By Herron Todd White
September 2019

Western Australia’s economy has had a tumultuous past 10 to 15 years and given the topic of this month’s review, we think it’s a good time to revisit history for a second as a pre-cursor to the current discussion.

Some key economic indicators have seen large peaks and troughs, often over relatively short periods of time. Consumer sentiment, population growth, migration figures, business investment, employment, wage growth, the cash rate, etc are all interconnected and each plays its part in influencing demand and supply. From a macro standpoint, the end product of this fluctuating demand and supply is a rising or falling median house price. The valuation figure stamped on each of our reports is influenced by many of these macro-economic indicators as well as countless micro economic and property specific characteristics such as location, land size, dwelling size and quality.

The median house price for the greater Perth region is expected to settle at $490,000 for the June 2019 quarter, remaining unchanged from the previous quarter but down 3% since the June 2018 quarter. Between 2001 and 2006, Perth’s median house price doubled from $180,000 to just under $400,000 on the back of the resources boom (source: REIWA, 2017). In 2006, increased resource investment influenced the mining sector across the whole state. Mineral exports were ramping up as the amount of iron ore Western Australia was capable of exporting quadrupled in value from 2006 to the peak in 2012 (Figure 1).

This led enabled businesses across Perth and regional Western Australia to find space for a number of new job vacancies and in 2006 we saw 31,000 migrants flock to the state, including both net interstate (3,100 persons) and overseas migration (28,070 persons).

Many people from overseas were attracted by the large salary and incentives packages on offer for both skilled trades workers and other positions that required little prior experience. On top of this, residents from the eastern states found good opportunity to come and work in Western Australia on a temporary basis. This influx boosted the population in a relatively short amount of time. Usually at the start of any significant population increase, the median rental will rise long before any movement in the median sale price because new residents generally look for a home to rent first instead of buying from the get-go. This caused a sharp increase in demand for rental properties, decreasing the number of days to lease as tenants found that they had to act quickly to secure their ideal property.

In the twelve months from 2006 to 2007 Perth’s median rental price increased by about 20% from $280 to $340 for houses and $260 to $310 for units (Figure 2). It didn’t stop there though. Migration figures increased again, then had a lull and eventually peaked in 2012 when we saw a total of 58,600 people travel to Western Australia to get their share of the revenue from the resources boom.

Figure 3 demonstrates the relationship between greater Perth’s median house price and Western Australia’s net migration figures. This relationship isn’t plainly obvious by looking at the graph, but it becomes apparent once we understand that there is a lag between the net migration figures and the median house price. Isolating the peaks of each statistic, net migration peaked in 2012, the median rental price peaked in 2013 and then the median house price peaked in 2015. This represents a one year delay between increased migration and rental prices and then a two-year delay between increased median rental and median sale price.

There are a few reasons for this lag. At the beginning of the mining boom when we experienced increasing net migration, demand started closing in on the amount of supply that was available. As tenants soaked up this rental stock, leasing prices increased due to the competitive environment. As rents continued to increase, purchasing a property slowly became a more attractive proposition and increasing wages bolstered consumer sentiment which gave home buyers the peace of mind to make their purchase decisions. Since median house prices were now rising on top of rents, investors flooded the market in the hope of both capital gains and a solid rental income, furthering the shortage of accommodation for new arrivals. In turn, this only increased the median house price further due to more competition.

Once the state government was reaping the benefits of the mining revenue, it was able to invest some of this back into infrastructure which created more job vacancies. Developers were seeing this housing shortage as an opportunity to maintain strong supply to the market. A number of office buildings, apartments and land developments started up, but they would not come to completion for several years.

Commodity prices had been on the rise for a while and in 2012 mining investment had reached its peak at just under 8% of the Australian GDP, compared with its average of 2% prior to the boom. The resource sector responded to the commodity price boom by continuing to expand productive capacity, but this soon came to a head as our supply of resources met declining international demand.

As mining investment declined, so did the availability of jobs. Some mining projects came to completion and this started the increase in unemployment rates. The construction phase had ended, temporary contracts did not get extended and we started to see a lot of redundancies. Wages were decreasing so migrants who had come from the eastern states and overseas moved back home. Suddenly businesses were consolidating their workspaces as they employed less and less people. The office buildings, apartments and land developments that were under construction were now coming to completion, however, there were no tenants or home buyers to lease or purchase these spaces. The CBD office vacancy rate skyrocketed to over 20% and now supply severely overshadowed demand, reversing the economic cycle. From here consumer sentiment began to slip and less access to finance stopped any interest from investors and owner-occupiers. Residential rents, office rents and house prices started their slow descent down to their current position.

Net interstate migration has been in the negative since 2014. In 2017, 14,000 people left Western Australia for other Australian states, however since then, both interstate and overseas migration has improved slightly.

An analysis of several different localities assists to provide an insight into lead indicators which enable us to gauge where the market is at.

Port Hedland continued to have a positive 2019 seeing a 3.4% increase in the median house price over the June 2019 quarter to $225,000. Karratha appears to be slightly more advanced in the cycle, having experienced an average of 10.2% growth in the previous 12 months, with a median house price of $345,000. Notably, the rental vacancy rate in both areas has plummeted in 2019, with demand remaining strong and a lack of investor activity over the previous five years restricting supply. We know that these areas are often the first to indicate changes to net migration associated with mining industry cycles.

Within Perth itself, the June 2019 quarter saw increases in activity from the extreme ends of the market as the sub $350,000 and above $3 million price brackets improved the most. The overall median rent rose to $350 per week in the June 2019 quarter. This equates to a $10 increase in both the median house and median unit rent, now $360 and $330 respectively. The rental sphere has continued to be a strong performer over the past two years. The number of days to lease decreased by one day to 41 days in the June 2019 quarter. According to the REIWA, 54% of greater Perth suburbs saw an increase in leasing activity in July.

Remembering the lag between rental increases and median house prices, we expect that Perth may experience a similar, albeit smaller property market cycle in the coming years. Australia wide, a $75 billion resources construction boom is underway. Within Western Australia, several new iron ore townmines are either currently in the early stages of construction or have recently been announced to commence construction and the activity in the lithium industry is still top of mind. On top of this, the Western Australian Government has apportioned a significant budget to the Metronet infrastructure project over the coming years with nearly $8 billion of funding allocated to road and rail expansions, level crossings and inclusions for the Morley-Ellenbrook line and the Byford Extension on the Armadale line. Job vacancies are starting to rise again, and we expect wage growth may slowly increase as a result. 

REIWA’s President Damien Collins recently said that “while the market has been declining for some time, the economic conditions in Western Australia are looking far more positive than 12 months ago. I would advise those who are thinking about purchasing their first home, trading up or investing, to act soon and take advantage of current conditions before the market starts to recover and prices inevitably rise.” Our thoughts and predictions definitely align with Mr. Collins as affordability is arguably the best it has been for a long time.

Speak with a Perth Mortgage Broker today.

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