By Herron Todd White
October 2020

Perth’s rental market has shifted to a state of severe undersupply with a residential vacancy rate of 1.6 per cent at the beginning of September. For a rental market to have an ideal balance between supply and demand, the vacancy rate should sit at around three per cent. The Real Estate Institute of WA (REIWA) has stated that there were 3206 properties available for rent for the week ending 30 August which was 51 per cent lower than the year previous. Due to the lack of outward migration and consistent levels of inbound returning locals, the rental shortage won’t be slowing down any time soon. The Greater Perth median rent remained stable for a number of quarters up until mid-2020 when it increased $10 to $360 per week.

Even with the population increase and rental shortage, we haven’t seen many investors return to the market and without investors creating new supply, the rental shortage will only worsen. The state government has recently extended the emergency period for the Residential Tenancies (COVID-19 Response) Act and this will only further deter investors from the marketplace as there are limitations on the landlord’s ability to price rents at market value and evict problematic tenants (REIWA, 2020). It even restricts a landlord from renewing a current lease agreement at a higher amount than what was negotiated at the start of the lease – which occurred in a fundamentally different market. This appears to be a short sighted and potentially politically motivated response by the state government that could result in a larger net increase in rental prices at the end of the COVID-19 Response due to the lack of demand in the investor market to improve supply.

Historically, an active rental market is followed by an increase in sales activity with a period of delay in between. When the average number of days to lease tightens and rental prices increase, it becomes more difficult and less economical to rent. As such, purchasing becomes a more attractive option and tenants will take the leap into home ownership.

In a bid to stimulate the economy, the state and federal government stimulus measures have brought forward the decision making process for potential homebuyers as many have taken the plunge into purchasing vacant land or house and land packages, taking advantage of what appear to be once in a lifetime incentives (at least on paper). In Western Australia, first homebuyers can benefit from up to $69,440 if they meet the eligibility criteria. This includes the Federal HomeBuilder grant of $25,000 and the Western Australian Building Bonus of $20,000, First Home Owner Grant of $10,000 and First Home Owner Rate of Duty Concession.

With many first homebuyers meeting criteria for at least two of the building incentives, it is clearly a great time to capitalise on the opportunity. This could potentially create value issues in the future for mortgage belt suburbs where first homeowner supply has been consistent for many years, creating a period of oversupply in locations not attractive as a rental proposition. Furthermore, residents looking to sell established dwellings in these areas may suffer from extended selling periods whilst the government incentives are in place. This is because the prospect of building a new home to your own specification whilst receiving money from the government seems to be a far more attractive option than purchasing older stock (that you may be charged stamp duty on), so it may be hard for current residents to leave their current location.

The developing suburbs on Perth’s urban fringe have seen an astronomical increase in sales rates and demand for vacant land as purchasers look to make use of the incentives currently on offer. This has translated to record low selling periods for vacant lots across the region as a result of the increased demand. This is also occurring in established areas where allotments that had previously been on the market for extended periods are now selling rapidly – even the ugly duckling lots!

Our valuers are reporting that rebates have reduced or disappeared across the board for many developing estates as the demand for vacant land is strong enough not to warrant any further marketing incentives. More so, developers have not only removed rebates that existed several months ago but have started to increase pricing in some estates to match demand and improve profit margins. Builders are doing similar – increasing building costs from record lows, to levels not seen for over a decade, and often by inconsistent amounts. Our valuers sight several hundred construction contracts each month and the pricing disparity for similar products is quite concerning. We strongly recommend that potential buyers do thorough research and compare costs between builders to ensure the costs line up with comparable specifications.

Many project home builders are now so busy that they can’t promise new clients commencement of construction before the end of the government incentive schemes and are turning away work. We are also seeing a flurry of new or establishing building companies stepping forward to cater for the astonishing levels of demand and to get the build across the line before the stimulus deadline – and again, we urge caution and strongly recommend doing thorough background research on your choice of builder. If it sounds too good to be true in the current market, it probably is! Beyond this, some construction companies are offering big incentives to lure interstate contractors due to the shortage of local workers. Incentives consist of six months accommodation including utilities and the cost of the two weeks in quarantine, among other benefits, which may seem enticing to (especially young and single) Victorian workers currently in lockdown if they can achieve approval to enter the state.

It is no doubt a great time to build in established areas if you can afford to. Survey-strata, sideby- side and battle-axe subdivision lots are disappearing swiftly and as competition for the last remaining lots increases, prices will take the same trajectory.

The City of Cockburn is located 20 kilometres south of Perth and over the past couple of years has had a number of new land estate releases that offer land and building options for purchasers. Recently the area has experienced increased activity which has translated to a high volume of vacant land sales. Hammond Park and Mandogalup have been the most prominent suburbs within the area that have experienced the increase in market transactions. For example, two vacant lots along Hartland Grove, Hammond Park both recently sold for the listed asking price after only being on the market for five and eight days respectively.

The far north-west corridor has also seen an increase in market activity recently for vacant lots absorbing the vast supply that is currently available. Suburbs such as Alkimos, Eglinton and Yanchep offer land packages that range from $150,000 to $300,000 and target first home buyers. This pocket of Perth has undergone a number of land estate releases over the past few years which have resulted in a large amount of supply of vacant land and new stock. Even lots that have been on the market for long periods have started to sell. For example, 58 Hackney Way, Yanchep was on the market for a total of 236 days and sold for $236,000 which was only slightly below the original asking price. The lot was also listed for sale in 2017 and was on the market for 724 days without selling. The lot includes 809 square metres of land area with a 20 metre frontage and is located in an older estate in Yanchep with potential ocean views from the second storey.

Similar activity is being recorded in the south-east corridor of Perth. This area has not only seen an increase in sales activity, it has also recorded a rise in resales of vacant lots. For example, 8 Syon Way, Piara Waters is a regular shaped, 360 square metre vacant block that sold for $260,000 after being on the market for 60 days.

The lot previously sold for $284,000 in 2017 directly from a developer and represents an eight per cent price reduction in between selling periods, which is considered reasonable given activity in the interim period. Further south-east, there is more vacant land stock currently available in the suburbs of Byford, Haynes and Hilbert that have also experienced uplift in sales activity.

The regional area of Kalgoorlie-Boulder has experienced a shortage of land supply with vacant land being sporadically spread throughout different suburbs. These lots are disappearing however the increased activity doesn’t seem overly significant. There is currently only one new estate in Kalgoorlie in the suburb of Karlkurla, with lots offered at a discounted price, but further lots may be made available if required.

In Karratha, 1,520 kilometres north of Perth, there has been a recent surge in demand for land. Vacant lots within new estates had struggled to sell over the past few years given subdued market conditions and the high costs of construction in the area. That has drastically changed as demand has gone through the roof! For example, the Madigan Estate in the suburb of Baynton had barely sold a vacant lot in years, but currently there are 23 lots under offer. This represents approximately 30 per cent of the entire development subject to an offer received over the previous few months. Our valuer who resides in Karratha has also noticed price increases in some estates and a lack of pricing discount for lots requiring retaining or other site costs. There is limited availability of infill lots within this region so the majority of land available has come from developing areas, but this may re-ignite demand for older dwellings on subdivisible lots.

As a result of high demand for vacant lots, remnant infill blocks within established suburbs around the Perth metropolitan area have seen an increase in demand. Even the most unappealing infill blocks are receiving premium prices as a result of the increase in demand and limited stock. Some blocks are even selling for $40,000 more than they would have sold for six months ago due to the change in market perception.

Infill blocks that previously had lengthy marketing campaigns are beginning to sell. For example, 50 Hamilton Street, Cannington was listed on the market in August 2017 for $499,000. Improved on the 719 square metre site was a circa 1950, twobedroom and one-bathroom dwelling. The site is zoned Residential R30, meaning it has subdivision potential for two lots. Between August 2017 and May 2019, the property was listed for sale four times for a total of 281 days without selling. The house was then demolished and the block was re-listed for sale in March 2020 and finally sold for $480,000 in June 2020.

Suburbs such as Craigie, Heathridge and Beldon have undergone recent zoning changes that now allow for subdivision. There are a number of blocks over 700 square metres that have now been subdivided into two or three lots over recent years and they have been performing well in the current market. For example, 2 Bullara Road, Craigie is a 242 square metre regular shaped street facing, survey strata vacant lot that sold for $224,500 in June 2020. The lot had previously sold for $205,000 in February earlier this year which represents a re-sale price increase of nine per cent over the five month period.

Further south, the established parts of Rockingham have witnessed strong levels of demand for vacant lots due to development potential as well as being within close proximity of the ocean. For example, a vacant block on Amity Circuit in Shoalwater sold for the listed sale price of $289,000 in August after just five days on the market.

Canal front vacant allotments in the Mandurah region, located 70 kilometres south of Perth, have witnessed an increase in market activity. In suburbs such as Wannanup, Dudley Park and Halls Head, vacant lots that had previously been listed for lengthy marketing campaigns have now received offers at around the original asking price. We anticipate this will only increase over the short term as the weather beings to improve.

As previously mentioned, our valuers have noticed an increase in building construction costs due to the high demand for construction in Perth currently, creating an increasing disparity between the cost of a house and land package and the selling price for near new stock that doesn’t attract government incentives. This may create a situation where a new house and land package is worth less than it cost the minute after being handed the keys. This is what occurred throughout many mortgage belt areas of Perth post 2013, so hopefully the memory is raw enough that buyers do their research thoroughly.

Perth is such an intriguing market at present. Our short-term predictions are that the shortage of rental premises will only worsen. Government incentives would need to change form and allow for more investors to enter the market before any relief is seen. Leasing prices will inevitably increase as potential tenants learn to act quickly and offer high to secure a residence. Landlords will be the victor in this market once the rental freeze ends and the longer the freeze occurs, the larger the winner they may be. The vacant land shortage will also continue with swift selling periods as the lack of staff prevents contractors from bringing land to market in a timely manner.

Unfortunately, anything past the short term becomes a guessing game. There are many factors at play such as the conclusion of government stimulus measures, the end of the mortgage freeze, how quickly rental prices rise, whether there is enough land in Western Australia to fill demand, whether there are any changes to interstate migration and border control – the list goes on. We do however think that once the government grants cease, so will the house and land purchases, as demand has been artificially brought forward.

Chris Hinchliffe
Director

Speak with a Perth Mortgage Broker today.

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