- Perth set for over 20,000 more people a year, but only has capacity to handle less than half
- Not all experts agree, with greenfield potentially able to deal with the increase
- Perth is still undervalued, say experts
The residential property market in Australia has navigated a tumultuous period from the outset of the pandemic.
Building booms across the country fed by the Federal and various state stimulus packages introduced to keep the economy moving caused unintended chaos, not just here in WA, but in other states as industry struggled to keep up with demand.
Global supply chain disruptions, worker shortages and myriad other issues converged during that time of heightened demand and the industry is still reeling from the fall out.
In Sydney and Melbourne, the boom led to steep price escalations, with the median house price according to CoreLogic’s Home Value Index in Sydney now sitting at $1.03m and $767,000 in Melbourne.
Here in Perth, the price increases were more moderate and while the delays and material cost escalations have been dire, the market has managed to remain relatively stable with a median price of $560,000.
What goes up, must inevitably come down, and while the East Coast markets have dropped significantly this year, Perth values have declined less than 1%.
Head of Research at CoreLogic Australia, Eliza Owen, advises that since values peaked in April 2022, the Australian property market has declined in value by around 7%. However, Ms Owen warns there is a lot of variation across markets.
“As of the end of October, Sydney home values were down over 10%, while Perth values had declined less than 1% from a peak in July,” Ms Owen said.
“The trajectory of the housing market will be dependent on interest rates. Given rates are expected to peak in 2023, that’s when we would expect to see a floor in price declines.
“The overall outlook is a very varied downturn, with far steeper declines anticipated across the more volatile markets of Sydney and Melbourne, while Perth and Adelaide are expected to see smaller price declines with a peak-to-trough fall of less than 10%,” Ms Owen said.
Looking at interest rates in more detail, Ms Owen advises that based on the major bank forecasts for the cash rate, the expectation is a peak in the cash rate of between 3.1% and 3.85%, with this peak expected to occur early to mid 2023.
“Inflation challenges are still fairly persistent but are showing signs of unwinding, so it makes sense that cash rate rises would continue into early 2023,” Ms Owen said.
Well respected West Australian property analyst, Gavin Hegney, agrees that the number one issue impacting on the market right now is interest rates.
He says that while the top end of the market remains strong given the influence of the mining industry, the lower end is where the real impact of interest rate rises will bite as borrowing capacity is limited.
Both Ms Owen and Mr Hegney also point to population growth and housing supply as a major driver of the market in the longer term.
Here in WA, supply is severely constrained, particularly in the medium and high-density space and Mr Hegney suggests that many medium density projects have not proceeded because they are not financially feasible.
“That disrupts the pipeline and has serious implications for our market in 12 to 18 months, particularly when the other aspect of demand being migration, has already had the button pushed,” Mr Hegney said.
“We are now looking at a population increase in Australia of 235,000 people a year, and Perth will get its fair share of that.
“If we were to get a 10% share of that, it equates to around 23,500 people a year coming directly to Western Australia.
“That is a concern for our property market because with the very low rental vacancy rate and the very low number of properties available for sale, we only have a capacity to handle less than 10,000 people.
“If that population projection is achieved, it would take our market to crisis point,” Mr Hegney said.
Interestingly, Colin Keane from Research4 has a different view on the likelihood that Perth will attract that many more people to our shores.
Mr Keane says that the Western Australian greenfield market does have spare capacity.
According to Research4’s data, new land sales and cancellation rates are back to pre-Covid levels and moving forward, the land sales market should be able to deal with a sale rate of 450 to 500 lots per month without a problem. This would strike a balance between supply and demand.
“The risk facing the Perth market is if a lot of people want to go back to Perth, or if the State captures a greater percentage of the national population, then that could cause some upward pressure on pricing. But as it stands, that is unlikely to happen,” Mr Keane said.
While they may differ in opinion regarding supply, on the topic of pricing, our experts agree that Perth remains undervalued.
Mr Hegney says that Perth should not be on the bottom when it comes to house prices across the capital cities, we should be sitting at around fourth in terms of affordability and that means our average house price needs to lift by around 20%.
This is particularly important for the medium and high-density sector where a moderate lift in sales values would make these types of projects viable again.
Mr Hegney does see economic factors working to lift residential values in Perth, with mining leading the charge, however there is the risk of another ‘boom, bust’ cycle, this time led by the Lithium sector.
“Some of the largest lithium mines in the world are here in WA and we are going to need to be constructing and expanding them in the coming years.
“This means we are likely to go through another boom bust phase, and if that happens to coincide with the pressure point of migration I mentioned earlier, then we will have another situation like we had in 2007/8, when we had a combination of factors pushing the market up,” Mr Hegney said.
Another pressure point that Mr Hegney highlights is the state government’s infrastructure plans, which have been on hold waiting for the building markets to stabilise.
“If they decide to push the button on some of those infrastructure projects, we very well could be in a situation where natural market forces are pushing prices up and creating demand that includes migration to the state, lithium mining ramping up and we have a triple whammy that would put us in a similar position to what we saw in 2007,” Mr Hegney said.
Taking things out to a broader Australian context, Ms Owen says we are experiencing similar market trends to what is being seen globally; asset prices are fluctuating with changes in inflation and interest rates, rental markets have been tight with low levels of supply, and detached housing and regional, lifestyle locations have generally had larger, longer upswings in value.
Longer term however, Ms Owen believes that Australia is a relatively competitive market.
“Strong net overseas migration levels, a resilient resources sector (perversely, global conflict has been a tailwind for Australian exports), and a housing market underpinned by individual ownership and rule of law is quite attractive for overseas investors,” Ms Owen said.
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This story was originally published in The Urbanist magazine, an official publication of the Urban Development Institute of Australia (WA). It has been edited for republication by The Property Tribune.
The Property Tribune thanks the UDIA WA for the opportunity to republish the work, and share thought leadership in relation to urban development and community creation with our readers.
Read the original copy of The Urbanist by heading to UDIA WA’s website under the News tab.
