By Herron Todd White
Perth’s weather is just now starting to turn and with winter creeping up on us, the next quarter should also bring a chill to the property market (though we wouldn’t say that it has been particularly hot recently anyway). During the March 2019 quarter, there were 6,636 properties sold in Perth, 1.1 per cent higher than the quarter previous – an improvement but a nonetheless shallow figure, on par with March 2018 sales volumes. On a positive note, Perth’s overall median house price increased 0.6 per cent to $500,000 in the March 2019 quarter. Perth’s unit median also held stable at $380,000 showing that we most definitely are bouncing along the bottom. However, with Perth’s current two-speed property cycle, oversupplied developing suburbs will likely see value decreases for some time.
Weak market conditions, particularly in Perth’s urban fringe, following the post-resource construction boom have perpetuated stock levels. UDIA’s State of the Land 2019 report demonstrates Western Australia’s current position.
At the current rate of sale, it would take 10.4 months to absorb Perth’s remaining stock. This is more than twice the current national average and nearly 3.5 times the ideal time of three months. This figure is a good starting point when analysing why Perth’s prices have been declining over the past few years. Sharp decreases in population coupled with strong construction activity and greenfield development created a divide in the number of residents available to fill these vacancies.
Western Australia’s economy seems to be caught between a rock and a hard place currently. The residential construction industry accounts for a significant portion of the gross state product, so the more properties being built, the better. However, our stock levels are so high and population growth so low that any further development, greenfield in
particular, will only result in greater depression of property prices for already struggling suburbs on Perth’s outskirts. This is one reason why Perth’s economy is so reliant on the mining industry. The more activity and spending in the resource sector, the more our population growth increases and therefore, the more construction activity there is.
Land values have been at an all-time low recently with purchasers being able to snap up vacant lots at as low as $99,000 in Two Rocks (156 square metres), $115,000 in Baldivis (265 square metres), $130,000 in Alkimos (180 square metres), $149,000 in Aveley (188 square metres) and $170,000 in Ellenbrook (326 square metres). There are a number of vacant lots across multiple suburbs that have been on the market for close to three years. Baldivis is seeing some of the longest selling periods Perth has seen and this has a devastating effect on values. The Baldivis lot mentioned above has been on the market for 1,014 days and is extremely affordable at $434 per square metre. This shows that entry into the Perth property market is more than attainable if you are willing to make the locational sacrifices. Unfortunately, urban sprawl has its limitations for attracting buyers.
Vacant land options are limited in Perth’s more established suburbs. The majority of opportunities come in the form of residential subdivisions and green title subdivisions are more commonly seen in older suburbs with medium to high land values. There’s a plethora of strata subdivision options available across Perth presently so if you’re okay with sharing common areas, then you will be able to find one in most localities for investors or owner-occupiers on almost any budget.
Beyond this, construction prices have also been exceedingly low, which alongside the First Home Owner’s Grant, has helped to create a fair amount of activity in the first home buyer segment. Dwellings are being constructed through volume builders for as little as $160,000, though this is for an incomplete product with the most basic of fixtures and finishes. This type of contract can omit an array of items including landscaping, internal wall painting, floor coverings, window treatments, lighting and air-conditioning.
Many home buyers desire a finished product so they don’t have to complete any further works on the new home at handover, so purchasers are often happy to pay a slight premium for completed, turnkey contracts. Building prices vary significantly depending on which builder you choose and what they offer. Recently, the cheapest building contracts have come in at just above $900 per square metre. In June 2018, the average cost in Australia was $1,270 per square metre according to the Australian Bureau of Statistics. Architecturally designed houses generally start from around $3,000 per square metre and even press upwards of $5,000 per square metre.
Unfortunately, in the current market many properties are being valued at less than what purchasers are paying for the land and building – from $5,000 to $50,000 and even lower. This trend is being exacerbated particularly in the establishing suburbs on Perth’s outskirts. In the past, a general rule for new builds was that land value plus the construction cost equals market value, however the chronic oversupply of new dwellings has caused a drop in value.
Since purchasing a house and land package is so cheap, many people would just prefer to build a new home to their own specification instead of buying in a lived-in, four year old property for a similar price. This is one of the reasons why selling periods for established dwellings in new, large scale land developments are far surpassing the Perth average of 72 days. Extended selling periods relate directly to value decreases as owners often end up discounting in order to sell.
Over capitalisation can also spell disaster for new dwellings. Valuers are looking for balance between the land and construction in regard to its suitability for the location. For example, you wouldn’t generally see a high-specification, architect-designed project home in Whitby or Eglinton. The typical home buyer searching in these areas would not want to purchase that type of product and therefore that property would be hard to sell. As a result, the owners may have to lower their price significantly to find a buyer. However, if this dwelling was in Mount Pleasant or Wembley Downs, then you would likely find more home buyers searching for that type of product, so there may be no loss of value. Another way to put it is that you wouldn’t want to purchase a $1 million home if the land is only worth $200,000. The typical consumer would rather spend a greater portion of their budget on greater land area or to live in a location that better suits them. Dwellings depreciate by age, but land at least has the chance to increase, so you don’t want the ratio of building and land to be too top heavy.
Items that can add value to new builds include well presented, low maintenance landscaping, ducted air-conditioning, better quality standard features (this depends on your chosen builder), stone bench tops in kitchens and bathrooms, kitchen overhead cupboards, high ceilings, double vanities and showers, floor coverings and undercover outdoor areas, but these features are costly and don’t always result in a 1:1 return, so be very careful not to over capitalise and always engage a property professional for advice.
Money can be lost in contracts through multiple variations for minor adjustments such as floor plan changes, higher quality or more tiling, mitred tiling, additional electrical sockets or external water taps, shower recesses or seats, dual shower rails, kitchen drawer types or styles, moving windows and owner-supplied fixtures and fittings. On top of this, valuers look out for rebates from builders or developers that alter the contract amount and are used to entice customers, but add nothing to the value of the property.
As stated before, value often depends on the appropriateness of the home for the location. Think about what the typical dwelling looks like in your desired area and compare that to what you want in your new home – do you think there will be enough demand for a home of your specification and design? The take away from this is to balance your desires with your budget and think about whether you want to regain the full cost of the property upon resale. Can you settle for the standard features or do you really need that ultra-modern, kitchen sink faucet and don’t care about the cost?
Speak with a Perth Mortgage Broker today.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.