Perth Property Investment
With so much weakening in price and investment in Perth property, growth having played out over the past two years courtesy of a reversal in frenetic population inflow as mining-related jobs dried up, there's growing speculation that the bottom in Western Australian residential property prices may not be too far away. Certain pockets within WA's single biggest real estate market, the Perth property market, which comprises 77 per cent of the state's population, and a handful of regional locations are still managing to deliver low single-digit growth.
However, the overall investment market is expected to continue drifting into the New Year with green shoots signalling an emerging correction phase late in 2016.
With an unprecedented number of new dwellings likely to hit the market in 2016, at a time when the state is experiencing a downturn in migration - which at 35,348 is 40 per cent down on 10-year averages - Hayden Groves, president of the Real Estate Institute of Western Australia (REIWA), expects classic signs of oversupply to continue.
There are now more than 16,000 properties listed for sale, which based on the numbers of Damian Collins, managing director of Momentum Wealth, is 38 per cent up on last year when the market was undersupplied and 25 per cent above typical volumes.
On the flipside, transaction levels for the September quarter were 8,600 and groves expects total transactions for the year to come in around 35,000 - well down on the typical 40,000-plus numbers.
Property sales aside, the decline in migration into WA - with interstate migration alone down 38 per cent in the March quarter - is also being acutely felt within Perth's rental market. In stark contrast with the peak of the rental market in 2011/2012, when rental numbers fell as low as 1,500, there are currently 8,500 units and houses available for rent across metropolitan Perth - well up on the normal supply of around 5,000.
What's contributed significantly to this glut, Andrew Wilson, senior economist with Domain says was the extraordinary number of fly-in, fly-out workers who created artificial rental demand.
Based on REIWA figures, overall median rents softened to $400 a week in the September quarter, down from $420 in the June quarter, while vacancy rates hit 5.6 per cent. That's great news for renters who are now spoilt for choice. But lower trending yields, now 3.9 per cent (4.1 per cent last year) for houses and 4.4 per cent (4.6 per cent last year) for units are responsible for sidelining many investors from entering the market, and this has contributed to the downward pressure on price growth.
With Perth property prices having slumped more than six per cent this year, it's as much a buyers' market as it is for renters. But due to lack of confidence, and heightened uncertainty over what's in store, Groves says owner-occupier's have outnumbered investors who remain notably absent from all WA property markets. Groves also attributes weaker "trade-up" activity to an exodus of high-earning resources workers who have sold up their higher-end properties and followed the job market back to the east coast or beyond.
But while REIWA recorded a median house price drop of 4.2 per cent in the September quarter to $522,133, the biggest in drop since it started tracking the market 21 years ago, Groves doesn't expect median prices to fall below $500,000.
What's expected to perpetuate price weakness in Perth next year, Gavin Hegney, founding director at LMW Hegney says are the 32,000 new dwellings coming to market. While these were expected to cater for the previous under-build, especially in light of strong population growth, Hegney suspects the market will only be able to absorb up to 20,000.
With this surplus likely to act as a ceiling on price growth, Hegney expects further overall market softening of between one and two per cent over the next 12 months.
However, on an encouraging note, Peter Jones, chief economist of Master Builders Australia, expects the sheer value of residential work being built, which peaked at $8.39 billion in 2014/2015, to come down by around a third to around 20,000 dwellings within two years.
Wilson expects the bulk of property investors to remain sidelined from WA's property market until there are clearer signals that flat rental demand is picking up. With WA more of a hostage to global growth than other Australian capital cities, Wilson says the great unknown is when an economic upturn will start to reverse lower consumer confidence levels.
But despite the severity of the mining downturn, he says Perth property has held up remarkably well. But with rents falling lower than house prices, he says investors are clearly waiting for vacancy rates to close so that yields can improve before re-entering the market.
Given the attractiveness of residential property investment in Australia, due somewhat to the tax benefits, Perth property does present long-term capital growth upside, Wilson says. But he says trying to pick winners in the short-term is fraught with danger.
"The strong entry-level product that we're witnessing right now is helping the entire food chain and this is a real plus for the overall Perth housing market," he says.
With the Perth market having run hot for some time, Groves says the current downturn presents good buying opportunities for owner-occupiers and investors alike. Given that the Perth market typically follows Melbourne by about two years, he says there could be a surprise uptick in 2017/2018.
"Meantime, sellers are having to chase the market down and it's currently taking an average 62 days on the market to sell, up from an average 42 days," Groves says.
He expects median house prices to drift for some time, but wouldn't be surprised if there were indications of an upswing in median house prices as early as December 2015.
"Given that this is when we might see an improvement in 'trade-up' activity, this remains a present possibility," Groves says.
Further down the food chain, Collins expects the frantic pace at which new dwellings have been built on the city's fringes, most of which are targeting first homebuyers - courtesy of generous state government grants - to show increasing signs of oversupply.
Clearly, it's hard to pick how long Perth's (property) oversupply tail will continue wagging. But Collins says the house prices overall could easily expand or contract within a range of plus or minus three per cent. Given the renewal and rezoning-factor that's still playing out in some areas - like Coolbellup, St James, Kensington, East Victoria Park, Hamilton Hill, Spearwood, Kardinya and Willagee - he says key pockets like these are more likely to continue outperforming the broader market.
But beyond short-term drivers like rezoning, Collins reminds investors to look at broader drivers of future growth, notably around good infrastructure, amenities, proximity to public transport nodes and urban development.
He expects Scarborough and neighbouring suburbs to benefit from a master plan, which includes numerous public and private foreshore improvements and developments, with nearby suburbs like Innaloo and Karrinyup benefiting from upcoming major shopping centre upgrades.
Then there's the activity centre of Joondalup to the north where further high-density dwellings are being earmarked for recently rezoned areas around the shopping and transport hub or areas closer to the city, like Bassendean and Warwick that are undergoing rejuvenation.
"Keep an eye on unrecognised mid-tier suburbs close to these growth areas that are also likely to be re-rated over time," Collins says.
While good buying opportunities will start to emerge over the broader market within the next 12 months, Collins reminds investors that certain pockets are presenting attractive entry points right now. He says while there's no need to panic-buy those entering the market at the tail-end of the current down-cycle stand to benefit the most.
"By the time you hear that the Perth market is moving, you'll have missed out on the first 10 per cent," Collins advises.
"Look for competing supply, keep away from fringe areas, be cautious of inner-city apartments where vacancy rates are between 12 to 15 per cent and focus on areas with good demand drivers, like unis/TAFEs, schools, employment nodes, transport hubs and other amenities, especially where there's limited supply."
Another signal of an emerging up-trend, David Cresp, director of Economics and Research at Urbis, says would be a return of annual population growth back to median long-term averages at between 40,000 to 50,000.
Similarly, he says watch for a pickup in demand from foreign buyers or any signals that investors from overheated east coast markets are looking for value beyond Sydney and Melbourne. While the down market together with low interest rates will present good buying opportunities over the next 12 months, Lenzo says the risk of downward pressure on prices means investors must take a medium- to long-term outlook.
"The info we're getting from developers is that prices will drift until confidence recovers and most likely late in 2016," Lenzo says.
"Developers are optimistic about 2016, especially with apartments and in-fill products that are no longer overpriced."
Projections: 2016 and beyond
Despite warnings by valuation firm Herron Todd White that Perth's inner city may suffer from an oversupply in 2016, some property analysts say these fears are unfounded, that upcoming tighter Governmental regulation and financing requirements will ensure builders meet, rather than exceed, buyer demand.
We have had strong property market growth over the past 12 months and Perth has experienced a significant increase in unit development and a lot of construction is underway. There is a down turn in the mining sector and this is having some effect on the rental market. However, we should see renewed activity in oil and gas in WA taking up some of the slack.
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