The month in review: Perth
By Herron Todd White
We start 2018 with a cautious but optimistic view, with a general feeling that the worst is behind us in most market segments. The most common term used to describe current sentiment is “green shoots”, however we believe that some market segments are already blooming, whilst others are still waiting for the storm to pass. Confidence levels are improving, reflected in price stability and increase in activity, particularly over the past two quarters. Our research indicates that over a quarter of Perth suburbs recorded positive sales growth in 2017 – a significant improvement from the previous year.
At the same time, the overall state economy has remained steady with positive signs of future improvement, although we await more information on critical Federal government contributions to arrest the decline in GST contributions. Western Australia is still encumbered by heavy debt levels created by significant infrastructure contributions required to cater for the mining boom, which did little but remove funds from WA and send them into Federal coffers. Key indicators including employment, one of our biggest state challenges from 2015 to 2017, has shown signs of growth again. The only indicator likely to slow overall state performance from its potential in 2018 is the continuing weak population growth, although the next wave of mining development appears to be well underway. It is a little understood phenomenon at present within the wider community – the previous construction boom in the mining industry has significantly expanded mining output and the challenge now is to maintain that output with mines depleting at more rapid rates. It’s no easy feat to replace multi billion dollar mines and the forward planning required is already having positive effects on the WA economy.
The December quarter brought us promising news. Perth’s median house price remained steady and increased in three out of five sub-regions. The central sub region took the lead with an 8.1% increase from the September quarter. The overall median house price is currently sitting at $507,000 but is expected to increase to $525,000 once all sales have settled according to the Real Estate Institute of Western Australia. The estimate would represent a 2.6% increase from the previous quarter and an equal figure to last year’s median price.
465 house sales were transacted in the week ending 9 January 2018 in comparison to 386 in the same week the previous year. Listings are down to 13,134 from 14,502 listings in 2017- another healthy sign of recovery. It is commonly believed that a balanced housing market is reflected when listings hover around 12,000 to 13,000 properties.
Properties are also selling quicker at present in comparison to 12 months ago, with the December quarter reflecting a ten day reduction in average selling days to an average of 60 days.
Speculations in a future lithium boom along with spikes in commodity prices, in particular high grade iron ore, seem to have boosted confidence in the Western Australian mining sector, likely to be reflected in the state’s property market. In response to the optimism, the Pilbara region appears to be in full recovery mode. In great contrast to recent years, we have seen significant increases in sales volume and examples of price recovery over the past six months. Port Hedland house sales jumped from 41 in the year to September 2016 to 64 in 2017, representing a 59% increase. South Hedland experienced a further increase from 113 to 207 while Newman surprised us with a whopping 120% increase from 35 sales in 2016 to 77 in 2017. We expect this performance to stabilise throughout the year and generally balanced market conditions are anticipated, although as we have seen in the past, such predictions can be affected by various project announcements and the rumour mill is rampant at present!
As previously mentioned, this will be a patchy year with mixed performance among our regions, subregions and even suburbs. Not all areas will do well. Outer developing areas such as Ellenbrook, Baldivis, Byford and the far northern coastal strip are still struggling and we expect to experience a peak in mortgagee activity later in 2018 in such areas, with prices unlikely to recover. Despite the affordability in the more distant areas, house and land packages should be treated with caution. Current funding restrictions prevent first home buyers entering the established housing market which is fuelling demand for house and land packages, however there is limited demand for such properties from the minute they have been lived in. Hence once a period of difficulty is experienced, it can be difficult for first home buyers to recover, which has been fuelling the mortgage in possession rate in such areas.
The good news is that 2017 offered upgraders a discounted entry to the million dollar market. The significant discount from previous years gave the market a very successful kick start, with a continuous rise in demand following the “once upon a time” incentive to take advantage of the double bonus of discounted prices and cheap money. A further improvement is expected to flow through 2018, with increasing prices due to rising demand in areas already suffering from declining stock levels, such as Cottesloe, Mount Pleasant, Dalkeith, Rossmoyne and South Perth. Bull Creek, Padbury, Balcatta, Stirling and other secondary suburbs are also expected see further activity and rising prices.
Older units and apartments in good locations are selling at a significant discount to historical transaction levels due to high volumes of new supply. House prices are rising while unit prices are drifting. The overall demand for apartments is expected to remain low in 2018 unless we see a significant uplift in either house prices or rental returns (which is not expected). Home buyers and investors tend to prefer detached dwellings over apartments, especially at this point in time when housing is still very affordable. Older apartments in North Perth, Mount Lawley, Wembley, Victoria Park and Northbridge are definitely worth watching in 2018 and the rental returns on offer could look very attractive in comparison to other segments of the market. The new price point in sought after locations provides great odds for capital gains in a recovering market. Modern, small units in oversupplied areas such as the City of Belmont should be treated with caution, as demand appears to have plummeted and there is no current indication of an increase in demand.
On a more granular level, Melville is worth watching in 2018. You can get a foot in the market at sub $500,000 for a fairly basic but decent home. $1.2 million gives you views and a more prestigious dwelling. The suburb is well located with close proximity to Fremantle, the freeway, beaches, schools, shops and recreation activities. Developers have soaked up parts of the suburb in response to recent zoning changes. We are now seeing a number of modern units being built. Some new products are already listed and it will be interesting to see how well the market absorbs the new offerings.
Down south, Mandurah struggles to meet its seasonal target. Pre-summer, Mandurah’s peak selling period, started well with increased sales activity but activity plummeted to well below average in late December. Our prediction is that Mandurah will at best remain stable during 2018, but the likelihood of a slight price drop is greater, according to our local valuers. The beach front in suburbs north of Mandurah may however take an interesting turn. At present, the area seems to have been forgotten, with prices appearing to be very good but we believe the bargain hunters may be disappointed soon as declining stock levels are likely to push prices higher.
In terms of overall affordability, Perth is offering very good value for money in comparison to other capital cities. There are many suburbs within ten kilometres of the CBD where you can purchase a liveable home on a full sized allotment for under $500,000 and the options increase significantly if you extend your search outwards by two or three kilometres. Parkwood, Ferndale, Bibra Lake, Craigie and Padbury are all on our watch list.
Something to keep in mind is that buying near new products in establishing suburbs is often significantly cheaper than purchasing land and building, but be careful of areas where high volumes of new supply are still coming through. House and land packages are marginal at best when compared to near new housing prices, despite discounted building costs and incentives galore.
In summary, 2018 is likely to be reasonably stable, but with some opportunity for growth and most importantly changes in attitude among investors and speculators. The overall economy is experiencing recovery with increasing employment providing opportunity for greater investment and expenditure in the state. We have seen a very patchy performance, although an overall improvement, in the property market over the past two quarters. Prices are rising and properties are selling quicker, particularly in more sought after suburbs. Growth is expected to continue throughout the year. Now could be the time to snap up a decent residential property in a decent location before the rest of the market catches on. On the downside, mortgagee activity is likely to peak in outer suburbs with declining prices and activity. Overall, 2018 will serve as a confidence booster, bring us stability in the market and prepare Western Australia for a big turn in 2019. We predict that 2018 will end with a median house price of $540,000.
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