The Smartline Report – June Edition

The month in review: Perth

By Herron Todd White
June 2015

The Perth Property Market – Long Term Outlook The Perth property market has been most subdued since iron ore prices started to fall below the magic $80 per tonne. Premier Colin Barnett has been trying to bash Tony Abbott and Joe Hockey up for more of a lion’s share of GST since our royalties from iron ore have fallen through the floor causing a big hole in the state’s budget. He had a small win last week when he was handed $500 million for infrastructure projects in the Federal Budget.

In Western Australia, property prices have been falling, jobs are being cut and projects are on hold.

On the other side of the pond, things are still holding up and we can sense the smirks on the faces of the Sydney-siders who must be saying “Cowboys!”.

Well giddy-up Sydney. Here’s our take on the Perth property market.

In most recent months, Perth has seen a fall in confidence in the property market (despite strong demand for new homes, thanks to population growth and low interest rates) with the news over the past few weeks of job cuts in the mining sector weighing down perceptions and market sentiment.

Western Australia has an obvious strong correlation between high commodity prices (iron ore, oil and gas) and the demand and price for property in Perth. So with confidence sagging, prices falling and rents coming down, is it all doom and gloom for Western Australia? Well, let’s take an optimistic look at the future for Western Australian property.

Iron ore is back to nearly $60 per tonne after falling to a ten-year low of US$46.70 earlier this year. This is welcome news for the Western Australian economy. Commodity prices have been climbing on the back of tentative signs of supply cutbacks, rising oil prices and economic stimulus in China, with the moves exacerbated as the gloomy rhetoric around the commodity for much of the year ensured heavy short

Meanwhile, oil and gas prices are also surging from lows seen in the past six months. In recent times, major players such as Woodside and Chevron have been cautious, but with higher prices, we are likely to see more natural gas export infrastructure investment in Western Australia. In fact BP Exploration as recently as this week announced its biggest investment project in the Great Australia Bight (off South Australia) with the world’s largest oil rig under construction for that project.

During the mining boom of the mid 2000s to early 2010s, Perth’s property market boomed as speculators entered the market and the population of Perth grew at breakneck pace. We might not see that kind of growth again, but there is every chance a new, lower, yet more sustained period of growth is ahead.

While Perth continues to grow strongly and above historical trend, the boom times are certainly over, with prices cooling from double digit year on year growth to about 5% to 7% capital growth today.

Gone are the days of explosive wage growth and ridiculous beer price inflation.

The boom phase of the mining era is over for now. In 2015, it is more about exports and less about capital expenditure, however this is not necessarily bad news in the medium to long term for Perth.

BHP Billiton and Rio Tinto are still pumping out ship loads of ore. Their strategy is to decimate the local Chinese miners, small local firms (FMG, Atlas Iron, BC Iron) and other international players and take
market share. According to the Wall Street Journal, it appears to be working. While BHP and Rio may become slimmer operations (BHP has trimmed off and created South 32) and some jobs will go, overall there will likely be sustainable growth in the mining sector.

China now has to import more than 80% of its iron ore meaning that the country must continue to rely on Australia’s cost efficient supplies.

The big three world iron ore miners are bluffing when it comes to more supply according to US iron ore expert, Cliffs Resources Chief Executive Lour Goncalves: “None of the three majors (BHP, Rio, Vale) can continue to support their massive CAPEX needs without allowing the iron ore price to increase.”

With these reports in mind, the iron ore price is unlikely to tank beyond its current correction of about 50%. In fact iron ore may well be a sustainable business for years to come. Some jobs may be lost, but overall exports in iron ore and other minerals are likely to sit at sustainable levels for some time to come, (perhaps around $50 to $60 per tonne) underpinning realistic and sustainable growth for Perth’s mining sector and government coffers.

While growth in Perth property prices has been subdued in recent months, Perth is likely to see significant long-term capital growth in the coming years. Some of these reasons are outlined below. One of the greatest reasons is the demand for housing and the shortage of options for the people of Perth.

From a domestic perspective, Perth is seeing a number of migrants from the rest of Australia, particularly areas like Sydney and Melbourne which are more crowded and much more costly than Perth and Tasmania and South Australia, where professional and blue collar jobs are more scarce and pay lower. Secondary schools in Western Australia are some of the very best in Australia, especially the private and independent schools in established suburbs.

Perth is also a destination of choice for many international immigrants, particularly well educated and wealthy immigrants from countries such as the United Kingdom, China, Singapore, South Africa, New Zealand, Malaysia and India. Perth’s incredible lifestyle, health and education systems (top universities in particular) are extremely attractive to overseas immigrants, especially those who have discovered the extremely high cost of living and property prices in Sydney and to a lesser extent Melbourne.

Infrastructure Investment
Both the Federal and State Governments have billions dedicated to infrastructure projects in and around Perth. Some of these are already underway, such as the new Perth Stadium, Elizabeth Quay. Other projects kicking off are the extension of freeways and highways, new light rail, Perth airport and other local projects.

Agriculture, energy, minerals, education, high end manufacturing, legal and financial sectors all offer lucrative potential for Perth’s economy in the long term.

The fact that Perth is so close to Asia where there is a rising super middle class of hungry consumers means that Western Australia is going to develop huge wealth and growth over the coming decades in all sectors.

There’s going to be a lot of demand for inner city and near CBD development in the medium term, especially as young people and older Australians look to find property closer to essential services and entertainment.

We are already seeing that development take place, particularly in the CBD and other areas such as the City of Belmont and City of Subiaco, with an increase in inner urban living, rather than what occurred in the 1970s, 1980s and 1990s where people just went to a greenfield site up in the north-west corridor. We are doubling the size of most of our largest shopping centres and local authorities are getting on board with urban infill programs. Our new football stadium at Burswood, new hotels and large scale infrastructure projects in the Perth CBD (such as The Link project, Elizabeth Quay and Waterbank) are all underway and will set Perth up to be a greater tourist destination, especially from the South-East Asian market in the years ahead.

Demand for homes in established areas is going to increase dramatically in coming years as attitudes change and urban sprawl creates congestion and social issues in the outer suburbs.

High-rise and low rise high density property developments will continue to generate significant interest and wealth for investors and developers. So, while we like to hear how much Sydney-siders hate us and think we are a bunch of cowboys who live in a boom and bust state, there is much more confidence in the WA economy than that of either NSW or Victoria and our weather, beaches, people and roads are nicer.

Please note that information in this publication is subject to change without notice. Smartline assumes no responsibility for any errors, omissions or mistakes in this document. © Smartline Home Loans P/L 1999 – 2015. Australian Credit Licence Number 385325


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