Regional Towns vs Capital Cities: I've Done the Maths Over 40 Years

Should you buy in a regional town or a capital city? This question keeps showing up in my inbox, at dinner parties, and in every property forum on the internet. And the answer that most people give — "it depends" — is technically correct but practically useless.

So let me give you a less diplomatic answer. For the vast majority of investors, regional towns are a worse bet than capital cities. Not marginally worse. Significantly worse. The data spans four decades, and it's pretty hard to argue with 1.

But — and this is important — there are specific circumstances where regional investment makes sense. I'll cover those too. Because blanket statements are just as dangerous as bad investments.

The 40-year scorecard: $100,000 invested in 1979

Bloomberg published a dataset that tracks Australian property returns by location category over a forty-year period. The findings aren't subtle.

If you'd invested $100,000 in a capital city property in 1979, that investment would be worth approximately $1.1 million today. If you'd put that same $100,000 into a regional town property, you'd be looking at roughly $650,000 2.

That's nearly double the return for capital cities. Over forty years, the compounding difference is enormous — we're talking about $450,000 in lost wealth from choosing the wrong location category.

The capital city return translates to roughly 6.1% compound annual growth. The regional return works out to about 4.7%. That 1.4 percentage point gap doesn't sound like much in any given year. But compounding is ruthless. Over decades, small differences in annual growth rates produce wildly different outcomes.

Now, I can already hear the objection: "But Yan, regional towns have higher rental yields!" And that's partially true. Some regional towns deliver 5-6% gross yields compared to the capital city average of 3-3.5%. But even factoring in higher rental income, the total return — capital growth plus rental yield — still favours capital cities in the long run 3.

The reason is simple. Rental yield provides income. Capital growth provides wealth. And property investors who focus on income at the expense of wealth end up with a portfolio of cashflow-positive assets that haven't appreciated meaningfully in twenty years. I've seen this pattern dozens of times.

Why regional towns underperform (it's about population volatility)

The underperformance isn't random. There's a structural reason regional towns lag capital cities, and it comes down to population stability.

Capital cities have diversified economies. Melbourne has finance, education, healthcare, technology, manufacturing, professional services, and government. If one sector contracts, the others absorb some of the displaced workers. The population base is stable because employment is diversified 4.

Regional towns, by contrast, are often dependent on one or two industries. Moe relies on power generation. Ballarat depends on services and public sector employment. Mining towns in Western Australia — Port Hedland, Karratha, Newman — are entirely tied to resource sector cycles.

When those industries boom, people flood in. Housing demand spikes. Prices jump. Investors pile in, chasing the returns. And for a while, it looks brilliant.

Then the cycle turns. The mine scales back. The power plant closes. The major employer restructures. People leave. Housing demand drops. And prices crash — not gently, but hard. The mining towns of Western Australia during 2014-2017 are the most extreme example. Properties that sold for $800,000 at peak were changing hands for $250,000 four years later 5.

That kind of volatility destroys wealth. Even if you buy at the bottom and sell at the top — which nobody consistently does — the emotional and financial stress of holding through a 60-70% drawdown is something most investors simply cannot tolerate.

Capital city property doesn't produce those wild swings. Melbourne's worst drawdown in the modern era was about 10-12% from peak to trough during 2018-2019. That's uncomfortable. It's not catastrophic.

The pandemic distortion (and why it's now unwinding)

Between 2020 and 2022, regional property experienced a once-in-a-generation boom. Remote work policies let people decouple their income from their physical location. A software developer earning $150,000 in Melbourne could suddenly live in Daylesford or Torquay, buy a house for half the Melbourne price, and pocket the difference.

Regional towns that had been flat for years suddenly saw 30-40% price jumps in eighteen months. Media coverage was breathless. Social media influencers declared regional investing the "smart money" play. Property spruikers launched regional-focused buyer's agent businesses overnight 6.

Human nature being what it is — chasing what's already gone up — a wave of investors piled in at elevated prices, buying on the assumption that the trend would continue.

It hasn't. Remote work policies have partially reversed. Many employers now require three to four days in the office. The population flow back to capital cities has already begun — Victoria, notably, has shifted from interstate outflow to inflow 7. And regional towns that saw 30% gains are now seeing prices soften as the extraordinary demand subsides.

This is the core problem with regional investing: the booms are real but temporary. The busts are also real and often longer. If you can perfectly time your entry and exit — buying at the bottom of a regional cycle and selling within two to three years at the peak — you can make outstanding returns. But that's not investing. That's speculation. And if I wanted to speculate on a two-to-three-year time horizon, I'd buy equities or cryptocurrency, where the liquidity is orders of magnitude better than residential property.

When regional actually makes sense (and for whom)

I'm not categorically against regional property. There are specific situations where it's a rational choice.

SMSF portfolios with limited capital. If you're using your self-managed super fund to buy property and your balance is $150,000-$200,000, your purchasing power is constrained. A 30% deposit on a $450,000 property in Ballarat or Bendigo is achievable. A 30% deposit on a $700,000 Melbourne house isn't. SMSF rules also prohibit borrowing for renovations or structural changes, so you need properties that deliver acceptable returns without modification. Some regional towns — particularly larger centres like Geelong, Ballarat, and Bendigo — fit this profile with rental yields of 5-6% and vacancy rates under 2% 8.

Portfolio diversification for experienced investors. If you already own six or seven properties in Melbourne and your portfolio is heavily concentrated, adding a regional property can increase your overall portfolio volatility in a way that, counterintuitively, improves risk-adjusted returns. This is advanced portfolio construction and absolutely not appropriate for someone buying their first or second investment property.

Cash flow stabilisation during accumulation phase. If you're building a portfolio and your existing properties are negatively geared, a regional property with a 5-6% yield can provide the cash flow buffer you need to hold your growth-oriented metro assets through a rate cycle. We've done this for clients using Geelong's Norlane and Corio suburbs — purchase at $400,000-$450,000, rent at $600 per week, completely covering the mortgage repayments from day one 9.

But in all three cases, regional is a tactical allocation within a strategy that's primarily anchored in capital city property. It's the side dish, not the main course.

The Melbourne southeast corridor: where growth and yield coexist

The reason I keep coming back to Melbourne's southeastern suburbs — Cranbourne, Hampton Park, Narre Warren, Berwick — is that they solve the problem regional investors are actually trying to address.

Most people buy regional because they want higher rental yields and lower entry prices. Fair enough. But you can get both of those things without leaving Melbourne.

A property in Hampton Park purchased at $590,000 on a 600+ square metre block, renovated by our in-house team, and rented at $850 per week delivers a gross yield above 7%. That's higher than most regional towns. And the capital growth is anchored by Melbourne's population base, economic diversity, and genuine land scarcity in established suburbs 10.

Our approach at Optima is to buy land-dominant properties — where at least 80% of the value is in the land — in supply-constrained suburbs, then physically transform the rental potential through strategic renovation. A $13,000 light conversion (new flooring, paint, room reconfiguration) can push rent from $550 per week to $950 per week. A $60,000-$80,000 conversion can create separate dwelling units that collectively generate $1,000-$1,200 per week 11.

You cannot do this in regional towns. The rental market doesn't support it. The tenant pool isn't deep enough. And the capital growth trajectory doesn't justify the capital outlay for renovation.

The forty-year data is unambiguous: capital city property outperforms regional property on total return. But even within capital cities, there's a massive variance between suburbs. The framework isn't just "buy in Melbourne." It's "buy in the right part of Melbourne, at the right price point, with the right physical characteristics, and then actively improve the rental yield."

That's what separates professional property investment from passive speculation. And it's why, across 350-plus transactions, we've consistently delivered both growth and yield in a single asset — something regional property simply cannot match over the long term.