Being a top dog has its perks but also enormous burdens. You are under constant pressure to maintain your lead position, and any sign of a slowdown is greatly magnified. Just look at Perth and Western Australia in general. Having been the ‘wonder child’ of the housing market for a couple of years now, Perth has grown at an astronomical rate while the other states have struggled to keep up.
During the past 12 months, property prices have jumped a staggering 8.4%, at least 4% higher than during the previous peak in the first mining boom of 2005–7.
“Low levels of post-GFC construction were unable to keep up with the surging population growth driven by record levels of overseas and interstate migration into Western Australia during the second stage of the resource investment boom,” explains Angie Zigomanis of BIS Shrapnel.
The low interest rate has also seen a significant number of first home buyers getting into the market as housing affordability has improved.
“Demand has increased across the board, with growth in lending to first home buyers, upgraders, and investors,” says Zigomanis. “Price rises have also been broad-based, being highest in middle and outer Perth.”
Yet even with this stellar performance many experts increasingly doubt the sustainability of this growth. “Can it really continue growing at this rate?” they ask themselves, as they look for hints of a weakening trend.
Outlook for 2014
Reasons to be cautious
WA’s history of property boom and bust is justifiably a concern for investors, who are wondering if the market has reached its peak and will now see a rapid decline in prices from here onwards. Our experts list the following reasons why investors need to be cautious.
1. Mining investments are slowing
“The trouble with WA is that the mining investment boom is now slowing,” says Shane Oliver, AMP chief economist.
“Mining has provided a huge boost, but it is hard to predict how the state will fare once it enters the mining export (as opposed to investment) phase. There are a lot less jobs in the export phase, and less work means less growth. So the current heat will come out of that region. Mining exports will continue. But I think we have seen the best of times in Perth.”
Zigomanis agrees that the decline in resources investments will have a dampening effect on the WA economy.
“I think the bigger effects of the declining resources investment will overwhelm the other rises we’re seeing now,” he says. “Ultimately, I think it will lead to a decline in the other areas as well, because there won’t be the same number of jobs and the employment growth to sustain consumer spending and to sustain dwelling demand.”
2. Rental market is weakening
WA also recorded the strongest activity from first home buyers, which resulted in softening rental yields and rising vacancy rates.
The Real Estate Institute of Western Australia (REIWA) reports a sharp increase in vacancy rates to 3.1% in the September quarter from a tight 1.9% at the end of 2012.
The REIWA report also notes that there is now 80% more rental stock in the market as tenants move into home ownership. As such, the overall median rent has dropped by $5 to $470.
“Perth is already quite expensive,” says Cameron Kusher, senior research analyst at RP Data. “What we’re seeing in terms of rental growth is that people are coming out of the rental market and going into the home ownership market. So we are seeing less pressure on rents; rents are only up about 4.5% over the last year. At the same time last year they were growing at 13% or 14%.”
3. Property price growth set to moderate
Perth’s strong performance during the past year or so is likely to be followed by a slower growth rate, according to the experts.
“Growth is now tapering off in Perth, which is not surprising given the consistency of its growth over the last two years and how strong it had been growing earlier this year,” says Zigomanis.
Kusher says the pent-up demand from homebuyers has probably been met. “There was a lot more activity in that Perth housing market over a fairly short 12–18-month period, and maybe a lot of that pent-up demand has now been captured.
“I think the pent-up demand, particularly from first home buyers, has been captured quite quickly, so we don’t expect demand to ramp up again.”
4. Rising supply will dampen price pressure
With more supply coming onto the market, Harley Dale, the Housing industry Association’s chief economist, says there’s going to be less upward pressure on property prices.
“WA is now on the wrong side of a resources boom that has pretty much been going on for a decade,” he says. “It’s hard to see the sustainability of really fast property price growth, provided that you continue to see an increase in supply. You will see price gains still, but it’s hard to see how those gains continue to be really strong unless the construction recovery runs out of steam.”
Kusher points out that there are definitely signs of softening in the property market and agrees that housing stock has been rising.
“What we’re finding at the moment is that the amount of stock has started to climb, and they’re already higher than they were at the same time last year,” he says.
“With mining investment a significant part of the overall economy of WA, and with less mining expansion going on, this will have an impact on engineers, surveyors, a lot of people in WA who are heavily reliant on that mining and resources sector.”
5. Economic growth to slow
The strong income growth, low unemployment (4.9% in June quarter 2013 compared to 5.6% nationally) and solid economic growth have all contributed to buyer confidence over the past 12 months. However, BIS Sharpnel is predicting the rate of economic growth to slow over the next 12 months, which will weaken demand for housing.
Another indicator, retail spending, in which WA has dominated the other states for a number of years, has also now slowed.
Accordingly, Deloitte Access Economics forecasts that WA will slip down the state growth leader board in the next few years.
From top dog today, the economic forecaster is expecting WA’s growth rate to fall below the Australian average in 2014–15.
Reasons for optimism
While there may be good reasons to be concerned, there are even more reasons to remain optimistic.
1. Property prices still on track to grow solidly over next 12 months
Experts believe there is still growth to be had in Perth’s property market.
“We think there’s probably enough pent-up demand in the market to keep things going for another 12 months at a reasonably solid pace, in terms of price growth,” says Zigomanis.
“The window for Perth is probably another 12 months to 18 months of growth. We think it will start to slow beyond that. At the moment, Perth is being carried by its own momentum. But slowing economic conditions will eventually have an impact.”
2. Mining projects are a long way from completion
Mining investments may have slowed, but business investment is still larger in the west than elsewhere, says Deloitte Access Economics. “Right now, construction spending is still bigger than Christmas. This means growth is still magnificent.”
Deloitte’s Investment Monitor shows a quarter of a trillion dollars of spending in the state, more than half of which is already underway or committed.
While there have been a number of projects suffering from cost blowouts, the major projects are still on track, according to Deloitte.
“Work on the $12 billion Prelude LNG project is progressing well and not suffering cost blowouts. The recently shelved Browse LNG project has been given another life, with the project proponents going for a floating processing option instead.”
Other projects such as Gorgon are well on track, says the economic forecaster. “Gorgon leads the way, while work also continues on the Wheatstone, Prelude and North Rankin. In the pipeline, work on the proposed $2.5 billion Greater Western Flank project has been pushed out to commence in 2014.”
Construction on the remaining components of Fortescue’s Solomon Hub development have moved closer to completion, with developments of the Firetail and Kings iron ore deposits.
“We don’t think that mining investment will just, sort of, shut off,” says Zigomanis. “Projects are still being completed so it will work its way through. Even though the resources investment cycle has peaked, there is still a lot of work going on.”
3. Economy remains healthy
Growth in the job market is expected to ease, but it’s starting from a strong base. WA still outperforms the other states in terms of consumer spending, thanks to generally higher income growth.
“The easing in consumer confidence is really a reflection of the expected sharp slowdown in mining investment activity in the WA economy. But having said that, there has been some strong income growth for the WA household sector, and that should support some steady price growth in the Perth market for some time,” says David Cannington, ANZ senior property analyst.
4. Undersupply to push prices higher
At this stage, there is a sizeable dwelling deficiency in WA, at around 30,000 dwellings (or over a year’s underlying demand). BIS Shrapnel expects this to continue to drive momentum in price growth over 2013/14, with a forecast rise in the median house price of 8%. However, it also expects growth to begin slowing as the pace of the economic slowdown accelerates, with total growth of 17% forecast over the next three years, taking the median house price to $600,000 at June 2016.
5. Population is still growing rapidly
WA’s population is growing so rapidly that it’s now almost 40% higher than the decade average. According to the ABS, WA recorded an annual growth rate of 3.42%, driven by a record number of Australians moving to the state as well as a sustained flow of international migrants. That growth is now helping to fuel housing construction, which is rising rapidly as well.
