Perth April 2018

The month in review: Perth

By Herron Todd White
April 2018

As Western Australia’s economy is predominantly influenced by the performance of the mining industry, we have seen some extreme fluctuations over the past few years. The post-peak period is often compared to the boom time, which is bound to disappoint in every measure. By disregarding significant outliers, keeping in mind the countercyclical nature of the local market in comparison to national trends and instead of looking at the longer term, Perth is not doing too badly. In fact, many measures have improved.

Like most marketplaces, Western Australia’s population trend has a significant impact on the overall performance of the property market. The state’s net migration can be significantly affected by the mining industry, as the scale of some projects results in a significant demand for skilled labour in relatively short periods of time.

We are currently sitting at an unemployment figure of 5.7% which reflects a 0.7% decrease over the past 12 months and is now only slightly above the national unemployment rate of 5.5%. Over a ten year period, Western Australia’s unemployment rate averages a quite reasonable 4.8%. On a similar note, the Australian Bureau of Statistics reported employment growth of 1.9% in Western Australia last year. The state’s net migration is increasing as a result of uplift in employment opportunities, with those relocating doing so with employment already in hand. This is also likely to be having a positive effect on the rental market. The Real Estate Institute of Western Australia recorded stable rental prices, a declining number of listings and a vacancy rate at 5.3% – the lowest rate in two years.

Recent improvements in commodity prices and economic state measures have boosted confidence levels among business owners and investors, resulting in long-awaited employment growth. Contractors to the mining industry, who form a large part of the state’s employment pool, have responded according to the mining sector’s performance. The Reserve Bank reported investment growth in the mining sector over the past year, as projects developed during the mining boom either required replenishment or simply a far larger scale of ongoing maintenance programs.

Western Australia’s rich lithium supply is partly responsible for the rise in investment. The increased international demand for electric cars using lithium batteries is increasing the positive outlook for many new mining developments. The world’s largest lithium mine happens to be located in Western Australia, along with numerous other projects which are yet to be developed.

Despite the mining industry’s strong influence on state performance, mining is only the fifth largest employer in Western Australia. Health care and social assistance have become the leading industry in the state. Construction, retail and education are close thereafter.

The Murdoch Health and Knowledge Precinct are a $200 million, mixed-use development expected to commence in late 2018. The development will be located in the heart of Murdoch’s medical and educational area and is set to be the second largest employment centre in Perth. The centre will provide commercial and medical spaces, offices and residential apartments. We expect this to have a strong influence on the performance of the local market, particularly given its already sought after locality. The area features good accessibility to both the CBD and Fremantle, a wide offering of housing types and entry level pricing remains within the reach of first home buyers in some of the surrounding suburbs.

In terms of construction, the oversupply of residential housing has been a hot topic over the past few years. Construction commencements and commitments peaked as the mining boom was already waning. The current, sometimes significant, oversupply is slowly getting soaked up by the market although only after seeing the inevitable price corrections. However, current first home buyer demand, although lower than traditional rates, is still increasing the supply in already chronically oversupplied localities such as Baldivis and Ellenbrook.

According to our recent analysis, Baldivis has 628 properties listed for sale with only 30 of those being under contract. This reflects a current market activity rate or absorption rate of 5%. Similarly, Ellenbrook, our second most oversupplied suburb, has 259 listings and a market absorption rate of just 11%.

Based on our analysis, Baldivis has two years’ worth of supply sitting on the market – without any further supply being added – which it is. The market is largely driven by first home buyers and the majority of activity is still house and land package purchases. First home buyers are often known to push the cost of their house and land package to the upper end of their borrowing capacity, therefore interest rate movements can have significant effects on the suburb. There are likely to be many homeowners in similar suburbs thanking their lucky stars for the stable interest rate environment we have experienced!

Properties in such localities are often transacting at heavy discounts in comparison to just two years ago, due to oversupply and significant market competition for the limited buyers around. Established properties have taken the hardest hit as the price difference between existing and new is affordable. The problem with new dwellings is that once lived in, the value depreciates at a very high speed as the pool of buyers for a used dwelling is very small in comparison to the demand for a house and land package. Buying a brand new house in Baldivis can be compared to buying a brand new car. Once you drive it out of the garage, the car instantly drops in value. Our valuers have reported several examples where near new product is transacting at a 15% discount to brand new products.

In the inner metro area, things are rosier and the market is predominantly driven by upgraders who are taking advantage of their chance to get in cheap. Affordability with a sprinkle of confidence is, without doubt, the measure that matters the most in today’s market.

Upgraders have already pushed the prices up in sought after suburbs such as the Cottesloe. Shelly and Waterford, situated along the Canning River, have also experienced uplifts in median prices. The two suburbs are seen as upgrade targets to those in secondary areas and prices are attractive on historical measures.

Cannington is one of the very few secondary suburbs that have experienced an improvement in the past couple of years. Prices are on the rise as the $350 million redevelopment of Westfield Carousel shopping centre progresses. The expansion is expected to create additional employment when it opens in late 2018.

In summary, the overall residential performance is heavily influenced by the performance of the mining industry, amongst many other sectors. Increased hiring has resulted in a return to positive net migration in recent times. The predominant dependence on the one industry is something the state is trying to move away from by diversifying economic reliance into other industries. Health care, construction, retail and education are the industries responsible for the majority of Western Australia’s employment. Several large developments within these industries are currently being built, pushing the sectors for further improvement.

Attractive lending rates have a huge impact on today’s activity, especially in prestige suburbs. It is mainly upgraders taking advantage of the opportunity however we have seen some increase in investment activity as well.

Oversupply is also a measure that has caused many headlines in the newspapers. Outer suburbs have taken the hardest hit while inner metro suburbs are slowly absorbing the excess stock.

We are currently seeing a patchy performance as each suburb has an individual response or sensitivity to changes in economic factors. Some suburbs are booming whilst others are declining.

Overall, the market is tracking in the right direction and we have confidence in the short-term performance of the majority of Perth’s inner and secondary suburbs.

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