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K E Y D E M A N D I N D I CATO R S

D W E L L I N G T R A N S AC T I O N S

P O P U L AT I O N G R OW T H

H O U S I N G F I N A N C E C O M M I T M E N T S

F O R E I G N I N V E S T M E N T

AU C T I O N C L E A R A N C E R AT E S A N D L I S

L I S T I N G S S TAT I S T I C S

K E Y S U P P LY I N D I CATO R S

R E S I D E N T IB UAI LLD I N G A P P R OVA L S

P R O P E R T B YU I L D I N G AC T I V I T Y

P R O P E RT Y L I S T I N G S
SPOTLI GH T
VACA N C Y R AT E

Perth
I N F R A S T RU C T U R E

R E S E A R C H O U T LO O K

2017
Contents
OVERVIEW4

K E Y D E M A N D I N D I CATO R S  7

K E Y S U P P LY I N D I CATO R S  12

INFRASTRUCTURE  16

RESEARCH OUTLOOK  19

2| Property Market Spotlight Sydney 2016


A B O U T M O M E N T U M W E A LT H M O M E N T U M W E A LT H S E R V I C E S
Momentum Wealth is a research-driven, full-service property We provide a holistic service offering for our clients to
investment consultancy dedicated to helping clients build accelerate their wealth through residential and commercial
multi-million dollar property portfolios. property investment, including:
We offer a premium, advice-driven service helping clients in
the strategic planning, financing, acquisition, development Property wealth planning
and management of their residential and commercial
Finance broking
investment properties.
Buyers agency
This holistic service offering provides a one-stop shop for
Property development
clients to accelerate their wealth and reach their property
investment goals sooner. Property management
Development syndicates
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M O M E N T U M W E A LT H R E S E A R C H C O N TAC T U S
Our in-house research department monitors and completes For a free consultation to see how we can accelerate your
detailed analysis of Australias property markets to identify personal wealth, please contact us on (08) 9221 6399 or at
future growth areas. info@momentumwealth.com.au

To determine the best investment locations, our analysts


examine a number of macro and micro factors, including, but
not limited to:

Housing supply and demand


Population growth
Rezoning
Gentrification
Economic output
Public and private investment
Local amenities
Transport nodes
Dwelling types
Wage growth

Using this intelligence, were able to identify properties that


outperform the market allowing our clients to reach their
investment and financial goals sooner.

Property Market Spotlight Sydney 2016 |3


Overview
M AC R O E C O N O M I C DATA

OFFICIAL CASH RATE INFLATION (AUS)* INFLATION (WA)* ECONOMIC GROWTH (AUS)*

1.5% 1.5% 2.1% 1.9% 1.0% 0.7% 2.4% 1.7%


Mar 2017 Jun 2017 Mar 2017 Jun 2017 Mar 2017 Jun 2017 Dec 2016 Mar2017

*Annual change

MEDIAN DWELLING PRICE (ANNUAL) GROSS RENTAL YIELD

$510,000 $419,000
3.6% 4.1%
-2.9% pa -2.6% pa

RESEARCHER OUTLOOK KEY POINTS


Recent cyclical downturn driven by record-high residential housing construction and lower
population growth, leading to supply outweighing demand.
Lower population growth a result of the end of the resources construction boom, as projects were
finished being built and moved into their production phase.
After hitting a record high in June 2016, housing completions have been steadily declining, which
will allow excess stock to be absorbed and a return to a more balanced market.
The rental market has suffered significantly after becoming overinflated during the resources
construction boom, when high population growth pushed rents up and vacancies down.
Rental stock remains elevated but has plateaued over the past year, suggesting it has found a floor.
Perth market has likely bottomed, although investors still need to be vigilant with the location and
type of properties acquired.
Local buyers remain cautious as the WA economy continues to adjust post-resources construction
boom and diversifies into other industries including tourism, agriculture, technology and education.
The recently elected state Labor party will begin to implement its flagship Metronet rail project
which, in addition to a strong pipeline of private spending, will help drive the economy and
construction industry.

Residential Property Spotlight Perth 2017 |4


PERTH MEDIAN DWELLING PRICES
Perth property prices recorded an unprecedented rise in the mid-noughties, fuelled by the start of the
resources construction boom, which ran through to 2012/13. Despite a slight dip in prices during the
Global Financial Crisis, population growth rates in Perth of 3-4% per annum followed, which were driven
by the increasing job opportunities in the resources sector. Subsequently, the rental market surged with
rental rates increasing rapidly, forcing yields upwards and investor confidence through the roof. With the
high rental rate, it became cheaper for many to purchase which then forced owner occupiers to enter
the burgeoning market. As commodity prices dropped back to more normal levels, and the last of the
mega resources construction projects were completed, property prices started consolidating in 2014.

Perth residential property prices


$600,000

$550,000

$500,000

$450,000

$400,000

$350,000

$300,000

$250,000

$200,000
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Houses Units

Source: ABS, Momentum Wealth Research

This was not only due to the end of the resources construction boom, which flowed through to the
states broader economy, but a significant ramp up in residential construction, as the number of dwelling
commencements hit a record high (see page 14). Since then, property prices have drifted, due to a
slowing economy, weak consumer and business confidence and an oversupply of stock.

Residential Property Spotlight Perth 2017 |5


P E RT H R E N TA L M A R K E T
Perths rental market has been hit hard in the aftermath of the resources construction boom due to lower
population growth and the weakening labour market. Less people have moved to Perth to absorb the
rental stock, which has resulted in vacancy rates deteriorating since 2012. The vacancy rate has maintained
a level between 6% and 7% since 2015, which is much higher than its 10-year trend rate of 3.9%. This
excess rental supply has impacted rental rates with a consistent drop in the median price, from ~$475
per week in 2013 to ~$360 per week in 2017. This has led to lower yields hitting the cash-flow positions
of many investors. This has been somewhat offset by declining interest rates, though, which have been
trending lower in that time.
At the peak of the resources construction boom in 2012/13, rental applicants were required to provide a
very strong rental history and in many cases required to submit offers above the asking price to secure a
property. In many cases, it wasnt uncommon to have up to 20 groups at an open inspection for a rental

Rental prices and vacancy rates


$500 7.00%

6.00%
$450
Median weekly rent

5.00%
$400

Vacancy rate
4.00%
$350
3.00%

$300
2.00%

$250
1.00%

$200 0.00%

Median weekly rent Vacancy rate

Source: REIWA, Momentum Wealth Research

property. In todays market, home opens are quiet with very few quality applicants. While rental stock
remains elevated, it has plateaued over the past year suggesting that it has found a floor.
Despite the significant decline in median rents, Perth still records yields stronger than the major east-coast
cities of Sydney and Melbourne. This places Perth properties in a strong cash-flow positon in todays low
interest rate environment.

Residential Property Spotlight Perth 2017 |6


Key demand indicators
P O P U L AT I O N G R O W T H
WAs population experienced unprecedented growth between 2010 and 2012 amid the states resources
construction boom. During this period the average growth rate per year was around 3%, latest figures
show year-on-year growth has stalled to just 1%. Since a peak of 88,156 new residents in the year to
September 2012, WAs total population growth has fallen 71% with just over 25,000 residents added in the
year to September 2016. Net interstate migration fell below zero in late 2014 and has been negative since
then, meaning more people moving to the eastern states than there are arriving in WA from the eastern
states. However, population growth has remained positive overall due to natural increases (i.e. births) and
a positive net overseas migration, which has stayed relatively stable at around 14,000 new residents per
year since 2015.

WA population growth
90,000

80,000

70,000

60,000
Annual no. of people

50,000

40,000

30,000

20,000

10,000

-10,000

-20,000

Natural increase Net overseas migration Net interstate migration Total growth

Source: ABS, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |7


LABOUR FORCE
For many years Western Australia enjoyed an unemployment rate lower than the national average as
investment in the resources industry bolstered the local economy. However, in more recent times as the
resource sector moved from a construction phase to a production phase, the ensuing slowdown in the
economy led to the seasonally adjusted unemployment rate to rise to 6.5% in January 2017, the highest
in the country. Since then the state has experienced a change in government prompting a new direction
with confidence rising amongst the general population. The reserve bank has maintained record-low
interest rates at 1.5% encouraging firms to borrow and hire and this has assisted in growing the number of
people in full-time employment to the highest level since November 2015 (934,100). The unemployment
rate has fallen back in line with the national average at 5.5 per cent, the lowest level seen in WA in over 12
months.
The state government has committed $425 million over the next 5 years to tourism in an attempt to
diversify the economy, steering away from such a heavy reliance on the resource sector. This heightened
focus, coupled with an upcoming increase in construction activity thanks to public and private
infrastructure spending, should help WAs labour market continue its steady recovery from the recent
downturn.

WA labour force
8.0 1,200

No. of people employed (,000)


7.0
1,000
Unemployment rate (%)

6.0
800
5.0

4.0 600

3.0
400
2.0
200
1.0

0.0 0

Axis Title

Unemployment rate People employed (full time) People employed (part time)

Source: ABS, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |8


HOUSING FINANCE

Owner Occupier
The value of housing finance commitments in WA has been trending downwards since it peaked at
$28,829,011 in December 2014. Despite historically low interest rates, the current value of commitments at
April 2017 represents an 18% decline since the peak, which is in line with the decline of the Perth property
market as a whole. First home buyers are taking up a relatively large portion of the market at 23% with
upgraders accounting for the remaining 77%.

Investor Activity
Investor lending activity has followed the trend of owner occupier lending, with values peaking in
March 2015 at $15,510,398. The current value at April 2017 represents a decline of 45% since the peak.
The proportion of investors in the market sits remarkably low at 26%, with the long-term average for
Perth considered to be approximately 32%. To put this in perspective, the proportion of investors in the
overheated New South Wales property market peaked in May 2015 when there were more investors in
the market than owner occupiers (52%). As the east coast markets slow in the coming years, its expected
national and international investors will return to the Western Australian property market.

$305,400
First Home Buyer Average Loan Size
$347,600
Non First Home Buyer Average Loan Size

Buyer activity
$35,000,000 45%

40%
$30,000,000
35%
Value of commitments

Proportion of investors

$25,000,000
30%

$20,000,000 25%

$15,000,000 20%

15%
$10,000,000
10%
$5,000,000
5%

$0 0%

Owner Occupier Lending Investor Lending Propotion of Investors in the Market

Source: ABS, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |9


FOREIGN INVESTMENT

Foreign Buying Activity


Foreign buyers have been less active in the Western Australia market in recent times with their total
market share slipping from 9.3% in December quarter 2016 to 5.6% in March quarter 2017. Nationally,
foreigners make up 10.8% of all new properties purchased, on average. This shows that Perth is less
attractive on a global scale than that of the NSW (11.6%) and Victoria (13.8%) markets. In the established
housing market foreign investors accounted for 7% of sales in WA for the first quarter of 2017, up from
5.4% the previous quarter and more in-line with the national average of 7.2%.
Apartments are the most demanded property class from foreign buyers being 45% of all foreign
purchases.
Many governments from the eastern states have hiked foreign investment duties and land taxes in recent
times in response to heightened activity from foreign buyers. These cost increases are prevalent in Victoria,
NSW and most recently Queensland. WAs newly elected Labor party has also promised to introduce a 4%
surcharge on foreign buyers of residential property in Perth. The aim behind these increases is to quell
demand in order to increase affordability in the market for domestic buyers.

Property types purchased by foreign investors in Perth (%)


50

45
45
40

35
36
30

25

20
19
15

10

0
Houses Apartments Dwelling/Land for Re-Development

Source: NAB, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |10


AFFORDABILITY
The Perth market is relatively affordable in comparison to its east-coast counterparts. Sydneys price-to-
earnings ratio (i.e. average dwelling price compared to average income) is 9.55 for houses, which is near
double that of Perth at 5.5. In the past 5 years houses have become more affordable in Perth with the city
having a multiple of 6.0 in 2011. This is in stark contrast to Sydney, which held a price-to-earning ratio of
7.0 in 2011 the increase is recent years can be attributed to its recent upswing in property prices.
As rising prices increasingly lead to affordability constraints in Sydney and Melbourne, Perth and Brisbane,
which have much lower average house prices and a greater affordability ratio, become more attractive
to investors and owner occupiers. Current pricing has meant it is possible to buy two median priced
properties in Perth for the price of one in Sydney, increasing diversity and cash-flow options for buyers.

Median dwelling price to average earnings

8 Capitals 5.8
6.96

Canberra 4.65
6.96

Darwin 4.77
6.75

Hobart 3.67
4.53

Perth 4.29
5.5

Adelaide 4.8
5.92

Brisbane 4.86
6.29

Melbourne 6.03
7.72

Sydney 7.31
9.55

0 2 4 6 8 10 12

Units Houses

Source: ABS, Core Logic, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |11


Key supply indicators
BUILDING APPROVALS
Residential dwelling approvals have been in steady decline since hitting a record annualised high in the
year ending December 2014. Since then, the total number of dwellings approved on an annualised basis
has dropped almost 40% to 20,080 as at the end of April 2017.
The downward trend in building activity is a positive sign for an oversupplied market. With construction
of new dwellings all but grinding to a halt over the next year or two, the excess amount of dwelling stock
that currently exists will slowly be absorbed, bringing demand back in line with supply and creating
conditions for price growth.

Residential building approvals (annualised)


35,000

33,000

31,000

29,000
No. of approvals

27,000

25,000

23,000

21,000

19,000

17,000

15,000

Source: ABS, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |12


BUILDING APPROVALS BY DWELLING TYPE
The downward trend in building approvals can be analysed by each individual segment of the market. For
the year ending April 2017, the number of houses approved was 14,858 and the number of semi-detached
dwellings approved was 2,050, which is down 21% and 14% respectively from the same period a year
earlier. The apartment segment is also significantly down from previous peaks with the number approved
in the year ending April 2017 at 3,026, which is down 40% from the same period a year earlier.

Type of building approval


25,000

20,000
No. of approvals

15,000

10,000

5,000

Houses Villa or Townhouse Apartments

Source: ABS, Momentum Wealth Research

As can be seen in the graph the number of apartments makes up only a small proportion of the total
number of residential dwellings approved, but this segment has gained more market share in recent years.
Apartment approvals currently make up about 15% of total residential dwellings approved. This is well
above WAs long-term average of 11%, however still insignificant when compared to Sydney, where more
than 50% of dwelling approvals are for apartments.

BUILDING ACTIVITY
The notable trend of building activity is the reduction in dwellings commenced since it peaked at
32,593 for the March quarter 2015 (see page 14). In the most recent quarter there were 21,498 dwelling
commencements which is a 34% drop since the recent record high. The start of the downward trend for
commencements 3 years ago is only just being seen in dwelling completions as a typical build is 12-24
months. We can see the peak of completions occurring in June 2016 with a steep fall occurring off the
back of the limited properties under construction. We can expect this downward trend in completions to
continue until after dwelling commencements start rising again.

Residential Property Spotlight Perth 2017 |13


The spike in dwelling construction in 2014 occurred off the back of the peak of the resources construction
boom, as confidence was high and property prices were rising. It was also driven by a change in the state
governments first home owners grant policy, which delivered additional incentives for first home owners
to build, instead of buying established stock. This resulted in many renters deciding to buy and build their
own home, which left a large hole in the rental market. The rental market was further impacted as Perths
population growth dropped from 3-4% to under 2% at the end of the boom. The Perth property market
suffered a double-punch blow as renters built homes adding to supply levels, while demand dropped
significantly as population growth ground to a halt. In todays market, as completions continue to fall, we
can expect supply levels to begin to balance, which in the short to medium term will help buoy house
prices.

WA building activity
35,000

30,000

25,000

20,000

15,000

10,000

Dwellings commenced Dwellings completed Dwellings under construction

Source: ABS, Momentum Wealth Research

H I G H D E N S I T Y S U P P LY LO CAT I O N S
By analysing the number of multiple
dwelling approvals by suburb, investors
Number of unit approvals by suburb
can identify the areas at risk of short-term
4,500
oversupply. Multiple dwellings include
4,000
anything not considered a stand-alone
house. That is villas, townhouses or 3,500

apartments. 3,000

As expected, much of the supply is 2,500

focused on the Perth Central Area, with 2,000

4,216 high-density dwellings given 1,500


approval since 2013. Investors should
1,000
also be wary of Rivervale where there has
500
been more than 2,000 approvals since
2013. Unless purchasing a stand-alone 0

house with a good land component, this


area wont provide the best prospects for
future capital growth.

Source: ABS, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |14


L I S T I N G S S TAT I S T I C S

Days on market
Average time on market for properties in Perth is 75 days. This is a 13% increase on the same time last
year and is significantly higher than when WA was in the height of the resources construction boom,
when selling days were approximately 49 days. Houses are selling quicker than units which is common
nationally.

Discount rates
The average vendor discount for houses and units is 6.6% with approximately 52.7% of all sellers having to
discount. This is a sign of a true buyers market as properties are consistently selling for below asking price.

Sales listings
Sales listings in Perth hit a 2-year low in July 2017 when the total number of properties dropped to
~13,600. This is significantly lower than the most recent cyclical peak when listings reached nearly 17,000
in November 2015. Since then, the number of properties for sale has been on a downward trend, which
indicates that the worst is behind the Perth market a balanced market is considered to be 12,000 to
13,000. We can expect listings to rise again in the 2017 spring selling season when more sellers come
to market, but we dont foresee the number of properties for sale to increase anywhere near the highs
reached in 2015.

Sales listings and days on market


18,000 78

76
17,000
74

Average days on market


16,000 72
Sales listings

70
15,000
68

14,000 66

64
13,000
62

12,000 60

Number of sales listings Average days to sell

Source: REIWA, Momentum Wealth Research

Residential Property Spotlight Perth 2017 |15


Infrastructure
P U B L I C A N D P R I VAT E I N V E S T M E N T TO B O O S T J O B S
AND AMENITY
The newly elected Labor state government, which was swept to power in March, has promised no
drastic cuts to infrastructure spending, aiming to significantly improve the public transport system while
keeping total spending under control. New treasurer Ben Wyatt has outlined about 90 new and existing
infrastructure projects centred on road and rail and worth a combined total of about $5 billion. Given
the states tight financial position, infrastructure spending will be capped over the coming years as the
government attempts to reduce the debt levels created by the previous Liberal government, whose
unprecedented levels of spending delivered projects such as Elizabeth Quay, Perth Arena and the Perth
Stadium (to be completed early 2018). Labors plan for infrastructure will be primarily focused on the
delivery of their signature heavy rail project Metronet, which will connect Perths suburbs and deliver a
world class public transport system to the city.
Along with government spending, Perth will receive a major boost to jobs and amenity through a large
pipeline of private infrastructure spending. The city is set for an increase in construction activity with a
number of large scale hotel and apartment projects in the works, while planned expansions to Perths
major shopping centres are worth more than $4 billion. Its these expansions and upgrades that will have
the more pronounced effect on the property market, transforming local shopping centres into vibrant
hubs accessible by day and night and significantly increasing the amenity levels of certain suburbs making
them more desirable places to live.

Residential Property Spotlight Perth 2017 |16


Metronet
Labors heavy rail project,
Metronet, will account
for more than half the
allocated infrastructure
spend at $2.75 billion and
will provide over 10,400
jobs in the completion of
stage one over the coming
6 years. The entire project
will almost double the
range of Perths current
rail system and, in doing
so, will reduce congestion
on roads, an issue which
is worsening for outer-
suburban Perth drivers. A
recent study by the RAC
predicted that by 2031, if
current road use trends
continue, seven of the 10
most congested roads
in the country will be in
Perth.
The city wont only benefit
from a reduction in road
congestion a focus on
rail transport will also
allow for the creation of
transit oriented hubs at
key suburban centres,
providing diverse work
and lifestyle opportunities
around new train stations.
Property prices in these
areas surrounding future
stations will no doubt The planned transit lines for Metronet.
benefit, as was evident
when the rail lines to
Joondalup and Mandurah
were completed. Below is a breakdown of the cost, planned completion and suburbs set to benefit most
from each project of Metronet stage one.

Project Cost Planned completion Suburbs set to benefit


Forrestfield-Airport Link Fully funded in previous 2020 Redcliffe, Belmont,
state budget Forrestfield
Yanchep extension of $386m 2021 Butler, Alkimos,
the Joondalup Line - Eglington, Yanchep
13.65km
Thornlie to Cockburn $474m 2021 Canning Vale, Southern
Line 17.5km River

Residential Property Spotlight Perth 2017 |17


Project Cost Planned completion Suburbs set to benefit
Morley to Ellenbrook $863m 2022 Embleton, Bayswater,
Line 21km Morley, Noranda,
Beechboro, Bennett
Springs, Whiteman,
Brabham, Ellenbrook
Byford Extension of the $291m 2023 Byford
Armadale Line 7.5km

Source: Momentum Wealth Research

Hotel, apartment and shopping centre development


With the state government tightening its purse strings in a bid to pay down debt, private sector
investment will play a big role in stimulating the Perth economy. A pipeline of projects including 15
major hotels, 40 large-scale apartment projects and nine major shopping centre projects will not only
create tens of thousands of jobs for the wider economy, but will also enhance amenity in specific local
communities driving demand and prices for nearby housing.
Hotel development will typically be limited to the Perth CBD and although it will help to stimulate
the economy, it will not directly impact the residential property market. Apartment projects are more
interesting to investors as they impact both demand and supply in local markets. Large projects will add
a significant amount of supply to the immediate area, placing downward pressure on prices for the same
type of dwelling stock. Houses on large lots of land will not likely be affected, however smaller units and
apartments might see price growth and rental income constrained as they come into direct competition
with the brand new stock. Some of this supply-side concern will be neutralised however by the demand
that is created from the increased amenity these projects provide. Large scale projects of 50 apartments
or more will typically incorporate quality commercial offerings on the ground floor including restaurants,
bars, cafes and retail stores, overall making the suburb a more desirable place to live.
In terms of upcoming private infrastructure spending in Perth, shopping centre redevelopments are
the projects set to have the most significant impact on certain property markets. Below is a breakdown
of the nine centres going through redevelopment, with details of the expansions, costs and estimated
completion for each.

Shopping centre Existing Expansion New total Expected Cost


sqm commencement
Morley Galleria 73,000 50,000 128,000 2031 $800 million
Garden City 72,221 48,000 120,221 2020 $725 million
Karrinyup 59,715 53,825 113,000 2020 $500 million
Westfield Carousel 82,338 27,662 110,000 2018 $350 million
Westfield Whitford City 77,787 27,000 103,985 2019 $450 million
Westfield Innaloo 51,300 62,750 99,000 2019 $600 million
Midland Gate 57,580 11,500 69,000 2019 $100 million
Mandurah Forum 34,859 24,000 58,859 2018 $350 million
Perth Airport DFO 0 24,000 24,000 2018 $145 million

Source: Momentum Wealth Research

A prominent trend among these redevelopments is the incorporation of a public plaza or main street
style precinct that ensures the centres remain active by night. By creating dining precincts and activating
shop fronts on the exterior of malls, spaces become habitable and vibrant after dark when the malls
close, ensuring derelict and dead spaces are avoided. With such an increase in amenity, investors need to
consider where, when and how much is being spent on these upgrades as properties in the immediate
vicinity are poised to benefit from these projects.

Residential Property Spotlight Perth 2017 |18


Research outlook
P E RT H H A S B OT TO M E D, BU T W H E R E TO F R O M H E R E ?
An oversupply of sales listings has proved a major drag on the sales market in Perth in recent years. This
has been driven by the two-fold effect of a steep drop in population growth and a spike in the number
of new residential houses being built both of which started occurring at the end of the resources
construction boom. The large pipeline of new housing supply, which only peaked in June 2016, trailed
the states economic boom due to the 18-24 month lead time of housing construction. Subsequently,
this new supply started to enter the market after the states economic conditions had already began
deteriorating, which compounded the downward pressure on the Perth property market. Encouragingly,
building commencements have been dropping steadily since peaking in late 2014, which has resulted in
a slowdown in the number of building completions since the June 2016 peak, meaning less new supply
is coming to market. As this continues, we can expect existing stock to be absorbed and listing levels
to start falling back to a more balanced market. In July 2017, sales listings in Perth dropped to below
13,600, which is a 2 year low, according to REIWA data. With this in mind, we expect that the Perth market
has likely bottomed, although investors still need to be vigilant with the location where they buy as
well as the type of dwellings theyre adding to their portfolios. For investors with a long-term view, we
see extreme value in properties that have recently been rezoned for higher-density development (or
subject to rezoning) and offer great amenity, such as a mix of public transport links (i.e train stations),
activity centres (caf, retail and local shopping centres), the coast line, the Swan River, among others. For
example, opportunities exist within Perths middle ring to purchase properties on ~750sqm for ~$550,000
that offer a mix of the aforementioned amenities and can be developed into a duplex or triplex. Taking
a view of holding such properties for 7-10 years before developing may be most advantageous. This
allows investors to acquire assets at todays reasonable price points before holding to realise the value
(i.e. develop) when market conditions are stronger. These types of development sites in Perths inner and
middle ring will become particularly attractive as the citys population is forecast to grow by 700,000
residents in the next 2 decades to 2.6 million people.

I S T H E W O R S T B E H I N D T H E R E N TA L M A R K E T ?
The Perth rental market has suffered significantly in the aftermath of the resources construction boom,
with climbing vacancy rates and large rent reductions leading to some of the worst rental market
conditions in Perth in 20 years. The unprecedented population growth in 2010-2013 grossly overinflated
rental rates in the city, meaning investors were receiving yields of 5%-plus. The ensuing correction in the
market, as population growth eased and many renters shifted towards home ownership, meant that rental
prices dropped sharply. In extreme cases where oversupply of rental stock was prevalent, such as inner-
city apartments, weekly rents dropped from $600-plus to circa $400. Investors who have failed to drop
their rental prices have been hit hardest through extended vacancy periods, however those that have
acknowledged the deteriorated conditions and met the market expectations have been best positioned
to find tenants. Interestingly, the lower rental prices have had minimal impact on investors ability to repay
their loans, given the Reserve Bank of Australias rate cutting cycle during this period. At the start of 2012,
the RBAs official cash rate stood at 4.25% but this has since dropped to 1.5% meaning investors loan

Residential Property Spotlight Perth 2017 |19


repayments have also declined in a similar line with their rental returns. Despite the softer rental market,
yields are still relatively high (4.3% for apartments and 3.7% for houses) compared to some other cities
around Australia, particularly Sydney and Melbourne, leaving Perths cash-flow position still relatively
strong. Furthermore, while elevated, the total number of properties for rent has remained stable over the
past year, signalling that the rental market has found a floor. As new housing supply continues to decline
off the back of lower building approvals, we can expect the rental market to reach a more balanced state,
which will help underpin returns for investors going forward. Subsequently, we shouldnt see any more
significant drops in rental prices in this current cycle.

ONCE BITTEN, TWICE SHY


While the recent downturn in the Perth property market was primarily driven by slower population
growth and a spike in residential housing construction, leading to supply outweighing demand, a
lack of confidence can also be to blame. The lower population growth and the comparatively high
unemployment rates have suppressed both investor and owner-occupier activity. Investment activity is
down approximately 5-10% on 10-year averages showing that there is room for activity to increase in this
space. While population growth and employment have slowed they are still in a relatively strong position.
Population growth remains positive (and is expected to return to long-term averages) and employment
rates are still at average national levels. Therefore, the lack of confidence is likely being steered as much
as it is by perceived risks as it is by the actual risks (i.e. economic and job stability). However, as the
local economy continues to adjust post-resources construction boom, we can expect confidence to
begin to turn as locals become accustomed to the new conditions. This confidence will also be further
strengthened as the WA economy continues to diversify. While the resources industry will continue to play
a large role in Perths economic fortunes, the state government has placed an emphasis on supporting
other industries to create a more diversified and sustainable economy, including tourism, agriculture,
technology and education. This will help buyers return to the market with more certainty, particularly as
job stability firms.

Residential Property Spotlight Perth 2017 |20


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