The end of the mining boom has hit Western Australia hard – and the worst could well be yet to come
Well, that went south quickly.
Despite bullish predictions that WA property markets, particularly Perth
, would remain solid even with the mining slowdown, the outlook just seems to be getting worse. Falling commodity prices is one thing – although the latest indications are that there is likely to be something of a recovery in commodities moving into 2016. However, it’s the combination of the resources slowdown with the end of the construction phase for major projects, such as the Gorgon and Wheatstone LNG projects, that has delivered a double whammy to western property markets.
Indeed, Deloitte Access Economics highlights that “a staggering $112bn worth of projects will be completed by 2017. That’s equivalent to more than double the total value of engineering work underway in each of NSW, Victoria, South Australia, Tasmania and the ACT combined”.
“Freefall can’t be avoided or even mitigated to any meaningful degree by public spending,” adds the think tank. “The roughly $400m worth of new utilities and transport infrastructure projects recently announced by the State Government will barely touch the sides of the gaping hole that the fall from the ‘construction cliff’ will leave.”
It makes for depressing reading. WA’s interstate migration rate – the highest in the country in 2012/13 – has now turned into an outflow. The unemployment rate has increased from 5.1% to 6.1% in a year. Are there any bright spots for WA?
Things look bleak where the capital city is concerned. While its long-term capital growth has been solid – driven by the mining boom, of course – the market turned a sharp corner in 2015, with values falling. CoreLogic RP Data suggests that average values have dropped by 3.6% between October 2014 and September 2015.
“Perth was ground zero for the mining bust,” says BIS Shrapnel’s Angie Zigomanis. “Everything was great during the boom, but it totally overshot the mark, peaked in 2013–14, and is now coming off pretty quickly.”
The disappearance of fly-in fly-out (FIFO) workers from the Perth landscape is a major factor in the city’s changing fortunes, says Domain senior economist Andrew Wilson.
“The end of FIFO has had a massive impact on the market,” says Wilson. “It has contributed to the previously strong interstate migration turning into an outflow.”
Fewer people in Perth means less demand for properties. Both Wilson and CoreLogic RP Data research director Tim Lawless agree that Perth values are likely to fall by another 5% during 2016, with potentially further falls in 2017.
“This is clearly more than an adjustment, especially given the low interest rates at present,” says Wilson. “Perth didn’t experience any kind of boost as a result of lower interest rates, so there’s clearly a major correction taking place in the market.”
The rental market looks equally dire following the exodus of FIFO workers – who occupied many rental properties. Vacancy rates have climbed rapidly over 2015 to reach 3.7% in September; meanwhile, rents have fallen by as much as 15%, according to Zigomanis.
To make things even worse, Zigomanis points out that there’s still a sizeable pipeline of new properties being constructed, especially CBD and riverside apartments. There is a significant risk of oversupply in that part of the market, as well as a high risk that there will be no one in Perth to rent them.
That’s not to say there aren’t bright spots in the Perth market – they’re just few and far between. Wilson comments that Perth has the most active first home buyer community in Australia – a metric that could bode well for the long-term performance of the housing market.
In addition, he suggests that premium detached houses in and around the inner suburbs, as well as in locations like Fremantle
, are likely to hold their value best in a falling market.
“Those higher-priced inner-city houses and inner-suburban homes tend to be somewhat insulated from economic issues,” says Wilson. “However, even with those properties it’s more about ‘holding the line’ than pursuing value growth.”
Eventually the Perth market will also provide excellent opportunities for buyers when it reaches the bottom of the market. However, the question is when that will be.
None of our experts believe there is much chance of a recovery in the short to medium term.
“The worst is over in terms of commodity prices, but we’re still only halfway through the unwinding of mining investment,” says AMP’s Shane Oliver. “We’re in for another couple of years of price declines.”
“There’s more downside to come,” agrees Zigomanis. “The Perth market is unlikely to bottom out until at least 2018. There will be fantastic buying opportunities when it hits rock bottom, but until then it’s a watching brief.”
“Prices haven’t fallen off a cliff, but the declines are accelerating,” adds Wilson. “The biggest issue is that it’s turning into a crisis of confidence. Buyers and sellers are staying on the sidelines, waiting for the market to turn – but there’s no real sign that confidence will be re-established any time soon.”
For the time being, then, investors would be well advised to exercise extreme caution in Perth as there is clearly still some way to go before that market begins to recover.
If the outlook for Perth is gloomy, then it’s even worse for areas like the Pilbara. Values are plummeting in former superstar performers like Port Hedland.
Rents have also fallen significantly from their mining boom heyday – albeit still providing a substantial yield – while SQM Research reports that vacancy rates in Port Hedland climbed to a staggering 6.9% in September 2015.
Our panel of experts are united in saying that the Pilbara pain is nowhere near over, with further price falls to come. AMP’s Oliver suggests that Port and South Hedland could see falls of up to 30% over the coming year, while Tim Lawless suggests prices will fall 20%.
“That’s the risk of being dependent on a single economic pillar,” says Lawless.
The only part of regional WA that our experts suggested could see some upside over the coming months are the tourism-based areas in the southwest, such as the Margaret River region, thanks to the lower dollar.
“The Margaret River, Busselton and Albany may benefit from sea changers and tourism,” suggests Lawless.
Even so, these areas are less likely to see a boost than equivalent parts of the eastern seaboard, as much of the tourism industry in this region has been sustained by the salaries of Perth’s FIFO workers. Fewer FIFO means less money flowing into the coffers, potentially putting the brakes on growth.
Do you have more than $120k in your super fund? You could use your super to buy property - Find out how