By Herron Todd White
We’re starting 2020 with a positive mindset. It’s been a hard slog over the past seven years as market conditions contracted in line with construction activity in the resources industry. There’s been plenty of pain throughout the state, but in many regions it appears that consumer confidence is on the up and consumers are spending again. We believe that 2020 will be an educational year for many market participants on several fronts and in different markets. We also believe that the market will once again be influenced by activity in the state’s resources sector. Both of these points should see investors return to the market, particularly in the second half of the year. In fact, we consider that late in 2020, many market participants will either have or be actively looking to purchase, but will come to realise that the choice of stock has become more limited throughout the year.
A big driver this year is expected to be the resources industry. 2019 was a relatively positive year in the industry. After a long period of routine maintenance, a construction phase has commenced, albeit not to the same extent as what occurred between 2006 and 2013. Increased activity throughout Karratha in particular, but also Port and South Hedland, are lead indicators of demand. Values in Karratha surged by double digits in 2019, with several suburbs in the town experiencing growth in excess of 20 percent for the year and the rental market being stripped of stock. Construction projects in the inland Pilbara are expected to have further flow on effects to Port Hedland, Newman and Tom Price, and the manpower required for these projects will positively affect net migration statistics. The big question this cycle is what will happen to wages? With extensive reconstruction projects occurring throughout many areas in the eastern states, will Western Australia attract enough skilled tradespeople to fill the order books? If so, what will that do to vacancy rates both in the Pilbara, but also in the fly in fly out base of Perth? What flow on effect will this create if and when investors return to the Perth housing market? By the end of the year, we should have a decent indication of the scale this cycle will be.
The rental vacancy rate in Perth peaked in 2016 at 5.5 percent according to SQM Research and has been steadily declining since. The rental vacancy rate stayed below three percent throughout 2019, reaching a low of 2.5 percent, which coincided with a slight increase in the median rental amount. According to REIWA, such a rate is representative of demand slowly outstripping supply and a good indicator that the median rental rate may continue to rise, subject to any increase in supply. Whilst a rate of 2.5 percent is somewhat high historically for Perth, we need to keep in mind that the majority of supply in the past seven years has been in outlying suburbs, hence we would expect that the actual rental vacancy rate in inner Perth is much lower and would be starting to look quite attractive to investors.
The outer suburbs are also interesting though and we do expect to see an increase in investor activity in these areas as well, but for a different reason. These oversupplied areas such as Ellenbrook, Baldivis, Clarkson and Piara Waters offer relatively new properties that may be more attractive from a depreciation point of view and given the distinct lack of demand in recent years for near new dwellings in such locations, values have declined significantly.
Ellenbrook currently has a median sale price of $346,000 and attracts a median rental of $330 per week, but there are more attractive offerings for bargain hunters. For example, this property in Boyagarring Gardens recently sold for $335,000, comprising a 2013 built brick and tile dwelling on a 452 square metre allotment. Prior to its sale, it was rented for $380 per week whilst offering attractive depreciation benefits.
Similar examples can be found in Clarkson, a modern suburb in Perth’s northern coastal corridor. The following property in Walpole Place sold for $350,000 in September, below Clarkson’s median house price of $363,500. The property comprises of a 1995 built four-bedroom, two-bathroom dwelling on a 648 square metre allotment and is subject to a lease of $400 per week.
Similar examples are found throughout many of the establishing outlying areas of the Perth metropolitan area, where for several years the market has been dominated by first home buyer house and land packages, with minimal demand for used dwellings placing continuous downward pressure on values. It will be interesting to see what happens in this space given the returns currently on offer for properties offering attractive depreciation benefits in a market where there are signs of an impending increase in demand. Watch this space! To be clear, we do not expect to see much capital growth in such suburbs throughout 2020, but there are other factors that may influence the purchasing decisions for market participants keen to buy in subdued market conditions, as opposed to the returns currently available in most other capital cities. Choice can play a large part in the buying decision and with stock on the market sitting at circa 12,000 properties, a quarter less than the same time last year, it’s obvious that the choice of stock available is on the decline.
At the other end of the scale, we have seen an increase in market activity in many more sought after areas. These markets seemed to surge and pause throughout 2019 and caused a great deal of confusion as to where the market was at. What did become clear though, is that many market participants believed they had ample time to find the perfect property and quickly realised they had misread the market. We expect this to continue throughout 2020 as a sense of urgency returns to the market from those who missed out on previous offerings. In locations such as Nedlands, we are hearing (and witnessing) various surges in demand where the market will pause for a period of time, listings on the market slowly build and then a surge of demand will see multiple offers on many properties in a short period of time, or buyers who previously missed out on a property act swiftly with strong offers during the very early stages of a marketing campaign. Whilst the average property in Perth takes 84 days to transact, the median to achieve a sale in Nedlands is currently 26 days – not bad for a suburb with a median sale price of $1.63 million.
Returning to the more affordable end of the scale, we do expect that we will start to see an increase in activity in established secondary markets as the rental market tightens and rental values start to rise later in the year. We expect to see an increased sense of urgency from those who have been renting as they watch the availability of decent stock dissipate, forcing them into a return to the housing market. We also expect to see an increase in upgrade and exchange buyers – those buyers who have been considering relocating and the dwindling stock supply creates a sense of urgency. With transactions comes discussions between friends, colleagues and the like and real estate becomes the topic of choice at barbecues In the apartment market, government intervention has resulted in a period of concern. In 2019, the Western Australian government announced stamp duty exemptions for off the plan apartments on the proviso that construction of the development had not commenced yet. Whilst there is method to the madness (build demand that will lead to a construction boom at some point in the future), the immediate effect was that demand for established complexes or those currently under construction declined overnight. It also placed an additional level of caution over the long-suffering apartment market, at the lower to middle value ranges anyway. We expect this to persist throughout 2020 as developers secure pre-sales prior to committing to commencement of construction.
All in all, we see a fairly mixed bag for 2020, but largely a positive one. We think that the market will educate itself that there is a finite time to bargain hunt and that trying to pinpoint where the bottom of the market is or was is a futile exercise, especially whilst above average returns are on offer. We see 2020 as a solid year for buyers ready to act on the choice of stock currently available, with the buying decision becoming harder later in the year and into 2021 as stock.
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