The Perth property market has experienced a roller-coaster ride throughout the past decade, ultimately impacting the growth of real estate investments. How will the Western Australian capital fare in the new year?
Pure Property Investment’s Paul Glossop said that, while investors who timed the market have done well in, passive investors have suffered.
From 2000 to 2014, Perth has gone through amazing growth as property prices tripled. However, after the said period, the capital city saw a 30 per cent loss in growth and a significant amount on cash flow.
Where Perth was the most expensive city in Australia in terms of property prices during its peak, the capital city now sees median values of freestanding houses at half the price of Sydney.
During the past year, the average home price has fallen by nearly 8 per cent in the Western Australia capital, with the average dwelling price at $437,080, according to CoreLogic.
According to the property expert, several socioeconomic factors brought about the decline of Perth, including a massive fallout of population growth, which resulted in the capital city falling from being the number one state to being the seventh to eighth state in terms of jobs creation, vacancy rates, population and other factors.
“It’s only just starting to turn a corner now. If you held onto it, you’re back to where you started. So that’s locking up your money for 16 years without anything.”
After years of decline and stagnation, CoreLogic data revealed that Perth’s property values have increased by 0.4 of a percentage point — the first boost in more than 18 months.
Further, the third quarter of 2019 saw the strongest rental growth market, with Perth at over 5 per cent.
Mr Glossop explained: “If you look at these indicators which show where it’s come from and where it is now, we’re all of a sudden seeing Perth in a position where rents are getting very, very attractive — vacancy rates are getting lower by the day.”
“On top of that, you’ve got some big infrastructure projects coming along, from transport infrastructure to healthcare and major square development, which now are leading towards jobs creation, unemployment dropping.”
Ultimately, Perth could very well be on the way to recovery, although no spectacular growth is expected in the near future.
According to The Agency WA’s general manager Stuart Cox, property prices are expected to stabilise and then rise slowly, providing attractive opportunities for long-term property investment.
At the moment, buyers are flocking into the lower end of the market where they’re taking advantage of rising rents and increased yields.
Investors from out of state and overseas are also starting to gather in Perth markets, as well as first home buyers who are keen to take advantage of low house prices as it is cheaper to buy rather than rent in about one-third of Perth suburbs.
Housing affordability is expected to deteriorate even further in 2020 as rising dwelling values across Australia through December 2019 capped off a “strong finish” to the property market for the calendar year.
CoreLogic’s head of research Tim Lawless said that the nominal recovery in housing values implies that home owners are becoming wealthier. While it may help to support household spending, this recovery may contribute to the deterioration of housing affordability as dwelling values outpace growth in household incomes.
The deterioration in housing affordability is likely to deliver a slowdown in activity across price-sensitive segments of the market as those who are saving a deposit find themselves facing a setback.
Despite the rising values, Mr Lawless said that smaller cities where housing is more affordable and economic conditions are showing improvement “may offer some insulation” for investors.
According to him, while jobs growth and population growth are slowing across NSW and Victoria, conditions are improving in Queensland, Western Australia and South Australia.
Further, comparatively low housing prices, coupled with higher migration rates and improving jobs growth, could play out positively for the capital cities in these areas.
Overall, Mr Lawless expects 2020 to be “the year may bring about a change in the growth dynamic”, with household values rising across most regional areas and larger cities witnessing a slowdown in the rapid rate of growth that was recorded through the second half of 2019.
Smaller capitals such as Brisbane and Perth, as well as key regional centres and lifestyle markets, could also see an improvement in conditions as buyers are attracted to affordable prices coupled with job opportunities and lifestyle factors.
Supply and demand
The Perth property market has started to show signs of life this year as it grew by 0.4 per cent for the first time in two years — a result of diminishing oversupply from the building boom that went on from 2011 to 2014.
CoreLogic figures showed 3,392 newly listed properties added to the Perth market over the last month, which was down 23 per cent from last year, 23.1 per cent below the decade average and the lowest since CoreLogic listing records commenced in 2007.
As supply levels fall, the capital city is taking advantage of a larger share of GST funds as well as government projects.
According to Property Club WA’s branch manager Troy Gunasekera: “Billions of dollars in new road and rail infrastructure will be spent in Perth over the coming four years starting from the beginning of 2020.
“For example, there will be six METRONET rail projects under construction in Perth in 2020, creating thousands of local jobs and opportunities for local businesses and transforming Perth’s public transport network,” he said.
Mr Gunasekera also expects an upswing in the resource sector, which will see billions of new private investment in the state and ultimately help alleviate the unemployment rate.
“As of September 2019, Western Australia had resource projects in the pipeline valued at an estimated $108 billion.”
Moving forward, with the expected Perth market rebound, the property expert anticipates renewed interest from investors across Australia, driven largely by higher rental yields and rising prices in the capital city.
To date, Perth remains one of the most affordable capital cities despite being home to over 2 million people.
Apart from the shifts in supply and demand as well as the movements in the apartment market, foreign and interstate investment, population growth, technology, health and wellness will also play major roles in shaping the property market in 2020.
Foreign and interstate investment
Savills Australia and New Zealand’s CEO Paul Craig said that, aside from the downsizing trend, lower interest rates, loosening of banks’ lending requirements and continued foreign buyer interest will also play a big part in how the property industry will fare in 2020.
Australia will continue to attract foreign capital supported by a cheap Australian dollar, positive yield spreads to debt enabling positive funding from leverage and the lag effect of cap rate compression due to some scepticism of further runs in yield as the country witnesses a record yield lows/highs in valuation, he said.
Further, 2020 will see the commercial office sector continue to compress and the industrial sector continue to attract capital.
“We are concerned about the low growth in rents; however, the inbuilt rent bumps of 2-3 per cent will support overall,” he said.
“Retail is an interesting asset class and, perhaps with tough retail sales turnover, a forgotten asset class with opportunities… Retail is worth looking at, especially supported by population densification and rising or changing socioeconomic conditions of the surrounding demographic.”
More Australian investors have also got their eyes on interstate markets, with 45 per cent of investors looking to buy outside of the state that they live in over the next 12 months and 63 per cent of investors considering rentvesting whereby they rent in one location and invest in another, according to the 2019 PIPA Investor Sentiment Survey.
PIPA chairman Peter Koulizos said: “Borderless investing as a bona fide property investment strategy had blossomed over recent years. More and more investors are recognising that there are myriad investment opportunities around the country rather than being blindsided by what’s happening in their own backyards.”
“Australia has eight capital cities and dozens of major regional areas, which have property markets at different stages of the market cycle at the same time.
“Savvy investors always consider the locations that offer the best market fundamentals as well as prospects for capital growth over the medium to long term. They chose not to follow the masses, but to invest in locations before prices start to rise, such as in Sydney in 2012 and in Melbourne not long after.”
Population, technology, health and wellness
RobertsDay’s co-founder and director Mike Day said that drop in car ownership, smaller houses, walkability impacting property prices, residential blocks atop shopping centres and “mini Melbournes” in outer suburbs are some of the 2020 trends that could have a flow-on effect on the nation’s property market.
Where communities used to be built around vehicles, the new year will see them built around pedestrians, cyclists and “light” modes of public transport such as e-bikes, trams and buses. Millennials and baby boomers will drive the demand for these changes, according to Mr Day.
Other trends that are likely to impact the property market in 2020 are the growth of “mixed-use” developments and the emergence of “overlapping use” buildings; growth in sustainable and affordable mobility on demand in suburbs; increase in the supply and demand for townhouses; the rising significance of “Walk Score”; and a separation of roads, bicycle paths and pedestrian paths.
Ultimately, whatever takes place in the next 12 months, as the beginning of a new decade, will set a precedent for the next 10 years, according to Mr Day.
“As our population grows and innovative new technologies and ideas emerge, future generations will look back at the 2020s and point to it as a decade that reshaped our cities — especially our outer suburbs — more than any other decade in the last century,” he said.
While there are opportunities present in Perth for property investors, Mr Glossop advised investors to take precautions when determining the value of properties in the capital city and ultimately investing in real estate.
Due to the big changes that the market has undergone, it could be difficult to assess the investability of properties.
“If you look at what a property is worth five years ago, I can guarantee that you’ll find properties every day of the week that show extremely good value based on that. But then you also have to look at what sold in the last three to six months,” according to Mr Glossop.
“When a market starts to recover, you need to consider the last three to six months as well as the values in its peak.”
According to him, it’s important to always scrutinise the levels of supply and demand when making decisions at this time.
“Attached markets, we’re just not touching that — anything in the apartments, townhouses area — because there is more supply coming to that market unnecessarily. Perth is the only major city market in the country right now, which still has actual positive signs as far as building approval is concerned,” he said.
In some areas across Australia, investors are actually better off holding onto their properties rather than rushing to sell, ultimately emerging as long-term winners in the Australian real estate market, according to Property Club’s president Kevin Young.
Houses that sold for a profit are typically held for 10.0 years and units 8.8 years. In contrast, homes that sold at a loss were typically held their property for 5.8 years while units that sold at a loss were generally held for a similar period of 5.7 years.
Mr Young said: “Investors had a greater likelihood of reselling their properties at a loss compared to owner-occupiers, with 11.3 per cent of owner-occupied properties resold at a loss compared to 17.4 per cent of investment properties.”
“It is therefore critical that property owners who are considering exiting the property market and selling their properties do not do so in markets that are at the bottom of their property cycle or in recovery mode.”
The top 10 markets where investors are advised to avoid selling are Brisbane, Gold Coast, Townsville, Ipswich, Newcastle, Melbourne, Sydney, Adelaide, Perth and Darwin.
As the Australian property market is generally in a state of flux, CoreLogic advised investors to be smart about the decisions that they will make beginning this new year.
Over the quarter to July 2018, there have been dwelling value declines in Melbourne, Sydney, Perth and Darwin, while Hobart, Adelaide and Brisbane had increases. Yet regional areas — excluding Western Australia — have either had small declines or reasonable increases over the same period.
Nationally, the number of sales has declined 9.8 per cent year-on-year to July 2018.
At the same time, the annual change in rent values has slowed, sitting at only 1.6 per cent nationally in July 2018. Some areas are stronger than others: Sydney and Darwin rents have declined over the period, while Melbourne and particularly Hobart have maintained momentum to the end of July.
Additionally, demand for investment finance is dropping.
“If you’re an existing property investor or just looking to start your portfolio, it’s important to be realistic about the changing market to determine the best strategy for you,” CoreLogic noted.
CoreLogic’s top 10 tips to help one invest well are:
1. “Do your homework”
2. Consider the location
3. Determine whether you’re going to build
4. Understand future ROI opportunities
5. Weigh up the type of investment
6. Determine possible renovation work
7. Consider DIY work
8. Walk away if you have to
9. “Sweat the details”
10. Protect your investment
CoreLogic also strongly advised investors to make sure that they never underinsured.
“You undoubtedly know that insurance is essential, but double-check to determine you are not underinsured,” CoreLogic said.
“Whether you own or are considering buying an apartment, be aware that improvements made to your lot by you or previous owners may not be completely covered in the strata insurance taken out by the owners corporation.”
Bianca Dabu, Real Estate Business, 22 January 2020