Australia's hottest property investment destinations

Parts of the Australian property market are still running hot. Here's where to look for either capital growth or yield.

Summary: In capital growth terms, the property market  largely remains a tale of two cities. But there are also great yield plays, if you know where to look.

Key take-out: Strong demand for select inner-city suburbs in Sydney and Melbourne is continuing to drive growth, while investors in some outer and regional pockets are experiencing solid yields.

Key beneficiaries: Property investors. Category: Residential property. 

One of the most common questions I get asked by residential property investors is “where should I buy?”

The challenge when answering this is that all investors are different. Most investors look to achieve capital growth, but some less so and are more interested in the monthly rental cheque. And then there are the emotional aspects of buying property, with many buyers wanting to be able to see their property regularly or to buy in areas that they most identify.

Given the size of the residential property sector in Australia there is a suburb perfect for every type of investor.

Capital growth

While past capital growth is not necessarily an indicator of future growth, it does give us ideas as to the type of property that tends to do well. Not surprisingly, the strongest performing houses are in Sydney and Melbourne and the top three are all in suburbs that could be considered prestige, with prices well over $1 million. For units, there are much more affordable options. 

In Sydney, the Bowral suburb of Burradoo has had the strongest median price growth in Australia over the past 12 months, driven by commuters looking for an alternative to the crowded Sydney market as well as those looking for a weekender. The inner-east suburb of Woollahra comes in third. In Melbourne, the beachside suburb of Hampton saw 30 per cent median price growth over the past 12 months.

For units, Ultimo in inner Sydney has seen the strongest growth, partly driven by strong white collar employment growth in Sydney's CBD. And although Queensland has not been performing as well as Victoria and New South Wales for price growth, there are suburbs that are achieving some of the highest price growth for units in Australia. Brookwater in Brisbane has seen 43 per cent growth over the past 12 months, while Noosa Heads has seen 37 per cent growth.

Table 1: Suburbs with strongest median price growth (y/e May 2016)
HousesMedianAnnual growth (%)
Burradoo, NSW $1,336,00032.3
Hampton, VIC $1,770,00030.1
Woollahra, NSW $2,660,50029.8
Units
Ultimo, NSW $745,25046.1
Brookwater, QLD $522,00043
Noosa Heads, QLD $630,00037

Source: Corelogic

The most in-demand suburbs

We regularly track those suburbs where we are seeing much more demand from buyers than people selling. With a shortage of stock, it would suggest that price growth is more likely.

Right now, houses in Melbourne and apartments in Sydney are seeing the strongest demand from buyers. In Melbourne, outer suburban Warrandyte is the most in-demand for houses, followed by inner-city Prahran and Brunswick. For units, it is inner Sydney with the north shore suburbs of Wollstonecraft and Cremorne and inner-west Drummoyne all seeing high demand.

Table 2: Suburbs seeing more demand from buyers than available housing (y/e August 2016)
HousesMedian price
Warrandyte, VIC$870,000
Prahran, VIC$1,331,000
Brunswick, VIC$863,750
Units
Wollstonecraft, NSW$910,000
Drummoyne, NSW$920,000
Cremorne, NSW$1,290,000

Source: realestate.com.au

High yield

Most investors look to residential property for capital growth, however some prefer a high average rental yield. Generally suburbs that achieve strong rental yield do not achieve strong capital growth. In some cases, prices can be declining.

For the highest rental yields, investors should look beyond the major capital cities. Houses in Zuccoli in outer Darwin are currently achieving rental yields close to 15 per cent, and although the mining town of Collinsville in Queensland has seen house prices decline, rental levels have remained relatively stable, also leading to a similar rental yield. Zeehan, a small town in western Tasmania, is currently achieving rental yields of 13.7 per cent.

For units, the best performer for yields is Thurgoona, an outer suburb of Albury. Stapylton on the Gold Coast and Deagon, an outer suburb of Brisbane are also achieving strong yields.

Table 3: Highest yielding suburbs in Australia (y/e May 2016)
HousesMedian priceAverage rental yield (%)
Zuccoli, NT$216,50014.9
Collinsville, QLD$70,00014.9
Zeehan, TAS$57,00013.7
Units
Thurgoona, NSW$60,00024.3
Stapylton, QLD$160,00017.9
Deagon, QLD$125,00013.3

Source: Corelogic

Buying at the bottom of the market

There have been some large drops in prices for housing, particularly in mining towns in Western Australia and Queensland. This does create opportunity for buyers, however there is a risk that prices will keep dropping.

For this reason, it is a good idea to plan to hold a property for longer than two years, ideally for five years, if you are looking for capital growth. That way, even if you haven’t bought at the bottom of the cycle, you should be able to ride out the declines. The other thing to consider is where price growth will come from. Some mining towns have very little other industry to support them.

The good news is that properties that have seen strong declines in prices generally have not seen the same decline in rental levels. Collinsville has seen prices drop by almost 50 per cent over the past 12 months. Rents, however, have not declined by as much and this town now has some of the highest rental yields. The mining towns of Karnup and South Hedland in WA have also seen strong price declines.

For units, the holiday destination of Rainbow Beach in Queensland has seen big drops in prices, as has the coal mining town of Emerald. In Canberra, Campbell has seen a price decline of just over 44 per cent, surprising for the location but it may reflect a large number of new units in this city.

Table 4: Suburbs with the largest decline in prices (y/e May 2016)
HousesMedianPrice decline (%)
Collinsville, QLD$70,000-48.1
Karnup, WA$464,000-47.7
South Hedland, WA$370,000-45.6
Units
Rainbow Beach, QLD$205,000-48.8
Campbell, ACT$465,000-44.3
Emerald, QLD$180,000-37.9

Source: Corelogic

I want to be able to negotiate a great deal

Conversely to those suburbs that have the most demand, there are suburbs that have more supply than demand. For that reason, it may be possible to negotiate a better deal.

Queensland's high-supply environment combined with a slowing economy has meant that the top suburbs in this list are located in this market. The towns are a mix of beachside (Forrest Beach, Bowen), farming (Cloncurry, Chinchilla, Bundaberg North) and mining areas (Moura).

Table 5: Suburbs seeing more supply of housing than demand (y/e August 2016)
HousesMedian price
Forrest Beach, QLD$235,000
Cloncurry, QLD$177,500
Moura, QLD$159,750
Units
Bowen, QLD$210,000
Chincilla, QLD$255,000
Bundaberg North, QLD$225,000

Source: realestate.com.au

Capitalising on demographic change

Investing in housing in places experiencing demographic change has the potential to provide high levels of capital growth, but this can be difficult to pick. These are the areas that I consider to be worth considering.

Our analysis of fastest-selling suburbs, as well as those suburbs most in demand from buyers, is showing a drive for affordable locations, particularly in Sydney and Melbourne. For Sydney, there are now very few affordable options and the Central Coast is seeing a boost in demand. In Melbourne, outer-east Melbourne, particularly those suburbs in the leafy Dandenongs, are seeing elevated demand.

The suburb of Glen Waverley is consistently the most popular suburb with Asian property seekers on our site. This suburb has seen the most sales over $1m in Melbourne over the past 12 months. Strong demand is not necessarily coming from local residents but also from Chinese buyers looking to move to Australia.

Sydney's CBD office demand is surging and more businesses are looking to grow. This has meant that there is greater demand for white collar workers and Sydney is now expected to attract more people from both interstate and overseas. Furnished apartments within the Sydney CBD, or close by, could be one property type to be considered.

Nerida Conisbee is chief economist of REA Group, owner of realestate.com.au - @neridaconisbee