however, it was Melbourne, regional Victoria and Tasmania that pulled ahead. What is particularly interesting is that for houses, the Parramatta region of Sydney has seen the largest price increases over the past decade. Over the past five years it has been Melbourne’s west.

There are two things that have pushed up prices in these areas. The first is rapid population growth and the second is not enough development. Sydney’s growth was particularly strong in the five years from June 2009, while Melbourne was less dominant. This can largely be explained by low levels of construction in Sydney relative to Melbourne post GFC.

Sydney’s economy took off but there were not enough homes. Melbourne at this time was better supplied.

Melbourne has enjoyed better price growth in the past five years, driven by stronger jobs growth and in turn, population growth. Hobart has also been a standout performer on the back of a structural change to the economy — less reliance on government and agricultural employment and more on tourism and education.

The pull west is also population driven and affordability ­remains a factor, perhaps perversely given these areas have seen the greatest price growth. Both Melbourne and Sydney’s demographic centres are being pulled westwards.

While beachside suburbs in Sydney and eastern suburbs of Melbourne remain highly desirable — we can see it from search activity — the reality is that few people, particularly young people, can afford homes that cost more than $2 million. Prices are also being pushed up slightly by new development as the housing stock continues to improve in the west. You only have to look at a suburb like Rockbank in Melbourne’s west to see what a new community can do to prices at a suburb level.

While historical trends are interesting, the next decade is of greater importance. My tip for top position is again Sydney.

Like what happened post GFC, development in Sydney is currently shutting down, plagued by oversupply in pockets, as well as quality issues eroding confidence in the development sector.

Sydney won’t see enough development over the next five years and once the economy starts booming again, it will be caught without enough housing and prices will skyrocket again.

Nerida Conisbee is chief economist at REA Group