Looking at the fundamentals, this city looks good
Now, which capital city looks like the best investment to me right now?
I’m going to tell you, but first, a little caveat. I’m talking about an average investment into an average property. I’m looking at capital city averages.
As I’m sure you know, you don’t want to just put average money into an average investment. You want to buy really well in a suburb with amazing prospects, and into an amazing property with heaps of potential.
That’s how you make money.
But just for arguments sake, let’s imagine you could buy the capital city and get the capital city returns.
Which one would I be backing?
For me, this year, it comes down to two cities: Perth and Brisbane.
The prospects for both are very solid.
For Perth, there’s a lot of rebound at play. Prices have struggled for some time, and Perth is due.
And with a resurgent mining boom, rents are up a massive 15.7%!
However, the mining boom giveth, the mining boom taketh away.
And with China going on the offensive to try and break the back of commodity prices last week, and given I think the arguments for a “commodities supercycle” are a bit overblown, am I a little nervous about the volatility in the Perth market.
But totally, if you’re willing to roll the dice, there are big gains to be had.
But if I were to pick one city, it’d be Brisbane.
I think Brisbane has the best fundamentals of any city right now.
First, it’s cheap. Brisbane’s relative cost against Sydney and Melbourne is running near the lowest level in almost 50 years.
A median Brisbane house costs less than half (48%) that of a median Sydney house as at March 2021. This is well below the historical average ratio of 63%.
The median Brisbane house was also less than two-thirds (65%) the cost of the median Melbourne house as at March 2021 – also well below the historical average ratio of 87%.
Now, I would expect those ratios to return to normal. That will either happen if Sydney and Melbourne prices fall (not likely), or Brisbane prices rise.
I think they’ll rise.
Next, Brisbane’s rental market is very tight compared to Melbourne and Sydney, as the vacancy rate data show us:
That’s largely driven by Sydney and Melbourne’s high-rise segment, but still, it’s creating an abundance of supply that’s going to hold the metro-level markets back. You can see it in the rental data already, with Brisbane gaining ground, and rents in Sydney and Melbourne still going backwards.
This is turn is about the closed borders and the absence of migrants and students, who normally are a big part of high-rise demand.
And it’s also about Covid and people bailing on the big cities. The populations of Sydney and Melbourne have fallen, while Brisbane’s has grown.
So that should see Brisbane’s rents continue to outpace rents in Sydney and Melbourne.
And that’s happening even though yields in Brisbane are already considerably better than they are down south.
So to me that says there’s cashflow to be had and that prices have more headroom to grow.
Put it all together, and the outlook looks very solid.
Now as I said, you don’t want to just buy ‘average’ properties, but if you are looking for a deal, Brisbane could be a good place to start.