Investing in metro vs regional areas

Written by Douglas Ross in Buying on February 15, 2017

Investing in metro vs regional areas

When browsing through properties for sale do you feel the temptation to look a little farther out? You’re not alone. The question of investing in metro vs regional areas draws investors into long arguments about the various pros and cons. However, the decision of where to invest should never be a stab in the dark. The following considerations should help you decide what part of the map you stick a pin in.

Investing in metro areas

Investing in metro areas is not a one-size-fits-all situation. Melbourne and Sydney have broken away from the crowd in terms of their growth. This means the values in different cities may tip the scales in favour of investing interstate. In this case, check out our tips on investing interstate. Beyond city differences, investing within a city’s inner ring is vastly different to investing in the outer suburban rings.

Yet, many view investing inside the metro area as the more popular and safer option. The main reasons for this?

1. Job numbers.

Without any significant policies pushing for a decentralization of populations, regional areas remain less viable in their job opportunities. Cities’ greater employment levels drive infrastructure and therefor property growth.

2. A smoother ride.

Metro areas still see peaks and troughs in their markets, but they tend to be less extreme than regional.

3. Liquid investments.

It is common to see higher short term growth in metro areas. This allows investors to flip properties if that is their business model, or at least build growth on their equity within a shorter period of time.

What are the downsides to investing in metro areas?

4. Higher costs.

With spiking growth comes extremely high entry costs for first time investors. At the start of 2017, Sydney dwelling price to income ratio was at approximately 8.5 and that nationally, dwelling prices have increased by 10.7% over a single year, as well as 10.8% the previous year.*

5. Lower rental yields.

The higher costs of getting into metro properties, exacerbated by associated costs such as stamp duty, are made that much harder to afford by comparably lower rental yields than regional areas. This is essentially due to higher populations and higher competition, which keep rental yields down. In January 2017, the gross yield on a house was 3.2%, down from the 4.12% of five years ago.*

Investing in regional areas

There is little hiding from the fact that investing in regional areas is a long term investment decision. But there are definite advantages to investing regionally, including higher rental yields and the opportunity to eventually retire in your investment property. However, the risks are greater when investing in regional areas and as such, the process of investing requires significant research and reasoned thinking.

Here are a few tips for investing regionally:

1. Seek out infrastructure growth.

Infrastructure growth (the planning of hospitals, schools, upgrades to existing infrastructure) is a sign of population growth and a healthy regional economy. Avoid investing in an area with a declining population. Look out for little existing or planned infrastructure, as this increases the volatility of your investment.

2. Avoid single-factory towns.

Any investor should listen to some Bruce Springsteen to learn that investing in regional areas that rely heavily on a single employer for their viability is a huge and unwise risk to take on. Look for employment diversity, ranging across blue to white-collar employment opportunities. With the future of many energy-providing factories uncertain, and with the mining boom in the rear-view mirror, all it takes is for that one factory to close down for an investment to become dead in the water.

3. Don’t wear rose-tinted glasses.

Don’t just be swept away by a property’s location or its connection to a tourism industry. Even if you intend to eventually live in the property, there needs to be solid economic reasoning behind your investment. The economic fluctuations within metro areas influence the economic health of tourist spots. So, investing in regional markets isn’t always disconnected from the influences of metro markets.

4. Delve into some data.

Look at vendor discounts, auction clearance rates, rental yields and vacancy rates. These numbers will help you get an idea of supply vs. demand in regional areas. Is demand high in a town? Well, if vendors are dropping their prices (discounts) or are sitting on the market for months at a time, you know that demand is low. Then look at why this is. Higher rental yields will close the gap between your outgoings (mortgage, ongoing costs) and your investment income.

Source: *CoreLogic 2017 data