31st Aug 2017

Perth's two speed residential market

If Perth hasn’t already hit the bottom of the market cycle, we are very close. It’s always interesting as a valuer watching markets go up, down and sideways and analysing the reasons why. Perth’s current residential property market has a bit of everything – good, bad and ugly with plenty of good buying to be had and some excellent opportunities in the marketplace.

There are some seriously impressive green shoots in the market. For the first time in years we are seeing interstate buyer demand as international and interstate investors look away from overcooked markets like Sydney and Melbourne. They see opportunity in Perth being a more affordable market in contrast and approaching the bottom of the market cycle. We’ve also got a seriously hot upgrader market where, in certain suburbs, stock is incredibly tight and buyers are stumbling over each other to get an offer in.

Yet two suburbs away, you may find a severe oversupply of stock, limited buyer demand and vendors having to aggressively discount asking prices to enact a sale. To anyone outside of the property profession, it could appear almost mind boggling. Despite the good signs, we still have a few hurdles we need to cross before we start to see a full recovery and our median house price head north.

Fear

There’s no hiding it, most businesses, individuals and families across Perth are doing it tougher and having to work harder for their money today than they did 3 years ago. Concerns around job security and negative wage growth is still having a massive impact on buyer demand.

An outrageously affordable rental market

Renting has never been cheaper. Tenants are lapping it up, either making the decision to rent a better property than they would be able to afford to purchase and/or staying put in cheaper accommodation while they save for a larger deposit. Either way this is locking up potential new demand which would normally flow through to the owner occupier market. It’s also having a detrimental impact on the residential investment market with yields declining and holding costs increasing for investors – both of which reduce the appetite to hold or acquire an investment property.

A flatlined cash rate

This will probably come as a surprise to some, but we need a rate rise to stimulate market activity. As soon as we saw lenders and brokers start to tip a rise in rates 6 months ago, following APRA changes to investment lending, we saw a sharp lift in buyer demand immediately following. The high end, prestige residential market, traditionally reacts negatively to rate drops suggesting a weaker economic climate.

While the current low interest rate environment presents a great opportunity to be paying down an existing mortgage, it also offers many buyers with an opportunity to purchase a better property they were unable to afford in previous years when rates were higher.

Since there is up until recently no urgency to enter the market to lock in a rock bottom interest rate, many buyers are sitting on the sidelines waiting for the market to ‘hit the bottom’ before they jump in. These low rates however are currently fuelling a seriously hot upgrader market.

Lending policy

It’s interesting watching how lenders and APRA (the regulatory authority who keeps the banks in check) change lending policy in an effort to control markets and mitigate loan default risk. With APRA taking more steps to introduce changes to investment lending, in order to control booming markets in Sydney and Melbourne, while arguably more effective than cash rate changes, unfortunately have a national blanket approach. Such recent changes introduced by APRA, which restricted investment lending and interest only borrowing, have had an impact in slowing east coast markets, however unfortunately also did an excellent job at putting the Perth residential market into a state of decline.

So what’s going up and what’s going down?

The upgrader market is looking to acquire good quality residential family homes, whether it be a large modern dwelling on a small block or an old dwelling on a large landholding which can be improved over time, situated in well regarded established suburbs within the price range of $750,000 – $1,500,000 is fiercely competitive. In some suburbs such as Floreat, Trigg and Mt Claremont we have seen values increase above 10% in many cases for particular property types.

Outer developing suburbs such as Alkimos, Baldivis, Ellenbrook etc are still feeling the worst of the contracting market as vendors trying to sell existing stock compete aggressively with developers offering vacant land and house and land packages loaded with tons of incentives. Values in general are still on the decline with these suburbs generally heavily oversupplied.

The CBD apartment market has felt the worst of changes to investment lending and the decline in rental values and has shown significant correction. There is still a significant oversupply of stock and plenty of new stock being offered for sale by developers. We note that more affordable 1x1 apartments have generally weathered the market better than larger, more expensive luxury apartments over $700,000. Developers are definitely getting more innovative with the quality and type of stock they offer which is attracting buyer demand, however at the expense of existing stock which depreciating at a much faster rate. Buyers are leaning towards ‘shiny new’ and the term ‘used apartment’ seems to be common place in the market.

For more information please contact:

Blake Lieschke

State Director Residential - WA