Perth is risky business until correction completes
The highest vacancy rate in Australia and falling home values should give investors pause
Perth has not enjoyed a prosperous reputation these past several years. It’s no secret that the market has suffered since the crash of the mining industry, and investors are still feeling the brunt of the aftermath.
Capital growth has been negative for several consecutive months due to an unforeseen decline in the value of resources since June 2014, which shocked households and private and public sectors, says Eliza Owen, market analyst at OneTheHouse.com.au.
“In early February 2016, ratings agency Moody’s downgraded the WA State Government credit rating from Aa1 to Aa2,” says Owen. “The decision was made following a mid-year economic outlook showing net debt in the state was estimated to be $29.6bn for the current financial year.
“The ratings agency believes WA shows heightened risk due to high levels of debt and a high dependency on resource exports.”
Owen states that the government’s budget deficit is a roadblock to its ability to address WA’s economic pitfalls. She says until then “owners in the state will have to wait for commodity prices to increase before further prosperity can be enjoyed”.
In the property sector, oversupply and slowing population growth continue to be problematic issues. Damien Collins, managing director at Momentum Wealth, says the good news is that stock on the market has reduced, from 16,969 properties in November 2015 to around 15,000 properties in February, according to REIWA. The long-term average is between 12,000 and 13,000.
In a March report, REIWA president Hayden Groves said “it’s significant to note that listings are now 8% lower than they were in November which suggests this could be the early stages of a correction in a market of prolonged higher-than-average stock levels”.
Correction is a key word in Perth market circles, where some experts – Collins included – believe the market is nearing the bottom of its current cycle. The February edition of Herron Todd White’s Month in Review
states that they “expect the residential real estate market in Perth to maintain a correctional trend through the first half of 2016, particularly at the lower end of the market (sub $500,000)”.
The report goes on to say that the lower end of the market is the most likely sector to experience continued correction in rental values and the potential oversupply of apartments.
Investors are warned to tread cautiously in the unit market of inner-city Perth suburbs, where apartments have experienced significant dips in value.
is a good example, recording an 11.6% slump in the median unit value,” says Collins. “It’s likely that [the unit] market will experience minimal capital growth until demand rises and stock is absorbed.”
Out-of-kilter supply and demand has pushed down rental yields, evidenced by SQM Research data which shows Perth’s asking rental prices for houses dropped 10.8% in the 12 months to February, while unit rents fell 8.7%.
In an effort to limit WA’s trend of low housing density, the state government released the Perth and Peel@3.5 million
proposal in 2015, which aims to accommodate the WA’s anticipated 2050 population by limiting urban sprawl and focusing on city infill and higher-density accommodation.
What does all this mean for investors? In terms of securing strong rental properties, WA’s real estate market must be approached with caution.
The state’s vacancy rate is the highest in Australia at 4%, according to CoreLogic February data, meaning would-be investors must choose their products carefully to avoid demand pitfalls and manufacture reliable long-term rental returns.
Collins warns against investing in regional areas, where properties carry higher risk due to their reliance on a sole industry.
“While rental yields can be higher in regional areas, it’s important to understand this is due to the risk of the investment,” he adds.
“Established suburbs within 10–20km of the CBD around the median price generally have lower supply and are more in balance, but no area of Perth would be considered ‘tight’.”
Top performers in outer suburbs include Marangaroo, 18km north of Perth, which has held a steady vacancy rate well under 1% for 12 months and sees rental returns of 5.21%, equating to $450 per week. Located 25km east of the city, Swan View’s asking rents have increased almost 10% in the year to January, with a median return of $395 (5.07%).
SUBURB TO WATCH
Scarborough undergoing a $57m facelift
A beachside suburb 14km northwest of Perth, Scarborough is set to be transformed through a $57.4m injection into the redevelopment of its foreshore and surrounds.
In an area that’s already a popular tourist attraction, and the state and local governments’ Scarborough Master Plan will focus on creating a beachside hub featuring boardwalks, piazzas, play areas and green spaces.
Damien Collins, managing director at Momentum Wealth, says Scarborough currently offers good value for houses when compared with other Perth beach suburbs. For example, Trigg to the north has a house median of over $1m, and City Beach to the south has crept up to $1.7m.
Scarborough’s new look and attractive amenities could provide a future boost to its growing property values.
According to ABS figures, 43% of Scarborough’s residents are renters, and the rental yield is 3.6% for houses and 4.3% for units. Although units have dipped in value over the past 12 months, Scarborough has the potential to navigate new supply and come out on top.
“The lower price point and revitalisation of the area will likely see Scarborough outperform the overall market with good capital growth,” adds Collins.
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