Cities Within Cities

“I’d prefer buying in Sydney, anywhere in Sydney. You know, big cities are more promising.”

Many property investors, especially those new to the game, believe only in big cities and believe that no matter where they buy in a big city, robust growth is promised.

Well, data has proven that big cities do not necessarily grow better than the regions (see blog: Capital vs. Regional City Mindset Will Hold your Investing Success Back), and in today’s blog, we’re going to discuss whether there’s no difference buying anywhere in a big city.

Melbourne will be our example.

As the second biggest city in Australia, Greater Melbourne consists of 40 SA3s. We pick 4 of them for today’s discussion:

We examine them from 4 perspectives: value growth, economy & demographics, housing demand and supply, and cash flow.

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Value Growth

Do all sub-regions’ house values in a big city grow at the same pace as the big city’s average?

In the long term…

In the past 10 years, the four regions’ house price growth rates varied from 74% to 142% (below chart). 

Knowing that Boroondara and Maribyrnong are just 20km apart, it’s interesting that one has grown 40% faster than the other. With such massive growth rate gaps, would you treat them as one “Melbourne property market” or four distinguished micro-markets? I would choose the latter.

The 10-year price chart also tells a lot about property market rules:

• The two closer-to-CBD regions, Boroondara and Maribyrnong, experience more dramatic ups and downs than the farther ones.
• Distance to CBD doesn’t matter to value growth; otherwise, Mornington Peninsula couldn’t have become the best performer, almost double Maribyrnong’s growth.
• A region’s past performance doesn’t determine its future growth: Boroondara’s price surge in 2013-18 didn’t bring strong growth in 2018-23, while Mornington Peninsula achieved impressive growth in 2018-23 with just an average 2013-18 performance.
• Etc.

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In the short term…

In the past year (Feb 2022 to Feb 2023), the four regions have seen various growth patterns, too. The below chart shows the median price trends of four suburbs, one in each SA3:

Growth wasn’t robust in any suburb because of hiking interest rates, low consumer sentiment, the growth cycle, and many more reasons. However, two of the suburbs’ prices are still higher than the same time last year, while the other two’s have declined much more.

It’s important to note that these regions’ performance difference results from many factors, including housing demand and supply, relative affordability, economic conditions, government policies, lifestyle preferences, etc. For example, despite its skyrocketed price level, Boroondara’s recently rising price might be led by its high demand-supply ratio (which we are going to discuss later); Meanwhile, Melton’s price stability could be thanks to its relative affordability. Each micro-market needs to be analysed from all data points to be better understood.

Among all the influencers, let’s have a closer look at their economic & demographic features and housing demand and supply.

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Economy & Demographics

The four regions have quite different economic conditions, including industrial structures and unemployment rates. 

The below charts show the top 5 largest employment industries in each region. 

The differences are apparent:

• Although the Professional, Scientific & Technical Services industry is a significant contributor to Boroondara’s economy, it can’t make it in the top 5 in the other regions; 
• While Construction provides 17.2% of all jobs in a far-from-CBD region (Melton), it only employs 6.6% of all workers in an Inner-East (Boroondara).
• As a tourist region, Mornington Peninsula supports a large number of Accommodation & Food Services businesses. However, this industry is not a primary employer in non-tourist areas like Meriton or Boroondara.
• Etc.

Besides major industries, the unemployment rates of the regions differ as well. The chart below shows that while the four regions’ unemployment rates share similar trends, the figures vary from Boroondara’s 2.0% to Melton’s 5.5%.

The difference in top industries leads to the variation in residents’ composition. The table below lists family household %’s, household income levels, household sizes, and renter %’s in the four regions.

Although the above economic and demographic features do not solely determine property market growth, they have an impact on the local housing demand level and housing type preference.

Housing Demand & Supply

The relationship between demand and supply is among the most significant influencers of property market growth. Different regions’ demand-supply relationships aren’t necessarily the same. 

Inventory, the ratio between # of for-sale listings and # of monthly sales, is a major indicator to measure the demand-supply relationship. The below chart shows the four regions’ inventory trends in the past half a year.

• Boroondara’s inventory demonstrates the region’s high demand level relative to supply.
• Melton – Bacchus Marsh’s demand seems low relative to its supply level.
• Maribyrnong and Mornington Peninsula are moving from high pressure (high demand & low supply) to a more moderate level. 

The difference in their inventory levels has contributed to different value growth rates.

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Cash Flow

For most investors, rental cash flow is essential to make holding easier and to build portfolios faster. 

Rental yield is what we use to measure cash flow level: A healthy/high-level yield (4.5% to 5% or higher) means high cash flow that helps you save faster; Whilst a low-level yield means that you would need to take money from your pocket for mortgage repayment and other expenses (e.g. council rates, maintenance costs, property management fees, etc.). 

The table below shows our four regions’ current rental yields.

Say we are going to buy a $1M house in each region now. What would the cashflows be like for each property? Let’s do some calculations!

Assumptions:

• Loan: 30-year P&I loan with an 80% LVR; the interest rate is hypothetically 5.5% over the entire term. 
• Holding cost: $10k the first year, with 3% yearly growth.
• Rental growth: 3% per year.

The chart below shows their cash flow trends.

At the end of the mortgage term, the Melton house could be generating $12k net income for you, but Boroondara would be costing you more than $30k just to hold it. That’s a significant $42k difference in one year! 

Note that the above calculation is purposely simplified to demonstrate the difference rental yields can make to your cash flow. It didn’t take into account each region’s current price level and council/water/property management/other rates, inflation & interest rates changes, big renovations on the properties, etc., which need to be considered in real-life cash flow projection.

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Data shows that price growth, economic & demographic features, housing demand & supply, and cashflow prospects vary significantly from one sub-region to another, even in the same city. Things like the “Melbourne property market” or “Sydney property market” do not exist. These big cities are a collection of many micro-markets with various growth patterns and influencers. It’s crucial to analyse these micro-markets locally in deciding your purchasing location.

In InvestorKit buyer’s agency, we don’t buy in “big cities” or “small cities” but in micro-markets where the influencers indicate high/increasing growth prospects. How do we locate those micro-markets? Our dedicated research team examines economic, demographic, and property market data and monitors market pressure nationwide. Would like to buy your next investment property in one of the high-pressure micro-markets? Talk to us today by clicking here and requesting your 45-min FREE no-obligation consultation!

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