Real estate investments in the Perth metropolitan area seem to have stagnant but will this continue? A population surge a couple of years ago caused a building boom that continues to supply the area with new dwellings. Population growth was not as strong as it had been last year, however, causing some experts to project declining property values due to a glut in the marketplace. The market does still offer solid yields, however, especially when compared to the low rates found in Sydney and Melbourne. Property Investment Perth may be a better idea to the astute property investors. There are still pockets of gem to be found in Perth.
Many of those construction projects will come online from 2017, providing housing for a market that may not exist. According to REIWA (Real Estate Institute of Western Australia), only 35,348 people migrated to the area in 2016, down 40 percent from the 10-year average. Meanwhile, the indicated is that the 16,000 properties currently available for sale are 38 percent higher than last year (when the market lacked adequate housing options) and 25 percent higher than a typical year. More dwellings for fewer people would be expected to deflate the value, and this is exactly what will happen.
The oversupply can also be felt in Perth’s rental market. There are currently 8,500 properties available to rent in Perth, far higher than the normal supply of around 5,000. While the fact that the number fell as low as 1,500 in 2011 and 2012 explains the building boom, it was never a sustainable number for the area. Andrew Wilson, Domain’s senior economist, argues that a huge number of “fly-in, fly-out workers” who have since left the area were responsible for the demand back then. There is no reason to think they are coming back in the same numbers anytime soon.
The result is a renter’s market in the Perth metropolitan area. According to REIWA figures, overall median rents fell $20 a week in the fourth quarter of 2016 relative to the third ($420 to $400), while the vacancy rate increased to 5.6 percent. This gives prospective renters plenty of affordable options. Real estate investors, on the other hand, are discouraged by the lower yields on Perth properties. Again according to REIWA figures, the yield for houses declined from 4.1 percent in 2015 to 3.9 percent last year, while apartment units went from 4.6 percent in 2015 to 4.4 percent last year. They are hesitant to enter the market as a result, further depressing property values in the area.
Overall, Perth property values slumped six percent in 2016, creating a buyer’s market to accompany the renter’s. Groves notes that while owner-occupiers have availed themselves of lower pricing, investors continue to avoid WA properties due to a lack of confidence caused by the region’s uncertain future. The loss of the area’s resource-workers, who were very well compensated, to job prospects elsewhere has also caused a decrease in the number of Perth residents looking to upgrade their home. While 2016 set a REIWA record for the largest Perth median house value drop as measured quarter to quarter (4.2 percent), Groves does not believe the current $522,133 figure will ever dip below $500,000. This should be pretty close to the region’s property value floor.
Further compounding the problem is the glut of new dwellings soon to be available. The founding director at LMW Hegney, Gavin Hegney, forecasts 32,000 new dwellings to enter the Perth market in 2017. The market is not crying out for increased supply, however, and Hegney sees a maximum of 20,000 of these becoming occupied. The resulting surplus will act as a ceiling on price growth, causing Hegney to project an overall softening of the market by 1-2 percent over the next 12 months.
Other experts are more optimistic in their forecasts. Peter Wilson, the chief economist at Master Builders Australia, expects the decline in demand to decrease the construction of supply. Residential construction work was valued at a collective $8.39 billion in 2014/2015, a number Wilson expects to decline by around 33 percent moving forward. This projects to around 20,000 new dwellings within two years. Wilson also notes that Perth property values have held up pretty well considering the near total collapse of its mining industry.
Wilson advises caution, however, concerning the return of investors to the Perth real estate market. He argues that WA depends more on the global economy than other Australian cities, making consumer confidence levels in the area more unpredictable. In his view, investors will wait for signs of growth before re-entering the market. They will also keep an eye on vacancy rates, as the current trend of rents being lower than house prices reduces yields to an unacceptable level for an investor. The reward is simply not enough to justify the risk.
Investors looking to make an impact in the area right now should look to areas currently engaging in rezoning programs. Example pockets in Perth to look into include Willagee, Kardinya, Spearwood, Hamilton Hill, East Victoria Park, Kensington, St. James, and Coolbellup. Suburbs of the area may also fit the bill. Karrinyup and Innaloo should benefit from the construction of a massive shopping complex, for example, while Scarborough has a plan for a variety of public and private developments. Joondalup is planning new apartment complexes around its shopping and transport hub, and areas such as Warwick and Bassendean are clearly on the upswing.
Beyond these areas, Collins advises prospective investors to look for the universal indicators of property growth. These include good infrastructure, unis and TAFEs, proximity to public transportation, quality amenities, a strong school system, career opportunities, and urban development. Desirable areas with limited dwelling supplies are especially attractive investment options. Inner city apartments with high vacancy rates and fringe areas are best avoided. Excellent buying opportunities will present themselves over the next year, and those who invest at the tail end of the downturn will reap the most rewards.
David Lenzo, Urbis’s Director of Economics and Research, states that another sign of growth would be a return to the area’s historical annual migration of 40,000 to 50,000. Any demand from foreign buyers or east coast investors looking to leave Sydney and Melbourne would also be an excellent sign. Investment is also made more likely by the fact that property in the area is no longer overpriced. Lenzo also reminds investors that while an economic recovery is on the horizon, short term oversupply may drive prices down. Investors should look at their investment as a medium or long term play, not an immediate pay day.
While many firms are suggesting that Perth’s property values will be hurt by oversupply in 2017, many experts feel that their warnings are too dire. The Government is expected to pass new regulations and financing requirements that will prevent builders from exceeding public demand by any significant amount. Moreover, the void caused by the decline in the area’s mining industry will be filled by new opportunities in oil and gas. Perth remains a desirable place to live and work, and property values are bound to reflect this sooner or later.
In conclusion, Perth’s real estate market had a down 2016, but there is still some optimism for the area’s future. Over-construction may fuel short-term losses, as a whole should show the area on the rebound. Property Investment Perth should be done sooner rather than later, as those who invest sooner will enjoy the most profit from the endeavour.