Perth June 2017

The month in review: Perth

By Herron Todd White
June 2017

The Western Australian economy has been haunted by a lack of consumer confidence over the past couple of years, hence home owners have exercised a high degree of caution when it comes to upgrading or extending their homes. Similarly, the prospect of paying stamp duty in a subdued economy has stalled transactions of established dwellings unless the product is highly desired by the market.

The problem with undertaking a renovation project in a subdued market is that there is always a risk that the expenditure will not reflect a direct increase in capital value. This has definitely been an issue in the Perth residential market in previous years and extends to the new housing market. The issue is, however, exacerbated in the established housing market given the proportionately higher costs involved in extension or renovation works. As an example, new construction typically occurs for rates of $1,000 to $1,500 per square metre of living area. In the situation of an extension or renovation, these rates quite commonly start at $2,000 and rise rapidly towards $3,000 per square metre for single-level properties.

Hence in the current market, decisions made to extend or renovate are most often based on emotional choices rather than financial common sense. They commonly occur with families in well-located, established areas offering little housing variety, where the location is not willing to be sacrificed regardless of the cost of the works involved to transfer the dwelling into something more modern and comfortable. In the current market, undertaking such a project in an outlying, potentially less desirable area is likely to be particularly challenging.

We have seen several investors follow the flip method and come unstuck, either due to the higher holding costs associated with longer selling periods or by simply mis-timing the market and the market corrects downwards as money is invested into the project. Hence these projects are not for the faint-hearted.

Some typical areas that are still seeing a decent level of extension or renovation work include Duncraig in the north, where a renovator’s delight can be obtained for a little over $500,000, but well-renovated properties can achieve in the $800,000s. The suburb is well located, being close to the coast but with good transport links to the CBD.

An example in the south is Parkwood, where entry-level housing sits at around $400,000 and good product can nudge past $600,000. The area offers little variety of housing but is well established with good sporting, shopping and employment centres in close proximity.

Also in the south, the suburb of Melville has seen a significant amount of redevelopment along with restoration of the original cottages. The suburb is garnering interest due to its proximity to the Swan River and Fremantle and proximity to more upmarket and sought-after suburbs such as Alfred Cove and Attadale.

Entry level is not far above $500,000 and well-renovated or extended properties can attract into the $800,000s.

Overall, we would urge caution for any home owner considering undertaking an extension or renovation project in the current market. It would be wise to speak to multiple builders to ensure you are getting the most competitive quote and seek the advice of a local property valuer to ensure you understand the risk-and-reward equation prior to committing to anything.