Will COVID-19 lead to a regional housing boom?

“Housing market data is partially suggestive of this, especially across the largest capital cities. Rental value increases are positively correlated with greater distance from the CBD for the largest capital cities.”

The latest CoreLogic indices show that growth across regional housing markets is higher than the capital cities in both quarterly and annual terms.

Values across the combined regional market increased 4.8 per cent over the year, while capital cities only saw a 3.7 per cent increase.

Looking closer into each state and territory, NSW and Victoria’s regional market saw positive capital growth in dwellings, while the greater capital city market recorded declines. In Queensland, South Australia and Tasmania, while both regional and capital city markets saw increases, regional markets had significantly higher growth.

The rate of annual change in combined regional dwellings has not outpaced the capitals since October 2019, when the largest capitals were moving through the end of a downturn, according to Ms Owen.

Through the COVID period to date (March 2020 to October 2020), values across the combined regional areas increased 1.7 per cent, while the combined capital cities value fell 2.3 per cent.

In each state, inner-city markets are still showing relatively weak performance. “This is because inner cities have historically seen greater housing demand from renters, particularly those from overseas, or working in industries that have been acutely affected by the pandemic.”

However, it is noteworthy that regional Australia has previously outperformed capital city markets based on cyclical patterns.

Further, Ms Owen explained that capital city markets generally have higher volatility, meaning returns are higher during upswings, and declines are deeper during downswings.

“This means that a snapshot of capital growth may not be enough to support the idea that structural shifts caused by COVID-19 have been the reason that regional areas have outperformed.”

CoreLogic also found that sales data has not highlighted consistent trends in demand.

In the three months to October, CoreLogic-modelled estimates suggest the growth rate in sales was 12.0 per cent across Sydney, but a lower 10.9 per cent in regional NSW. In Melbourne, sales volumes fell 18.0 per cent, while regional Victoria saw a 3.7 per cent uplift in sales.

“Sales data is also a difficult measure of demand through the pandemic, as sales have been highly volatile in response to social distancing restrictions,” Ms Owen highlighted.

Internal migration

Another trend that people tend to associate with COVID-19 is the shift in net internal migration patterns for Australia at the greater capital city and regional level, which has been particularly pronounced during the first few months of the pandemic.

Data from the Australian Bureau of Statistics (ABS) showed that, in the June quarter, when Australia faced its highest levels of government stringency in response to the pandemic, the net loss across the combined capitals of Australia was 10,500 people.

According to Ms Owen: “This is a record low in net internal migration. An additional shift of people from cities to regions is likely to have at least partially contributed to better performance in regional housing markets.”

However, she noted that migration from capital cities in Australia has been persistently negative for over a decade. In fact, net internal migration had been trending lower since early 2015, when affordability was worsening in the largest cities.

As housing prices peaked and trended lower, internal migration trends reversed, which suggests that housing affordability could be a key driver of movement to regional Australia that was evident well before COVID-19.

“Ultimately, the data suggests migration to regional Australia was not initiated by COVID-19, but may have amplified it.”

As stage 2 restrictions eased, migration trends showed that people are shifting away from densely populated cities that saw high levels of COVID-19 cases. Melbourne, in particular, saw the biggest drop in net internal migration, with almost 8,000 net people leaving the capital city.

However, a deeper dive into the ABS data shows the story is not as simple as COVID-19 driving city-dwellers to coasts and hobby farms, according to Ms Owen.

“Intrastate departures from Greater Melbourne, or the movement of people from the metropolitan to regional Victoria, had already been trending up with capital city house prices from 2017.”

While the June 2020 quarter indeed saw a record-high level of departures from the city to regional Victoria, at 11,746, this is only 3.1 per cent higher than the previous peak in intrastate departure, which was in December 2018, well before the pandemic struck.

In other states, the trend further refutes the idea that COVID spurred migration away from the capital cities to the regional areas.

Brisbane, for instance, defied the trend of intrastate departure and saw a significant increase in net internal migration. Importantly, the biggest net gain (885 people) to Brisbane was from the rest of Queensland.

“Ultimately, the combination of housing and population data highlights that in some parts of the country, COVID-19 may have spurred an increase in movement to regional Australia. This has at least partially contributed to an offset in the decline of values, or an increase in values, through the COVID period.

“However, migration data suggests the narrative does not appear consistent across the country, and highlights affordability is also an important driving factor of departure from the cities,” Ms Owen concluded.