Demand for affordable lifestyle regions and limited supply continues to buoy regional home prices.
COVID-19 has had a lasting impact on the way many of us live and work.
Since the onset of the pandemic, multiple lockdowns, more time spent at home, and accelerated adoption of remote working have led many to reassess their housing wants and needs.
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Regional towns, such as Bright, Victoria, have soared in popularity. Source: Getty Images.
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A unique set of circumstances not to be repeated
Housing markets in regional Australia thrived throughout the pandemic as people sought more space and more affordable housing. Remote working opportunities and preference shifts drove strong population growth in regional areas at the expense of the capitals, predominantly Sydney and Melbourne.
In the 2020-21 financial year, many opted for sea- or tree changes and regional populations grew faster than the capital cities for the first time in four decades. This shift continued, with lockdowns and restrictions persisting throughout 2021.
The past two years were an exceptionally unique period for housing markets in regional Australia as pandemic-induced preference shifts collided with record-low interest rates.
COVID increased regional populations in 2020-21, driving up property prices in non-metro regions. Source: Getty Images.
Post-COVID economy now facing new challenges
After a strong rebound out of Covid, Australia’s economy is now challenged by high inflation and rapid rate rises that are straining household budgets.
As public health restrictions have eased and interest rates have quickly risen, the boom has been replaced with slower growth and elevated uncertainty.
Home price growth has slowed Australia-wide, and many markets are now seeing prices fall.
Despite being a relative bright spot in the current housing market, regional home price growth is slowing. Regional prices are expected to continue to slow amid headwinds from monetary tightening and reduced net migration flows to regional areas.
Internal migration eases from Covid levels but remains high
Census 2021 data shows regional Australia recorded a net gain of 184,000 people in the five years prior, more than double the corresponding period before the 2016 Census.
This gain has been driven by large flows of people moving into regional Queensland, and in particular, regions in the southeast peripheral to Brisbane.
The Census also records places of residence one year ago. Analysis of population flows a year before the 2021 Census shows an acceleration of this migration trend as the pandemic prompted an increase in movement around Australia.
The 2021 Census data shows Queensland – both metro and regional – remained the most popular destination, with more people moving to the state than anywhere else in the country.
The Sunshine Coast was a top spot for interstate migraters during the pandemic. Source: Getty Images.
The Sunshine State has experienced an unprecedented influx of new residents, with a net gain of 107,549 people in the five years before the 2021 Census.
The pursuit of affordability and lifestyle is still in play
Though there are many life events that may prompt relocation, relatively affordable house prices are likely to be an influence. And as the pandemic struck, many escaped Covid lockdowns in southern states in search of scenic coastlines and more space.
Access to jobs and educational opportunities are also drivers of movement, with remote work capabilities making work less location bound. This allowed for an expanded set of residential choices for many, permitting increased movement within Australia.
The ratio of home prices in the capital cities compared to their regional counterparts illustrates the comparative affordability of properties in regional Australia. With remote work flexibility bringing more residential choice, it’s unsurprising that so many took advantage of these trends.
Although that affordability has sharply eroded after recent price growth, regional areas still present a comparative advantage, despite increases in mortgage servicing costs and a dip in borrowing capacities relative to the same period last year.
The gap has closed significantly in Sydney and Melbourne relative to their respective regional counterparts, but it hit a record high in Adelaide.
Looking at the east coast capitals relative to regional Queensland, it’s clear that even after the gap narrowed this year, the affordability advantage is still present, and historically significant.
Post-lockdown migration from capitals to regions remains high but has eased from Covid levels
Australia has limited timely reporting of internal migration flows. That makes it difficult to assess whether the pandemic-induced population flows have returned to long-term averages.
Population flows into Queensland look to have eased from the pace at which they were occurring. However, they remain above pre-Covid levels as indicated by the most recent national, state, and territory population release from the Australian Bureau of Statistics.
The state’s population – metro and regional – continued to be the fastest-growing, fuelled by net interstate migration.
Affordability makes Queensland more desirable than city living. Source: Getty Images.
For the regions specifically, the Commonwealth Bank’s Regional Movers Index also suggests the regional shift remains elevated relative to pre-Covid averages, although the pace has eased.
This is likely to be a reason why we continue to see regional housing markets outperform the capital cities.
It makes sense to see these flows ease but not reverse entirely, with the shift to the regions being a permanent move for some as remote working expands, while others will return to the capitals.
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Demand activity on realestate.com.au suggests elevated migration
Demand activity on realestate.com.au in regional areas has eased but remains elevated, suggesting ongoing population flows from the capital cities to the regions.
Search activity on realestate.com.au also highlights the popularity of regional Queensland for interstate property seekers. Regional Queensland is the top searched location for interstate property seekers in regional Australia. In fact, 31% of all searches in regional Queensland are from interstate property seekers.
Almost half (42%) of interstate searches are in regional Queensland. Regional New South Wales also ranks highly, accounting for a 24% share of interstate searches.
The most popular destination in regional Queensland for interstate property seekers is the Gold Coast, accounting for more than a third of all interstate search activity, followed by Cairns, the Sunshine Coast, and Wide Bay regions.
31% of all searches in regional Queensland are from interstate property seekers. Source: Getty Images.
That’s in line with the 2021 Census data, which showed that the Sunshine Coast and Gold Coast SA4s had the largest positive net migration gains of any SA4 region in Australia. Almost 60,000 people made the move between 2016 and 2021, with close to 30% of those having moved between 2020 and 2021.
Within those SA4s, the top destinations for interstate search activity are the Cairns and Hervey Bay townships. Unsurprisingly, Surfers Paradise and Broadbeach also rank highly amongst interstate property seekers on the Gold Coast.
Though far from conclusive, demand activity on realestate.com.au does suggest the migratory shifts detailed by the Census are still in play.
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Demand for regional property – digging deeper
In 2021, record low-interest rates fuelled extreme buyer demand and an exceptional pace of home price growth.
Throughout the latter half of this year, demand to buy property has slowed from the strong levels seen last year and into early 2022. As interest rates have moved sharply higher, consumer confidence has fallen, and expectations of continued price falls have weighed.
As of the time of the 2021 Census, more than 60% of Australia’s population resided in the capital cities, and two-thirds of those in the two largest cities, Sydney and Melbourne. It is clear capital cities remain the most popular residential choice, but throughout the Covid period, demand for regional property surged almost four-fold.
The number of potential buyers per listing in regional Australia was close to three times pre-pandemic levels in October 2022, despite falling 22% from the peak recorded in January 2022.
In the capital cities, the number of potential buyers per listing also remains marginally above pre-pandemic levels, despite having moderated 15% off peak levels recorded earlier this year.
Suburbs of the Sunshine Coast and Gold Coast have retained the most potential buyers per listing relative to the respective median for the rest of the state. Some suburbs have three times the number of potential buyers per listing compared to a typical regional Queensland suburb.
But that’s not where demand has most increased over the past 12 months.
Affordability is a key driver
Regions, where potential buyer demand has increased the most in the past year, are the more affordable areas of the 42 regional SA4s. In these SA4s, the median home value is below that of regional areas overall.
Queensland is still home to four of the top 10 regions where demand has increased the most in the 12 months to October 2022. However, these are regions where the median value of homes is still below $600,000 – well below the Sunshine Coast’s $1 million-plus median value.
Broadly, demand for homes in regional Queensland, regional SA, and regional WA continues to exceed that of homes in regional NSW and regional Victoria , with comparative affordability keeping these regions popular for buyers.
In the same vein, demand has fallen the most throughout the past year as interest rates have risen in higher value regions like the Southern Highlands and Shoalhaven (-47%) and Richmond – Tweed (-46%) SA4s.
Regional home prices
Regional areas continue to exhibit a lesser pace of price falls than the capital cities, rising 0.06% in October compared to a 0.11% decline across the capital cities.
Throughout the Covid period, interest in lifestyle properties surged thanks to more people seeking larger homes and space, especially in regional locations.
Regions that have attracted more people have experienced higher increases in housing prices
The regions saw higher internal migration and price growth through the pandemic period. And regions that have attracted more people have largely experienced higher increases in housing prices since the pandemic's onset.
Housing market conditions have slowed this year, with rising rates and falling consumer confidence.
Lifestyle and amenity-rich regional NSW and southeast Queensland areas that boomed with city buyers during the pandemic have been the first to see prices fall.
These regions also closely align with the areas that have seen the largest drops in demand from potential buyers.
Regional hotspots are the first to see prices fall
The SA4 regional market seeing the largest price falls to date is Richmond-Tweed, home to popular Byron Bay. Also impacted by flooding earlier this year, home prices have fallen 6.3% from their peak.
It’s closely followed by the Southern Highlands and Shoalhaven, where tree-changers sought space in the likes of Bowral. Home prices in that region have fallen 5.3% from their peak.
Other markets that thrived during the pandemic have also seen home price growth slowing rapidly, like the Sunshine Coast (-5.1%), Geelong (-4.5%), and Illawarra (-3.9%).
It’s often the case that the upper end of the market experiences larger price declines. Much like the trend we see across the capitals, it’s the comparatively higher-value areas within regional Australia that are seeing steeper price falls.
Why are so many regional pockets holding up so well?
Home price falls in regional Australia are not as widespread as in metro areas. Out of the 42 regional areas classified as SA4s, 28 have seen prices fall from their peak, while 41 of the 46 metro regions have seen home prices slip from peak levels.
Demand for more affordable regions and larger homes has provided support, resulting in regional areas faring better than capital city areas in 2022.
In the regional SA4s where annual home price growth remains strongest, the median value of dwellings is typically under $500,000. In regional SA, where home price growth is strongest, close to 80% of new for-sale listings in October 2022 were below $600,000.
In addition, conditions remain tougher for regional buyers, with the number of properties listed for sale still well below pre-pandemic levels.
This means regional buyers have less choice and less negotiating power – another reason why regional areas are exhibiting a lesser pace of price falls relative to the capital cities.
Lower inventory shields regional markets
The amount of choice buyers have has continued to improve in many parts of the country this year, particularly in capital cities. Though, the same does not ring true for many regional areas.
In regional areas, listings haven’t normalised as quickly. The good news is this process has begun in recent months. However, comparing available stock on market to pre-pandemic averages, it’s clear to see there’s much less choice for buyers in the regions. This is particularly the case in regional SA and regional Queensland.
Where listings are most below pre-pandemic levels
The SA4 regional market seeing the largest decline in total listings relative to pre-Covid averages is Barossa- Yorke – Mid North (-69%), followed closely by the Darling Downs Maranoa (-67%) region.
In fact, the best performing regional markets over the past year in terms of price, SA’s Barossa – Yorke – Mid North (-69%) and South East (-66%) regions and Queensland’s Wide Bay (-63%), have some of the respective regions’ tightest property supply.
In each of these regions, total listings are still less than half pre-pandemic averages, with the lack of choice for buyers likely insulating home values.
Although the balance of power isn’t shifting as readily toward buyers in the regions as it is in the capitals, the substantial rate rises this year, weaker consumer confidence, and reduced borrowing capacities are still weighing on buyers.
Properties taking longer to sell
How fast properties are selling, or the number of days on market, is a key litmus test of housing market conditions, which clearly shows the shift over the past year.
Nationally, the median number of days a property was listed on realestate.com.au before selling was just over 50 days in October. This has steadily climbed from last year’s record low of 29 days as the sense of urgency many buyers experienced has waned.
In the regions, the number of days on market has climbed from record low selling times, with properties also taking longer to sell relative to the same period last year in almost every regional area.
However, properties are still selling faster in the regions than they were before the pandemic onset. That’s particularly the case in regional SA and WA where buyers still have far fewer options.
Breaking down the regional SA4s, again it’s clear that the affordable areas where buyer demand has held up better are the regions where selling times have continued to fall.
In terms of where properties are taking longer to sell, it’s no surprise to see many of the higher-value lifestyle markets that boomed during the pandemic, like the Illawarra, Sunshine Coast, Gold Coast, and Richmond-Tweed regions are slowing the most.
Sales volumes are trending lower as buyer demand moderates
Sales volumes have slipped from last year’s record levels in every regional area.
The combination of sharp interest and mortgage rate rises, and expectations of continued home price falls, has dented consumer sentiment and weighed on buyer demand, clearly contributing to slowing selling activity.
There are only five of the 42 regional SA4s where sales volumes have increased to date this year compared with last. Queensland is home to three of those regions.
In most markets, sales volumes are still above levels recorded in 2019 before the pandemic onset and the unique combination of factors that drove regional markets to dizzying heights transpired.
Outlook
Rising interest rates have quickly rebalanced the housing market from last year’s extreme growth and remain front and centre of the fall in home prices.
Now the cash rate is sitting at 3.10%, with a substantial 300 basis points of tightening pushed through to date, and maximum borrowing capacities have dropped by close to 30%.
Property price decreases are not as widespread in regional Australia as they are in the cities. Source: Getty Images.
National prices have fallen for the eighth month in a row after peaking in March 2022, with the fastest interest rate tightening cycle since the 1990s weighing on markets in most parts of the country.
However, home price falls in regional Australia are not as widespread as in metro areas. Of the 42 regional SA4s, 28 have experienced a price fall from their peak, while the other 14 are yet to see the same.
While increasing borrowing costs are a headwind for prices, regional markets are likely to continue to exhibit a lesser pace of price falls. They remain buoyed by shifting lifestyle priorities, migration trends, and affordability advantages that are still in play.
In addition, conditions remain tougher for regional buyers, with the number of properties listed for sale still well below pre-pandemic levels, which is also seeing some markets remain more competitive and shielding home values.
Demand for homes in parts of regional Queensland, SA, and WA continues to exceed that of higher-value lifestyle markets of regional NSW and Victoria, with comparative affordability keeping these regions popular for buyers. We expect that to continue to be the case.
Affordability should keep regional areas popular for buyers. Source: Getty Images.
With additional rate rises on the horizon, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, shrinking buyers’ budgets.
The significant reduction in borrowing capacities implies further price falls. It will take time for higher interest rates to fully affect prices, so they are likely to continue to fall throughout this year as interest rates continue to rise.
However, if interest rates peak in 2023, price falls are likely to ease, with values stabilising as interest rate uncertainty reduces.