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New data showing residential property prices in Australia’s regional areas outpacing capital cities should come as no surprise.

The continued increase in demand for property in regional areas, many of which faced decades of decline, was a trend that accelerated during the period affected by COVID-19 (2020 to 2022).

Although internal migration has stabilised, we expect that many regional areas will perform strongly over the medium to long term.

To understand why, it is important to understand why so many people have been moving to regional Australia in recent years and how this might evolve in the future.

It’s complex, but here are some key reasons:

CITY SUPPLY CONSTRAINTS TO REMAIN

Australia currently faces a serious housing crisis unlike any in our recent history. Limited availability of affordable housing, new housing and land supply constraints and very tight rental markets mean an increasing number of people are looking wider than ever before and are (re)discovering the regions.

Current policy settings are unlikely to solve the crisis and will only serve to put further pressure, especially, on our five largest capital cities, which have traditionally absorbed most of the nation’s population growth. Indeed, the housing crisis in our capital cities is likely to get significantly worse over the next few years, potentially making more people consider regional locations.

The housing shortage will be especially acute in Melbourne and Sydney, which have traditionally attracted most of Australia’s international migrants, but where residential development conditions remain extremely challenging. Federal and State Governments have set highly ambitious targets for new housing, but current policy settings and market conditions mean these targets are unlikely to be reached.

For example, the Victorian State Government in 2023 set a target of building 800,000 new homes over the next decade (80,000 every year). However, Victorian dwelling approvals have fallen sharply in recent years with little prospect of increasing over the short-term. Only around 51,000 dwellings were approved in Victoria in 2023, the lowest in a decade, having declined from just over 62,000 in 2022 and almost 71,000 in 2021.

RECORD POPULATION GROWTH AND CHANGING DEMOGRAPHICS

Australia’s well-documented robust population growth is underpinned by high levels of overseas immigration. Many of these new migrants, together with younger Australians who are priced out of capital cities, are discovering that regional areas offer much greater affordability, while also offering liveability and, increasingly, a range of employment options.

This robust population growth is expected to continue indefinitely, notwithstanding recent changes by the Federal Government to migration policy. For example, the Victorian State Government’s recently released population projections (Victoria in Future 2023) suggest that the state’s annual population growth will average over 127,000 people from 2023 to 2051.

REMOTE WORKING & TECHNOLOGY

Technological change has been one of the defining features of Australia in recent decades and will continue to play a critical role in deciding how, and where, people live. As the Federal Government’s 2023 Intergenerational Report notes, “technological change has driven unprecedented economic growth and rises in living standards over the past 40 years” and “powerful forces will continue to shape Australia’s economy over the coming decades including …expanded use of digital and data technology.”

Technology and working from home (or remote working) continue to transform Australia’s economy and, specifically, the relationship between cities and regions and workplaces and homes. The remote working trend is not new and has become increasingly popular in recent decades, driven by a diverse range of factors, including technological improvements, offshoring and the evolution of businesses and industries.

Remote working accelerated during COVID-19 and demonstrated what was possible with the latest technologies. Although many workers have since returned to the office in some capacity, working from home rates remain higher today than they were before COVID-19 associated lockdowns. Of course, considerable uncertainty remains on how prevalent remote working will be in the future. This is especially the case because adoption will depend on a range of highly uncertain drivers, including, further improvements in technology and the outcome of negotiations between employers and employees.

Recent signs suggest however that the work-from-home revolution will continue as more employees seek and win the right to spend more time in their home office. The number of federal public servants working remotely is expected to increase following the decision by the federal government to formally remove work-from-office mandates. The federal government is Australia’s largest single employer to remove mandates and other employers, including state governments, might follow.

This ability to work remotely could be a key driver in creating demand for regional properties as workers shun the daily long commute and hustle and bustle of cities in favour of more affordable housing in the regions, while keeping their ‘city’ jobs.

DECENTRALISATION

Decentralisation has been a long-standing objective of many levels of government and big business.

Recent trends have renewed interest in decentralisation given a range of factors. These factors include robust population growth in the regions, the increasingly high costs of having centrally located operations in capital cities (including congestion costs) and the rise of remote working.

Over the coming decades, it is possible that policymakers may need to facilitate greater decentralisation to accommodate a growing population and solve the housing challenges our capital cities already face.

The 2023 Intergenerational Report, for example, notes that Australia’s population is projected to increase from 26.5 million in 2022–23 to 40.5 million in 2062–63.  This represents a total increase of around 14 million people, which is broadly equivalent to Sydney, Melbourne, Brisbane and Adelaide today. Accommodating this population represents a significant challenge and opportunity. There are various ways this could occur. One example is growing our regional cities including, especially, those that are mid-sized and might have a greater capacity to welcome new residents.

VALUE FOR MONEY

The difference between what $1 million will buy in the city versus what the same $1 million can buy in a regional city can often shock people. However, many capital city residents looking to the move to the regions also find that, in addition to their money going much further in the regional property market, it also can go much further across a range of other areas.

With Australia continuing to experience a cost-of-living crisis – and many younger buyers and new overseas migrants being effectively ‘locked out’ of capital city markets – regional areas are likely to remain of growing interest for those seeking greater value of money.

Similarly, many investors, including patient buyers with a medium to long-term horizon or not able to compete against domestic or foreign buyers with greater buying power, are now increasingly turning to regional areas in anticipation of continued long-term population and economic growth and the evolution of many of the structural trends discussed above.

By George Bougias

Oliver Hume

National Head of Research