Do You Own Property In A ‘Superstar’ City?

Question – Why has property price growth in Sydney and Melbourne significantly outstripped that of the rest of the country?

Answer – Sydney and Melbourne are ‘Superstar’ cities, at least that is the view of the Governor of the Reserve Bank of Australia, Phillip Lowe.

The Superstar’ capital growth  phenomenon is occurring in a number of cities around the world

Next level property value growth has occurred in cities such as San Francisco, Vancouver, Amsterdam and Auckland. We are not alone in this rarefied air!

I agree with the Governor’s assessment, and have believed that Sydney and Melbourne are the stand out cities to invest into in Australia for a long time. That is, if you can afford to purchase a quality asset and hold it for the long term. The purchasing part is becoming more difficult, or to be precise, more expensive.

The unfortunate, but predictable reality if you understand numbers AND human behaviour, is that the best places to live, will for that very reason, become the least affordable. It is a self-perpetuating truth that will not go away.

Notwithstanding the fact that we agree Sydney and Melbourne are outperformers in Australia, I did do a double take when I read his comments and thought to myself ‘did he really name them as Superstar cities?!’

This statement only adds further fuel to the Sydney and Melbourne property markets. This is a fire that the Government, APRA, and the RBA to a lesser degree have been attempting to extinguish for a couple of years at least. Given Dr Lowe’s position of influence, the comments are unlikely to be helpful. Especially given we are seeing genuine indicators that price growth is slowing, in Sydney in particular.

As I read through the article, another comment he made stood out, ‘for some reason the economic or social returns has risen for living in specific cities’.

Did he really say ‘for some reason’?

The RBA governor, I have no doubt, is a very intelligent and considered human being and I have great respect for the importance of his position. All that said, he might have had a response that was supported by a few more facts and figures and didn’t include ‘for some reason’. To cut the Governor some slack, he was put on the spot as part of a Q & A at a speaking engagement, nevertheless it is still surprising he uttered those words.

Given the ‘for some reason’ comment, I thought it was timely to outline ‘some reasons’ why the ‘Superstar’ phenomenon could be occurring in Sydney and Melbourne. It just so happens to be a topic I have been turning my mind to for more than a decade so here are ‘some reasons’.

Why these two Cities?

  • The population of each city is more than double that of the third largest city in the country, Brisbane
  • The combined population of the two cities make up around 40 per cent of the country’s population
  • Population growth in both cities are at historically high speeds, especially Melbourne
  • Both cities have regulations making it difficult to develop property in established locations
  • These cities provide the most job opportunities
  • A large proportion of the top tier income earners reside in these cities
  • The majority of the wealthiest foreigners prefer to purchase in Sydney and Melbourne and send their children to study in these cities (none of their incomes show up on Australia’s macro data statistics)
  • Those with the largest spare cash flow can ‘buy up’ property in disproportionate volume and price, relative to the average income earner and the middle class (this could be a hidden factor that I have not seen commented on before but is something I have suspected for some time)

Why two cities in Australia?

  • They are in the lucky country, Australia, which is currently on a world record streak for the longest run of uninterrupted growth period without a recession – 26 years
  • On average we live in the largest or second largest houses in the world
  • We are one of the most sparsely populated countries in the world – people like the mix of big city and outdoors.
  • Our standard of living is high compared to the rest of the world
  • Our climate is reasonably consistent
  • We are a first world and western country based in the rapidly expanding Asia region which has many upsides, (and some downside risk as well if things go pear shaped, but let’s not go there)
  • We are reasonably insular from geo-political issues around the world – ‘touch wood’ – given our geography ‘down under’ and not sharing any direct borders
  • We have a lot of dirt and ocean floor that companies can mine and then sell at a profit around the world
  • We have a ‘relatively’ functional and reliable democracy
  • Little incentives for baby boomers to downsize (many layers to this)

We could probably throw in the friendly rivalry between Melbourne and Sydney also!

When you combine these factors, I would suggest that you go some way towards explaining ‘the reasons’ for the occurrence of ‘Superstar’ cities.

The RBA might even be able to create an equation, graph, table or algorithm with the resources they have at their disposal that can provide some deeper numerical evidence to point towards why the phenomenon occurs. Not that we always need mountains of numbers to figure out why human behaviour causes certain financial outcomes. Fiercely independent property advice is a mixture of social science and financial analysis.

There is no doubt that the better the RBA, APRA and the Government organise themselves to understand the Superstar phenomenon that ‘for some reason’ occurs, the more chance they have of influencing the outcome so that we minimise the likelihood of ‘bubbles’ and ‘bursts’. This should have positive social affects and assist in maintaining a reasonable equilibrium and the opportunity for a good quality of life for all.

Compound Growth – The 8th Wonder of the World

History tells us that compound growth from property or any well selected quality asset will pay off in the long run. This numerical fact of life might change for property, but it is unlikely. The most likely outcome is that the key fundamentals driving the outperformance of certain properties and locations will remain the same for many years to come.

Let’s look at the difference an extra 2 per cent can make to your bottom line when you retire if you have a long-term Property Plan and are able to make property decisions that fit into your end goal:

$1,500,000 @ 6 per cent over 20 = $4,810,703

$1,500,000 @ 4 per cent over 20 years = $3,286,684

That is a 33% differential in wealth based on the same starting point with only a 2% growth gap.

It pays to understand compound capital growth and have a long-term plan.

All that said, I am glad to see that Sydney and Melbourne have started to plateau in value growth. I am a supporter of balanced growth, I just think Sydney and Melbourne will outstrip other capital cities, all things being equal. That is why I am reasonably content that the vast majority of our clients have purchased in those two cities for almost 15 years now. They are ‘superstar’ cities ‘for some reason’ after all – just ask Dr Phillip Lowe, the RBA Governor!

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