In today’s blog, we’ll look at a couple of areas that might provide outsized returns throughout this cycle and the reasons why.

Let’s get started.

The first is Mickleham in Melbourne. Mickleham’s story is the story of Melbourne, which has undoubtedly been the worst-performing capital city during this cycle. This one is for countercyclical investors. We have now clearly entered the second half of the property cycle, and there has been significant growth in many markets.

However, Melbourne is one of the strongest historical performers and has lagged behind. Incredibly, Melbourne houses are 41% cheaper than Sydney and are cheaper than Brisbane, Wollongong, the Sunshine Coast, and the Gold Coast.

We have about 140 years of data on the Sydney and Melbourne markets; during that time, they went through two world wars, recessions, depressions, tax changes, currency changes, and just about every factor that could negatively impact the property market. Yet the long-term performance remains near the top of the heap. It is reasonable to assume that whatever fundamental factors that have driven the market through those periods will continue to drive it into the future.

This cycle of poor performance in Melbourne has been due to increased state property taxes, which have helped pay for the multiple lockdowns during the pandemic. This will eventually pass too. In the meantime, this is the closest you’ll get to a time machine to buy Melbourne cheaply. Capital always chases returns, and as the other markets move forward, it is likely that capital will eventually rotate back to Melbourne for a late run this cycle.

One more piece of analysis is that peak valuation gaps (i.e., The relative price differences) between Sydney and Melbourne happen once every 20 years or so. What has always followed is Melbourne’s outperformance for the next seven to eight years.

We happen to have a peak valuation gap right now. This is simply a way to say that when a good asset has underperformed for a while it is followed by a period of fast growth as the price returns to the mean. Property, like most assets is a mean reversion asset.

Mickleham is in Melbourne’s northern growth corridor. A time series plot of Melbourne’s urban sprawl shows that the population is spreading north and northwest as the city expands and population densities increase. Mickleham is right on the finger of growth heading north.

Over time, land moves to its highest and best use, so if we were to look at the growth of a city, farmland eventually gives way to low-density housing, which over time becomes medium-density housing, which becomes high-density housing, and eventually, near the city center it gives way to highrises and retail and office space. If you take a long enough timeline, Mickleham is right at the start of this process, and as the city expands, prices have a long way to go.

Between the census periods of 2016 and 2021, Mickleham saw a 50.8% increase in professionals, a 32.5% increase in managers, and a 51.5% income growth. Accordingly, Hume City (where Mickleham is located) has consistently experienced faster economic growth than Melbourne and Victoria.

As I said, this one is a countercyclical play. It is a market with all the fundamental growth drivers in place, yet it still hasn’t boomed.

OK, moving to the Sunshine Coast

The Sunshine Coast is more of a momentum play than a countercyclical play like Melbourne. It is 90 km north of Brisbane and was (and still is) heavily targeted by sea changers. These are typically baby boomers (who own 50% of the wealth in Australia) who have retired and are looking for somewhere with a warm climate and a good lifestyle to live their golden years.

To do this, they typically sell their family home in Brisbane or the southern states and purchase something a little cheaper on the Sunny Coast. The issue is that the Sunshine Coast property market is quite small. That enormous inflow of capital into a small market is like trying to pour a bucket of water into a cup. It simply overflows. This has largely been why the Sunshine Coast routinely outperforms the Brisbane market. The aging population in Australia and the growing number of retirees means that this isn’t a one-cycle phenomenon but rather a secular change to the Sunshine Coast housing market.

However, something else significantly contributed to the strong performance. The creation of the Maroochydore Town Centre has changed the nature of the Sunshine Coast. It’s Australia’s only greenfield city and will become Australia’s largest regional business centre. It already has Australia’s fastest internet at 1G/sec (roughly twice the speed of the average 5G connection) with a cable connected to Asia. This will allow it to become a tech hub for the country.

We’re seeing a significant increase in the 25 to 49-year-old population as people in their prime working years move in to take advantage of the jobs. The same thing is reflected in the economy, which has grown faster than Queensland’s for 25 years. Incredibly, in 2023, the economy grew 25 times faster than the Australian economy. This has been reflected in the incomes with the fastest growth in the upper quartile between the census periods.

All this has led to an enormous increase in population and a huge supply-demand imbalance in the property market. Assuming the most conservative population growth estimates and the current rate of housing construction, the undersupply in the Sunshine Coast never gets better. In fact, it continuously gets worse over time.

If the housing supply is increased by 50% from the current levels, the shortage will be addressed by 2043. If the housing supply is doubled from its current pace, the shortfall will be addressed by 2032. The simple conclusion is that prices and rents will continue to rise. We can see this reflected in the pace of growth in asking rents, which have increased by 52% since the beginning of the pandemic. The most surprising part is that rents still appear to be accelerating, with an annualised quarterly figure of 20%.

Of course, the Sunshine Coast market has run considerably harder than Melbourne, with house prices up by 65% since 2019 already. The remarkable thing about this market is that it has maintained its momentum as the RBA raised interest rates 13 times, even as growth in other capital markets has begun to slow. The market will invariably continue to see a rapid move upward as the RBA pivots and cuts interest rates either this year or early next year… from bottom to top, it could be one of the big winners this cycle.

So there you have it. Two very different markets with two different investment theses for you to consider!