Where do house prices go up faster – Small towns vs larger cities

New Zealand property prices have turned a corner: prices increased in each month from June to September.

The Real Estate Institute (REINZ) hasn’t released the October data yet, but all signs suggest we are 6 months into the property market recovery.

That’s why real estate agents report more investors are entering the market. But where do property prices go up faster? Big cities or small towns?

Many investors think the bigger the city, the faster house prices rise. But when you do a side-by-side comparison the data doesn’t support this.

Since 1992 property prices in Gisborne (the smallest region) increased by an average of 6.4% per year.

That’s faster than larger regions like Wellington and Canterbury. House prices there increased 6.2% and 5.9% (on average) respectively.

It’s true that property prices in Auckland, New Zealand’s most populous region, went up the fastest. But a higher population on its own doesn’t mean that property prices go up much faster.

While bigger cities have more demand for property, they also have greater supply. As city’s populations grow, the demand for housing goes up, so more developers get in and build more.

This is why, over the long term, property prices in big cities and small towns go up at a similar rate.

But property prices do increase more consistently than smaller towns; you tend to see property prices go up in most years.

Smaller towns, on the other hand, tend to be more start and stop. They have more ups and downs.

Between 1996 and 2003, Gisborne house prices went down and stayed down. Then they had an immense period of catch-up growth.

That happened again between 2007 and 2016. Prices were flat, then they almost tripled in the 5 years between 2016 and 2021.

Compare that to Auckland. House prices there have steadily tracked upwards, relatively consistently.

This pattern is repeated across many small regions. Property prices stay flat for a long time,

but they can have immense periods of catch-up growth.

That consistency is important for property investors for two reasons.

First, investors use growing house prices to buy more properties.

As prices go up, investors’ wealth increases. They have more equity in their properties and can then borrow against some of that new wealth to buy another property.

Some large city investors grow their portfolios faster than investors in small towns.

The second reason is psychological. Imagine buying an investment property in Gisborne in 2007. Then the value of your house fell by 19% and stayed that way for 9 years.

You might think “property investing doesn’t work” and be tempted to give it up. Then you would have missed out on the large house price increases that followed.

Whereas if you invest in a larger city where prices go up more consistently, that constant progress can keep you motivated to stay in the property market.