Thursday, August 2, 2012

Perth Property on Cusp of Price Growth?

You could be excused for writing me off as a perma-bear on Australian property given the numerous blogs I've written in the past with a negative outlook on the national market.

Those above being two of the most recent posts I've made on property. 

However, I would consider myself more so a realist than a bear.

My recent post on the Melbourne property market outlined the statistics and data behind my particularly bearish outlook on this particular city where I suspect a 30% fall from peak by the end of 2014 is likely.

Overall I have a negative price outlook on Australian property in general with national stock on market near record highs (and around 9-12 months worth at current sale volumes), lending growth running at some 35 year lows and prices still high relative to incomes (despite the claims that affordability relative to incomes is back to 2003 levels, it is still historically at a very high multiple) and rent.

There is one market though which I believe could see real growth (a rate above inflation) over the next few years.

The Perth median house price is currently $466,861 according to Residex, which is around $5000 less than the June 2006 level of $471,441. Prices rose into early 2008 where they reached a peak of $520,928, before falling and trending sideways to where we are presently. So from June 2006 we've seen no nominal growth in Perth house prices and real prices (inflation adjusted) have taken a hammering (and they are also down over 10% nominally from the March 2008 peak).

Here is a chart showing the boom in Perth prices followed by the 6 year lull:


The price action in Perth is very similar to the boom and price stagnation that we saw in Sydney earlier last decade (first peak in January 2004 then stagnation through to early 2009):


Following over 5 years stagnation, Sydney prices rose 20% from January 2009 ($556,381) to the most recent print at $666,342. While it's far from "baked into the cake" we could see a similarly strong rise in Perth prices assuming we see conditions continue as they are...

The REIWA has been publishing a set of Perth stats recently which are worth a look over, here are the snapshots from November 23rd (2011), January 11th this year and August 1st (click any to enlarge):

So over this period (7 months) we've seen:

Stock on market has fallen from 15,641 to 10,948 (30% decrease in stock)
Available rentals have fallen from 2754 to 2417 (12% decrease in stock)

3 Months to October 2011 vs 3 months to May 2012:

Median rent has increased from $395 to $430 (9% increase in median rent)
Vacancy rate has dropped from 2.4% to 1.9% (tighter rental market)

Furthermore the number of sales for the week ending August 1st was 905, which is almost a 70% increase on the same week last year which saw only 537 sold. Clearly housing stock is being purchased at a much faster rate than last year and a faster rate than we are seeing new listings hit the market.

On top of the above stats we already know that Perth has seen some strong rental growth over the last couple of years. Residex statistics put Perth house rents at +5.26% over 2011 and +15.38% over the 12 months to June 2012.

Over the census period (2006-2011) rent prices in Western Australia saw the strongest price growth amongst all the states, rising over 76% in the 5 year period:

Along with rising rents, the census also pointed to strong growth of the population in Perth (and WA), in fact it was the strongest growing state in the 5 year period:
WA’s population also outpaced the rest of the country with 2.24 million people - a jump of 14.3 per cent, recorded in the 2011 Census data released by the Australian Bureau of Statistics today.

ABS regional director Jacky Hodges said it was the first time the state hit the 2 million mark in a Census.

The biggest boom was in the East Pilbara, which grew by 82.6 per cent to 11,950 people in 2011.

More than 152,000 people now live in Perth’s northern suburb of Wanneroo, which took out the title of the local government area with the biggest growth. Perth Now
And further info (Source: ABS):
Overall though, population growth in Australian capital cities slowed. Growth in all capital cities was down from last year, apart from Perth which increased slightly from 2.3% to 2.5%, and Canberra which remained stable at 1.9%. Darwin slowed the most, down from 2.0% growth in 2009-10 to just 0.5% in 2010-11.
And while WA has seen strong growth in population, dwelling completions (chart from MacroBusiness) to cope with the new demand for housing has remained relatively subdued (not booming like bubblicious Victoria):


Leith van Onselen tied together much of the above more succinctly than I in his forecasts for the Macro Investor Newsletter:
Perth's housing market is likely to be a star performer over the coming year. Although values have declined by 9.5 per cent (houses) and 4.7 per cent (units) since peak, which are above the average decline nationally, fundamentals have improved significantly, which should support price growth of between 2 per cent and 5 per cent over the next 12 months.

Affordability in Perth has improved considerably, with home prices relative to incomes the lowest in the nation, and prices compared with rents below the national average.

Rents are also rising sharply - up by around 16 per cent over the past year according to RP Data - caused by a rental vacancy rate that is the second lowest in the nation and has tightened considerably compared with the same period last year.

The tightening of Perth's rental market has been driven by the highest population growth in the nation combined with a low rate of dwelling construction. The number of homes for sale is also relatively low, and has fallen by 14 per cent since the same period last year.  Macro Investor
Some other data that may be worth taking into consideration:

Employment is much stronger in WA than other states


They have the lowest unemployment rate in the country (chart from Mark the Graph):

Recent retail statistics (chart from Mark the Graph) show that the Western Australian economy is in a league of it's own (there appears to be plenty of money to go around):


Commodity prices (driver of WA's good fortunes) have fallen a little from the peak, but are still at very elevated levels (although as pointed out by Houses and Holes at Macro Business this index will fall later in the year with the drop in coal and iron ore prices):

All in all things are looking pretty solid for Perth at the moment and we could see housing perma-bears surprised by the growth over the next couple of years.

That said there definitely remains some headwinds for the Perth property market, especially in the event of commodities falling further and reversing the effects of the boom.

My base case scenario is that central banks continue their policies to prop up a failing system with further debt shuffling and money printing (which should result in commodity prices remaining propped up and perhaps even booming even higher), but this is not a long term solution and Perth/WA is at high risk should the commodities boom ever bust (as presumably it will at some point like all other times in history).

Even if we see price growth over the next couple of years in Perth there is no guarantee that the bottom is in (in real or nominal terms) for property as realistically prices could still fall a lot further if this slow down in global growth decimates commodity prices and throws us into recession (at some point in the next few years).

So there you have it. I'm not about to go house hunting and fork over a deposit for a property in Perth next week, but I can definitely see the potential for short term growth versus the dismal return I fear that Melbourne property investors will see over the same period.

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  1. BB, while I agree with you that there is a chance in price increases in Perth (rentals and property value) I would think that this is a short term gamble. It may eventuate to this result but will be pulled back in line with the rest of the Australia over the mid/long therm.
    So while probability is there, it's only a spark under the water that will not last long.
    Your thoughts on this?

    Simple at

    1. I agree Val. I might follow up soon with another post clarifying some points and with some extra information I sourced when I get time.

      I think there is good potential for prices short term, but with the eventual commodity bust I think we will see prices in Perth reverse again, perhaps even to lower levels than today (e.g. could grow by 15% over 2 years and then fall by 20% following).

      Although I see short term potential I am not a buyer as the purchase costs are too prohibitive (LMI, Stamp Duty + other holding costs) for a short term hold. Shame there is not yet a trade-able index established!

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