The month in review: South West WA
By Herron Todd White
The Reserve Bank reduced the cash rate by another quarter of a percent this February to 2.25% on the back of a decline in commodity prices, weak domestic growth and rising unemployment. So how does a reduction in the cash rate influence and affect the property market in the South West?
The Reserve Bank reduces the cash rate to increase demand and stimulate the economy. A reduction in interest rates will contribute positively to the south west market as we would expect demand for housing
to increase as the servicing of loans becomes more affordable and in some cases achievable.
Currently the property market is steady with a stable level of sales throughout the locality. There is a levelling out of values throughout the lower and middle segments and a slight increase in land values. The top end of the market continues to be more problematic, with continuing weak demand and an over supply of properties for sale coupled with a lack of prospective purchasers in that value range. The rural residential market has also slowed with the majority of sales being below $1 million and experiencing extended selling periods.
We would expect the reduction in the cash rate to motivate and encourage some renters to leave the rental market and enter the lower segment of the market place as the gap continues to narrow between renting and holding a mortgage.
Consequently, a gentle flow on effect to the middle segment may occur as lower segment vendors look to trade up their homes. We would expect little to no effect to the top end segment as this market remains oversupplied in the south west with a distinct lack of prospective purchasers.
Overall, a reduction in the cash rate will have a positive effect on the property market, particularly the lower and middle segments. Nevertheless, the word on the street is that it is likely the property market in the south west for 2015 will be relatively slow. This is on the back of the Perth metropolitan market slowing significantly throughout the last two quarters of 2014 as the Perth market historically has a flow on effect to the south west market. Despite this, the south west market to date has remained relatively steady and a decrease in interest rates can only be positive.
The silence in this area created by the latest interest rate cut has been deafening. There has been no conversation in the community or evidence of increased real estate activity as a result. Local agents and finance brokers are reporting they are as quiet as they have ever been.
A contributing factor in this area is our typically lower average values compared to more populated parts of the country which correspondingly means lower average mortgages. The reduction of 25 basis points has less impact on repayments than it would in areas with higher mortgages. Where there may be some upside is in the higher value part of this market where some property may now come within reach of a broader spread of purchasers. The caveat here of course is that as soon as interest rates rise again there could be the same number of people seeing mortgage stress.
The reduction is timely for those with investment properties in the area. A strong rental market on the back of extensive capital works in this region has tapered off as the projects have been completed.
Residential vacancy has increased slightly as a result culminating in some reduction in weekly rental rates
over the preceding six to twelve months. A small reduction in interest repayments could help cushion the lower rental income for investors.
The hangover from the GFC is still being felt in the broader market and the perception is prospective purchasers are wary of getting caught by stagnant or declining property values combined with the possibility of interest rates going up in the medium term. Hence, while there is still a regular sales volume for a market of this size, purchasers remain very cautious in their dealings.
It may well be that another interest rate cut following close behind the most recent one may have a greater
impact. As there was a long time frame when rates were on hold, the market in a sense got used to the status quo. Family budgets were recalibrated and a new norm was established. One interest rate reduction has perhaps seen a modest increase in monthly disposable income but not enough to stimulate thoughts of purchasing a new property.
A second rate cut, sooner rather than later, may give some impetus to activity in our local property market.