Why Sydney and Melbourne outperform (Ep.39)

Today’s episode is all about what the Governor of the Reserve Bank of Australia, Phillip Lowe has called ‘superstar cities’ – Sydney and Melbourne. 

What is it about these two cities that give them ‘superstar’ status, drawing international attention and capital growth acclaim? 

In episode 39, we discuss “Why Sydney and Melbourne outperform” 

Listen as David Johnston, Cate Bakos and Peter Koulizos take you through the reasons why Sydney and Melbourne are leaders in median capital growth, why diversification is still a critical factor in your property strategy and how property selection can put you a cut above the rest.

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Show notes

  • Sydney and Melbourne – what do we mean by outperform? We are talking about Sydney and Melbourne having a better capital growth median. So, why do Sydney and Melbourne outperform? 
  • 1 Population growth – Sydney and Melbourne both have populations that are more than double that of the third largest city. Population underpins demand, which carries weight to drive values upwards. Other cities may have aggressive population growth over 5 years or 10 years, but long-term growth may not be following that track. Sydney and Melbourne have the largest population growth due to work, retirement and lifestyle factors.  
  • Population growth on a micro level (eg: the suburb you live in) does not relate to capital growth. Fringe suburbs have significant areas of growth, but that does not mean that you want to buy there. 
  • 2 Largest availability in job opportunities – having a greater spread of opportunities and industries makes Sydney and Melbourne attractive, which spurs regional, interstate and international migration population growth.  
  • 3 Top tier incomes –  Having the largest populations also means that big companies often base their head offices in these cities, which allow for the highest paying jobs. Flowing through to the next point… 
  • 4 Spare cash flow – Having the highest proportion of people with largest amount of spare cash flow, means that more residents can afford (not in all cases) a higher price for homes and to purchase more investment properties, which drives demand.  
  • 5 Australia is unique – We are one of the only countries that has two capitals to choose from. We have two states which combined make up 50% of the entire country’s population (and at least 50% of economic output as well). 
  • 6 Majority of wealthiest foreigners – Sydney and Melbourne are destination cities for foreigners who are wealthy enough to send their children to study abroad, along with a trophy home to call their own. This phenomenon of superstar cities plays out internationally – other cities include Berlin, Amsterdam, San Francisco and Auckland. Interesting to note that the average income measured across Australian cities does not factor in the international income, we wonder what the true average income would be?  
  • 7 Both cities have stringent regulations around more established locations – meaning that it’s harder to develop and subdivide in these locations.  If you cannot increase the amount of property to meet demand, property values are pushed up. In a country town, there is no lack of supplier, rural land can be rezoned to residential.  
  • 8 Two capital cities that have international interest – due to… 
    • Natural resources – a big part in our nation’s prosperity, in the 50s and 60s it was wool and now iron ore. 
    • We are sparsely populated – we get the benefits of living in the city and the outdoors. America and Australia have the biggest houses, compare that with Hong Kong and other international cities like Paris and Berlin where you can only get an apartment.  
    • Standard of living is high – our world record streak for uninterrupted growth period without recession has something to do with this. Standard of living includes health care, education and other factors like political stability.  
    • We are in the fastest growing part of the world – Asia.  But relatively segmented, which gives stability on an international scale 
    • Weather – you may have your jokes about Melbourne, but we’re not facing sub-zero temperatures. We’ve had a horrible season of bushfires which does have a flow on effect of desirability of certain pockets, but in general, our climate is relatively attractive.  
  • Other considerations: incentives for baby boomers to downsize, we could throw in the rivalry between Melbourne and Sydney which plays a part in driving up prices. Earlier in the year when this podcast was recorded, the economic metrics are the strongest as well.  
  • Where should I invest? Exposure to one of the capital cities is good, but don’t forget to think about diversification, your price point, land tax and potentially property cycle management.  
  • Performance of an asset comes in many shapes and sizes, investors can be targeting rental return as well. You can go into some regional cities and get moderated capital growth, with fantastic yield, tenure of tenant, low maintenance – all facets we have to look at.  
  • Anyone who suggests your portfolio should be in one or two of these cities is short sighted. Your purchasing strategy should take into account growth and yield, what you are trying to achieve with your portfolio – eg are you planning to buy and hold or sell a couple? Every property is unique, so it’s not as simple as just buying in Melbourne or Sydney, you still need to select a quality asset.  
  • Local information is critical – you can purchase a property that will outperform many places in Sydney and Melbourne. 
  • Regional cities – If Melbourne and Sydney are out of reach for you, you can look at a different dwelling type or look at a different city. There are superb period homes in a lot of our regions. The secret is understanding what is driving those markets and is it sustainable? For example, Ballarat and Geelong have shorter commutes to Melbourne that Bendigo does, which is why you get a lot of people living in Ballarat and working in Melbourne.  

David Johnston- The Property Planner’s Golden nugget:  Melbourne and Sydney have proven outperformance for 40+ years in capital growth, but you should never limit your location selection to just these two cities. You need to look at what’s right for you, what is your price point, what are your goals? There are unique properties across our wonderful nation that can provide outperformance outside of these two cities. 

Cate Bakos- The Property Buyer’s Golden nugget: I don’t completely agree that Melbourne and Sydney are the ones to target. People who are chasing the next big thing, bouncing around trying to time markets and catch waves can whittle away a lot of their gains in trading property. Have a strategy and stick to it. You can do very well if you sit tight in the city that you chose. Melbourne and Sydney will serve anyone well if you have cash flow to sustain them, but we have some interesting cities that deserve mention outside the big two ones. 

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