WA Excerpt from the 2010 November Market Report

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The laws of supply and demand are at play in WA’s main market – and it’s the former which is winning out for now.

Perth has certainly been doing it hard over the last few months.

After house price volatility saw average values yo-yo earlier in the first third of the year, the market appears to be stabilising – and at least in the short term, it’s not the rosiest of pictures. Residex figures suggest that growth in Perth over the three months to July sat at around 1.4%. RP Data’s Dwelling Value Index for June, meanwhile, saw values fall by 2.5% in a month – the biggest slide in the country.

The problem, says Real Estate Institute of Western Australia president Alan Bourke, is the exact opposite of what most of the country is facing – it’s that WA’s capital has too many properties and not enough buyers.

“The macro view of Perth is that it’s oversupplied by about 2,500 properties, with a particular oversupply problem in the south-west,” he explains.

“The oversupply issue has been exacerbated by a slowdown in population growth – partly down to tougher controls on students coming into WA – the interest rate hikes that have slowed Australia’s property market, and greater restrictions on overseas investors.”

That’s also contributing to a high vacancy rate, which isn’t helping rental levels: indeed, yields aren’t really robust enough to attract the cash flow investor, adds Bourke.

“The investors who are coming into the market are doing so because values for some properties have come off 10% or even 20% compared to the market peak in October 2007,” he continues. “They’re generally buying for the prospect of long-term capital gain, as the underlying economic foundations are sound.”

Indeed, the long-term prognosis for WA is extremely positive. The state government’s recent budget predicts economic growth will expand from 3.75% in 2009/10 to 4.5% in 2010/11, and again to 4.75% in 2011/12 (underpinned by the commencement of construction on major projects such as the $43bn Gorgon LNG project). Employment, meanwhile, is predicted to grow by 1.75% this financial year.

Even so, Bourke believes the Perth oversupply situation could take between six and 12 months to work through, so the prospects for growth are somewhat limited during that time.

Michael Veletti, director of CB Richard Ellis’ (CBRE) Perth office, is a little less downbeat about the medium-term outlook.

“The market has certainly softened, but we suspect a lot of that is related to buyers staying out of the market due to uncertainty about a number of issues: a ‘double dip’ global recession, interest rates, the election and the ructions over the mining tax,” he comments. “That means there’s pent-up demand, which we think will come through in the final quarter of 2010 and throughout 2011. That’s when we think buyers will start coming out of the woodwork.”

There are a number of areas in which Veletti suggests investors could well see good returns in the medium term.

“New developments up the northern corridor and towards Yanchep are continuing, thanks to a new freeway, and new access routes opening up due to infrastructure spending are trickling through. That’s always been a popular area for Perth, though, and is typically driven by an influx of skilled labour. Therefore, that area is likely to grow on the back of greater employment, and I would expect medium-term growth of between 9% and 10%.”

The area to the south-west of Perth could also present opportunities, too. While Veletti agrees that there have been severe oversupply issues, the area is ripe for growth.

“The southern corridor to Mandurah is well positioned to take advantage of the growing employment opportunities just a couple of hours out of Perth in the south-west, such as desalination plants, coal and bauxite mines and the reopened Boddington gold mine,” he comments. “The recently-opened Forrest Highway has also vastly improved transport routes in the area, too.”

Veletti feels that this improvement in infrastructure will see the oversupply issues resolve themselves in the near future as more people move to the area, and suggests that savvy investors could drive a hard bargain at the moment in order to pick up a good deal. There are risks in making such a move, though – not least the question of whether the market has completely bottomed out.

Another area Veletti highlights is a band of suburbs between 10-15km south of the Perth CBD, near the proposed site of the Fiona Stanley Hospital in Murdoch. As well as the likely demand for homes from hospital employees when it opens in 2014, Veletti notes that there are also opportunities for renovation. Most of the properties in the area were built in the 1970s and 1980s, and the value of subsequent improvements may be starting to decrease.

Bourke agrees that renovating could well be the way to go in Perth.

“In terms of value, the top quality properties are holding up best: it’s the marginals that are suffering most in the current climate, whether they’re on a busy road, or a bit run down,” he comments. “That’s where there’s real opportunities for investors to come in and renovate for profit. Those that have been waiting for this point in the cycle – where you’re already cashed-up and waiting to deal with someone motivated to sell – can really benefit.

Even so, Bourke has a word of warning for investors looking to swoop in and make a quick buck.

“If you’re buying property for high yield, you’ll be disappointed in this market – it really isn’t one that will give short-term gains. However, if you’re willing to wait for long-term capital growth, you’ll be able to pick up some good buys.”

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