What is separating the best and worst city housing markets?

One of the first things we do each year is take a look at the end of year property data and what it might mean for the year ahead.

The good news is that property values returned a solid year, increasing by 8.1 per cent nationally according to analysts, CoreLogic.

Like all years, it’s the gaps in performance which tells us a lot about the dynamics driving the market.

So, let’s take a look at how last year panned out.

As you can see, perennial underperformer Perth turned the tables on an ordinary decade recording a whopping 15.2 per cent jump in prices.

The biggest driver in Western Australia was a chronic shortage of housing stock and its relative affordability compared to the eastern seaboard.

In Hobart it was the opposite, with a second ordinary year in a row after nearly a decade of outperformance.

In Australia’s smaller capital cities, it was a year of treading water. The worst performing suburbs nationwide were dominated by suburbs in Hobart and Darwin.

Through the middle of the year, Adelaide and Brisbane vied for top spot in growth. By the end of the year, the Queensland capital kept its strong performance while Adelaide seems to have plateaued. 

Of course, there’s always differences between cities reflecting varying conditions on the ground in the market and the local economy. But a 16 percentage point spread in performance tells us quite a bit.

The ancient Sydney-Melbourne rivalry

Perhaps the most interesting divergence is between Sydney and Melbourne. Both metro regions house around five million people and have the highest income per household.

Both cities saw their midyear growth rates checked by the last two interest rate rises, yet Sydney went on to record three times the growth for the year.

Why the difference?

While there’s been a lot of ad hoc opinions thrown around, a closer look shows it’s a case of supply and demand.

The shutdown of migration affected Melbourne more as it had the fastest growing population over the previous decade.

Now add in Sydney’s lower housing construction rates and we can see the reason for the divergence clearly.

Great regional boom runs out of steam

Outside of the major capital cities, 2023 wasn’t quite as peachy.

Regional centres were the darlings of 2020 and 2021, with many boomers cashing in city house prices to retire to the coast. They were joined by thousands of investors recycling the Morrison government’s cash splash into short term rental properties.

That surge is over. Most regional centres struggled with low growth in 2023, others experienced losses.

It’s interesting to note, many of the worst performers are in or near recent flood zones.

But it wasn’t a universal tale of tepidness in the regions. Well serviced regional cities close to capitals experienced some good growth numbers.

Mixed metropolitan housing markets

As we pointed out in the middle of last year when highlighting Australia’s multispeed-property market, suburban locations with good services and low development were likely to prove best in 2023 and into the future.

That theme comes through in the December figures for strongest growth in metro locations.

In Melbourne, it’s leafy residential areas dominated by family homes across the east and south east.

In Brisbane, it’s the same story, with a heavy concentration of outperforming locations in the southern middle suburban ring.

It’s a little different in Sydney, with two high value locations leading the list. But in and below the top five are a slew of suburbs, like Kings Langley and Lakemba, recording 20 per cent plus growth for the year.

Sharp-eyed readers will note these locations are above the average median price for their respective city’s metro area.

That’s certainly true but hovering just below the top performers are scores of suburbs in the middle-outer suburban rings.

Strong performing locations, be they above, around or below the median price, share many of the same attributes: predominantly family homes, good transport and other infrastructure and high residential amenity.

Quality suburban houses to the fore

What do last year’s performance gaps tell us about the market’s direction in 2024?

Essentially, 2023’s results underline a market returning to its long term drivers after years of change.

The pandemic and the government’s huge stimulus response, and to a lesser extent, the boom in overseas investors from 2010 to 2017, made quite an impact.

But these have proved to be passing factors, so far at least.

What we are seeing now is the return of the well located, well serviced suburban family home to its rightful place as driver of the Australian real estate market.

Not all capital city homes (not even a majority) make great investments; careful and critical selection is vital. But home buyers and investors are converging on this property type.

Yes, other factors may upset this pattern or stop the market in its tracks.

The lowest unemployment rate in 50 years is starting to trend upwards. Interest rates have almost certainly peaked but global events could spoil their slow decline.

But countering that is huge latent demand for home ownership from younger Australians, a structural housing shortage, a tax system sympathetic to investors and big tax cuts for high income earners later in the year.