WA Excerpt from the 2013 January Market report

Perth, not surprisingly, will do well on the back of a blazing WA economy, but time could be running out for investors to take advantage.

Perth property prices are going to increase strongly over 2013. That’s the short of it and almost all analysts seem to agree. The long-term view is a little more complicated.

For starters, recent years don’t paint the city’s property market in the best light. This isn’t because price increases were absent, it’s because prices increased so much before the GFC and did little since.

BIS Shrapnel senior manager Angie Zigomanis puts it into perspective. He says the market was blazing up until the GFC and that many people got ahead of themselves.

They rushed into the market and then many of the drivers that had caused this boom – such as confidence from all the resource projects – were removed.

“To some extent there was overbuilding in Perth and house and land values became overvalued. It has taken five years or so for all of that to get shaken out. In those five years, median values have barely moved, while in the meantime, household incomes have probably gone up by around 40%,” Zigomanis says.

He says it is understandable if investors find it hard to place much faith in capital growth forecasts. After all, if a past price boom suddenly came to an abrupt halt because of worldwide economic conditions, why wouldn’t it do it again?

“At the height of the GFC, Australia wasn’t fundamentally that bad, but everyone was scared about what would happen and they cut back on spending. So yes, if there are big shocks outside of Australia, everyone might shut up shop again,” Zigomanis says.

Cue the reasonable amount of caution investors are feeling toward forecasts of growth, and a case in point is ANZ’s Australian Property Outlook September report. It claims the WA housing market is entering the second phase of a housing market cycle – one where the combined impact of improved housing affordability, tightness in rental markets home sales. But could it be right?

Despite the question marks, ANZ’s head of property research Paul Braddick says that there are clear differences between the property boom that Perth went through in 2007 and the boom it could possibly experience next year.

Supply and demand factors

1. Buyer sentiment

One of those differences, according to Braddick, is that a lot of buyers have learnt their lesson since the GFC.

“Raw unemployment figures for WA are low, but that fundamental picture has been overlaid by stories of people losing their jobs in a lot of sectors, whether it’s finance, retail or the public sector. So, despite the fact that aggregate unemployment rates haven’t really done anything dramatic there’s definitely been a sense that people are much more concerned now about their job security than what they were pre-GFC,” says Braddick.

This concern will mean Perth prices will grow strongly, but will not boom in the same way they did before the GFC.

Buyers don’t have the same sense that boom times will return or that worldwide economic troubles will be short-lived.

They’ve learned to look at the market more cautiously and this will impact their buying patterns. Braddick adds that pre-GFC surges were to such an extent that they will be hard to replicate again anyway. “Back in 2007 and early 2008 prices rose by almost 70%, which was always going to create medium-term problems for that market because prices ran ahead of themselves,” he says.

2. Dwelling shortages

A less marked rise in prices would appear to be headed Perth’s way this time around, according to Residex CEO John Edwards.

“We think the coming year will see growth in the Perth market. The market definitely will have some good growth for a little while. You couldn’t call it boom times, but by some measures the growth will be better than a lot of other places for a few years,” Edwards says.

Apart from price cycles, Edwards says that one of the reasons Perth prices will enjoy decent growth is an underlying shortage of rental accommodation. Building activity over the last couple of years has been low and this has meant that growth in the city population has overshot the supply of housing.

This will mean buyers who want to get into the property market will face more competition from other buyers and will have to start paying more to get the properties they want, resulting in widespread price increases.

Australian Property Monitors’ senior economist Andrew Wilson agrees that Perth’s supply situation looks good from an investor’s point of view. “They don’t tend to build multi-high density there, it’s mainly standalone houses and there’s been not a lot of incentive to build those. Once you get behind the 8-ball with the supply side not matching demand, it’s very difficult [for supply] to catch up, especially when you’re getting over 3% annualised growth in your population,” Wilson says.

3. Affordability

With the city in a good phase of its property cycle to be investing and the supply of properties low, Wilson says that one thing investors don’t need to fear is affordability putting a low ceiling on growth.

In many markets growth can be hampered when prices reach a level that local buyers consider unaffordable, but Wilson says that Perth property is more affordable than it has been in years, and this will leave a bit more breathing room for prices growth.

“The median house price is still around 8% below its peak, so in terms of affordability it’s still below its maximum of a couple of years ago,” he says.

Affordability will also be helped by the state’s soaring economy, Wilson adds. “Perth still has the lowest unemployment rate (at 3.5%) of the major capitals, the highest incomes and income growth, and despite some wavering in the resources boom there is still about $100bn worth of projects in the WA pipeline. This will continue to drive economic activity, demand for housing and demand for labour. It’s almost a perfect storm for Perth’s housing market prospects.”

One of the hallmarks of having a 3.5% unemployment rate is that it is considered “full” employment, according to Wilson. He believes that this is why Western Australia is getting over 4% growth in average wages. “There’s a heavy demand for labour and a shortage of labour, meaning wages and incomes can be bid up.

“We’re certainly not where we were in 2007, where we required 457 visas because there was such a dire shortage of skilled labour, but certainly there’s a lot of people moving into WA and they require housing.

“The other driver is Perth’s sub 1% vacancy rate in the rental market and in our last rental report; we had Perth’s rental growth at nearly 10% for the (September) quarter. It’s yet another sign of a shortage of housing and another incentive for people to buy rather than rent.”