The past decade has seen capital city housing markets well and truly outpace their regional counterparts.  While capital city dwelling values have risen at the annual pace of 4.3% between May 2008 and May 2018, the regional areas of Australia have recorded an average annual rise of just 1.5%. But this is all starting to change.

The dramatic capital gains in Sydney and Melbourne over the past two growth cycles has been the primary driver of higher capital city performance. Dwelling values have risen at the annual compounding pace of 6.1% and 5.8% respectively across Sydney and Melbourne over the past decade, while the regional areas of both states have seen values rise by a much lower 3.4% and 3.8% per annum. 

Things are different now. While values are falling in Sydney and Melbourne, regional markets have shown a recent accelerating trend in capital gains. There are three factors helping to drive this new outperformance.

1.     Cities adjacent to Sydney and Melbourne have benefitted from a ripple of demand away from the metro areas towards areas where housing is more affordable and critical amenities such as transport options, schools and health care are less congested.  Geelong is now one of the best performing regions nationally, with values rising at 10.2% per annum. The Capital Region of NSW, which includes Queanbeyan and Goulburn, has seen values rise 6.3% the past twelve months and Newcastle has seen a 5.2% rise in values. Each of these areas, and similar locations such as Ballarat and Wollongong, have their own economic drivers and challenges, but also offer up the opportunity for more affordable housing opportunities as well as commuting options. 

2.     Lifestyle markets are benefitting from stronger demand as baby boomers look for retirement options and equity spills out the South Eastern capitals to fund second homes and investments. The Southern Highlands and Shoalhaven in NSW have returned the third highest rate of capital gain across the regional areas of Australia over the past twelve months, with values up 6.8%. The Sunshine Coast has seen values jump 5.8% and Coffs Harbour is up 5.3%. Coastal markets located within reasonable driving distance from the large capital cities seem to be performing the best, however if the growth trend continues we may see demand rippling into areas located a further distance or those areas close to airports such as the Whitsundays, Cairns and Ballina.

3.     The mining regions have acted as a drag on the broader regional market growth rates, however most of the regions intrinsically linked with the mining sector are now levelling out, or moving into the early phases of what is likely to be a long and gradual recovery. Dwelling values in some mining regions, like Western Australia’s Pilbara and the Central Highlands of Queensland, remain more than 60% below their peak values, however values are now levelling or, in some cases, starting to rise. Considering the massive fall in values across some of these regions, although values are no longer falling, the recovery phase will take a long time.

Overall, I'm expecting the regional markets of Australia will broadly continue to outperform the capital cities due to the factors highlighted above. Additionally, low mortgage rates will continue to support demand, albeit with some offset being felt in tighter credit conditions and a lot more scrutiny around borrower serviceability.