Cities vs Small Towns – Which Get Better Capital Growth?

Should I Invest In a Big City or a Small Town?



Do house prices in New Zealand’s bigger cities increase in value faster than those in small towns?

This is a topic that routinely comes up in property circles … keep reading to find out if bigger cities really do achieve better capital growth.

Do House Prices In Bigger Cities Grow Faster Than In Small Towns

What does 28 years of data say?

The Real Estate Institute of New Zealand has been collecting data on the median sale price of properties over the last 28 years. The data goes back as far as January 1992.

Looking at how median sale prices have changed gives us a sense of the capital growth in each region.

For instance, here is the monthly median house price for Auckland since tracking began.

You can see that median house prices rose from $135,000 in 1992, through to $1,000,000 today.

That’s a whopping $865,000 increase.

In percentage terms, that’s a 641% increase, or a compounding growth rate of 7.19% every single year on average.

While that is an astonishing level of capital growth, when you run the same analysis across all 16 of New Zealand’s regions, you see that Auckland wasn’t the fastest appreciating area.

Otago achieved a slightly higher capital growth rate – 7.48% per year.

Take a look at the capital growth achieved across all regions.

Similarly, Gisborne, Hawke’s Bay, the Bay of Plenty, Northland and Waikato achieved higher capital growth rates than Wellington.

And Canterbury achieved the second slowest capital growth of all regions.

So it’s fair to say that on a total capital growth basis, there’s no evidence to suggest that bigger regions achieve a better capital growth rate than smaller areas. That is, at least in percentage terms.

Why Do Experts Recommend Bigger Cities?

So why do some property investment experts recommend big cities?

Looking passed the total amount of capital growth, there are other reasons property investors may prefer investing in larger cities.

For instance, property prices in larger cities tend to recover more quickly from economic downturns, compared with smaller towns. They also tend to be more consistent in their capital growth.

Compare Canterbury house prices (a larger region) to Gisborne house prices (a smaller one) after the 2008 economic downturn.

Canterbury house prices peaked in February 2008, with a median house price of $325,000. Four years and 2 months later, Canterbury house prices recovered and surged passed that previous peak.

Gisborne house prices, on the other hand, took 10 years and 9 months to recover from their ’07 peak and were flat through until mid-2018.

That matters because as their properties increase in value, property investors will use that increased equity to buy another property.

But, if your property’s value stays flat for a long time, there’s no additional equity to use to buy the next investment.

So, it’s all very well saying, “Invest in Gisborne … it’s got the same capital growth as other regions over the long term” … but it’s not just the long term or the next 15 years that matters.

Because what happens to your investment property’s value in the meantime will impact your ability to grow a portfolio.

Take a look at the following table, which shows how quickly each region recovered after ‘07/’08 peaks.

Consistently, the regions which have larger cities recovered more quickly than those filled with smaller towns.

The top four fastest recovering regions are home to our top 5 largest cities – Auckland, Canterbury (Christchurch), Bay of Plenty (Tauranga), and Waikato (Hamilton). The exception is Wellington, which was in the middle of the pack in terms of recovery times.

This is why property investors who care about capital growth are often better off investing in larger cities. Not because they’ll achieve higher capital growth over the long term, but because that growth is more consistent, and the property market is more resilient to a downturn.

Main Cities vs Small Towns

Why are main city property markets more resilient?

You might wonder what would lead to a larger city’s property market being more resilient, compared with a smaller town.

Generally speaking, the economy of a small town is reliant on a few specialist industries, with the bulk of the town’s population employed by those sectors.

Think tourism in Queenstown; dairy and agriculture in South Taranaki; or aluminium in Invercargill.

If these industries go through a downturn it will have a significant impact on employment in the town. As employment drops, three things happen:

  • People may move to other cities or regions where there are better employment opportunities.
  • Which leads to fewer potential tenants within the town, making it harder to rent your property and secure its income.
  • It also leads to lower housing demand, which takes steam out of the market. That means your investment property’s value may be flatter for longer.

You don’t see the same trend in larger cities.

Instead, major metropolitan areas have diversified economies, which are based on multiple industries.

That means if one industry goes through a rough patch, there are still employment opportunities in other sectors. The economy can still function, and there isn’t the same incentive for people to move away.

That keeps demand for housing resilient, making it easier to find a tenant and have confidence in higher house prices in the major cities.

Conclusion

Should I Always Invest In Larger Cities?

No. Not everyone should invest in large cities all of the time. Some investors focus on smaller towns and have been very successful.

But, if you’re an investor who wants consistent capital growth, for long term wealth and to grow a portfolio, then larger cities may be the right fit for you.