Why regional towns will keep winning the property race

Regional centres such as Wollongong in NSW are in a ‘sweet spot’ for workers willing to commute into the city but also to regularly work from home. Picture: Tourism Wollongong.

Property prices in regional towns ‘post-Covid’ were expected to slump as the cities roared back. But the bush is winning again.

Regional centres are beating the bigger cities on both price gains and rental growth and new figures for the three months to December confirm the trend.

This was not supposed to happen. CoreLogic research director Tim Lawless suggests: “Outside of the pandemic growth between 2020 and 2022 the outperformance of regional markets relative to capital cities is a fairly new phenomenon.”

You bet it is. For decades regional centres trailed the major cities with weaker price growth and an oversupply of rental space

But two key factors have the potential to change the story. Firstly, prohibitive prices in the major cities have underpinned price rises in regional centres, and secondly, the practice of working from home (often in regional centres) remains surprisingly resilient.

In fact the exodus from offices in city CBDs is plain to see in the most recent commercial property data.

Office property is now in a deep slump, with recession-like vacancy rates of more than 20 per cent in some districts.

It seems a significant amount of those empty desks in the city centre once belonged to workers, who are now in so-called so-called sweet spots. These are the towns where you can live affordably but commute to a day job in the city.

Key centres include the Sunshine Coast and the Gold Coast in Queensland; Newcastle and Wollongong in New South Wales; and Geelong, Bendigo and Ballarat in Victoria.

As Lawless suggests: “Property values in Australia’s combined regions are outperforming the combined capital cities despite the normalisation of international migration trends, affordability challenges and a reduction in borrowing capacity amid higher interest rates.”

In the three months to the end of December, dwelling values in regional Australia rose by 1.2 per cent while capital cities were running at 1 per cent over the same period.

So what happens next? Certainly the metropolitan districts look as if they will continue to set a low bar. Major players in the property market are already revising downwards their expectations for prices in the months ahead as interest rates have stalled at current levels.

A handful of forecasters have put out warnings that prices could be at their softest in the major cities rather than in regional centres over the months ahead.

ANZ just downgraded its forecast for the nation’s two biggest cities – but the bank left its nationwide forecasts unchanged at a 5-6 per cent increase. ANZ now forecasts that Sydney – which it had pencilled in for 6-7 per cent price growth – is set to lift at 5-6 per cent and Melbourne – which had been 3-4 per cent – is now looking at 2-3 per cent.

The outpacing of the city centre residential markets by regional centres is also clear in rental data, where regional rents rose 2.3 per cent over the period while capital city rents to by 2.1 per cent – though yields in regional property are often skewed by changes in highly volatile mining towns.

“It’s early days and we can’t know just yet – but the share of people who are willing to live outside the major cities and commute has clearly changed. It’s a period of experimentation,” says Adelaide Timbrell, senior economist at ANZ Research.

Lawless at CoreLogic adds: “There is likely to be a legacy of Covid with remote working at least partially embedded in workplace policies, however it’s unclear how work from home policies will evolve over time.”

For home buyers and investors the question is whether regional prices can continue to rise? Are we looking at a structural change in the market?

Terry Rawnsley, director of planning and infrastructure economics at KPMG, says: “I think it is structural and it’s going to keep happening until we see a convergence of prices between the regionals and cities. That is going to take a while, one thing we learnt in Covid was that people were willing to commute. Now we see people willing to commute for two and a half hours if they are only going into the city when it’s necessary.”