Mercia | Taxation, Business & Finance Advisers

There is a lot happening in the Perth property market that all investors should be aware of so I thought it would be an opportune time to let you know exactly what is happening and how you may be affected.

Prices – rising, falling or some of both?

It’s very easy to get caught up in a “one size fits all” approach to property investing. A lot of the headlines you see in newspapers and on television reflect what is happening nationally. The Australian property market is really a collection of thousands of sub markets across the country. While some of the major cities are suffering an inevitable slowdown after periods of solid growth (e.g. Melbourne), other cities, such as Perth are moving into an upturn as the mining boom Mark 2 takes off.

Even within a city there are varying submarkets. In Perth for example, you may hear that the market is oversupplied. That is generally true in some areas. We see that the outer fringes are still significantly oversupplied with excess stock built in the last boom, meaning prices have dropped or have stagnated for a long period of time. At the same time, in the areas we have identified for strong growth over the next few years, we have seen more competition for properties, meaning prices are still holding, and we expect them to rise first as we enter the next market upturn.

Where is the market heading in the next 12 months?

The Perth property market has historically lagged behind the major cities on the east coast by a few years. In 2001 – 2003 Sydney and Melbourne boomed while Perth grew at much lower rates. Once the boom in those cities ended, investors turned their attention to the Perth property market and Perth had a property boom from 2004 – 2007. Since 2007, the Perth market has been generally flat on average, whereas Sydney has performed well and Melbourne has had substantial growth. Both of those markets are now cooling.

We expect the trend to continue and see Perth as the outperformer while other cities have their slowdown. While we won’t see any significant headline capital growth in the market as a whole due to the oversupply in some areas, we will see good quality properties in great locations return some reasonable capital growth over the next 12 months.

Where is the market heading in the next 3 to 10 years?

The outlook for Perth is very strong over the next 3 to 10 years. With the strong growth in the resources market, meaning more jobs and more income, it is inevitable that Perth property prices will be strong. Recently, other respected economic forecasters have predicted the Perth property market will generate the highest capital growth over the next 3 years and 10 years also.

Is obtaining finance becoming easier?

There is no doubt that finance is harder to obtain than it was in the periods before the GFC. Many lenders tightened their lending criteria once the GFC hit and the introduction of responsible lending and National Consumer Credit laws has seen further changes. However in recent months, lenders have begun to loosen up and credit is definitely easier to obtain than it was two years ago, albeit not anywhere near as easy as it was before the GFC.

The tightening of credit may have impacted some borrowers, however for the vast majority, finance is still readily available.  The restriction on credit in a counter-intuitive way has actually been a benefit to property investors. While it has restricted some investors purchasing property, by far the greater impact has been on property developers. Significant levels of presales are now required and this has meant that new stock is harder to bring to market. This has restricted the supply of properties, meaning that any excess supply will be soaked up more quickly. It also means that when the excess supply is taken up, that new supply will not be readily available, causing a rise in prices.

Rents are on the way up!

The last boom in Perth from 2004 – 2007 was not only a boom in property prices, but also a boom in rental prices. Rental prices have not moved significantly over the last few years. The vacancy rate was approximately 1% in 2007 before increasing to as high as 4.7% in 2010. Over the last 12 months the rental vacancy rate has declined significantly to be just over 3%. A balanced market is considered to be around a 3% vacancy rate, so we are seeing a return to a normal market. Just as the supply of properties for sale varies significantly by suburb, so does the vacancy rates per suburb. Our analysis indicates that some suburbs in Perth have vacancy rates of around 1% whereas others have vacancy rates as high as 9%.

Consequently we are seeing rental growth in a number of the suburbs where we manage property. The ability to increase rents is still selective and tenants are price sensitive, but we do expect the next few years to see rental returns increasing, which is great news for property investors.

Market Summary

After a period of underperformance, it certainly looks like a very promising period ahead for the Perth property market. With over $200 billion dollars of resource investment in Western Australia either in construction or planned, there will be significant flow on effects to the rest of the economy and hence property prices. We expect Perth to be the outperforming market over the next 1, 3 and 10 years in Australia, as the mining boom Mark 2 gets into full swing.

If you are seriously looking to build wealth through property then I suggest you contact me as soon as possible. By the time you read in the paper or hear on the news that the Perth market has returned to strong growth, you will have missed a reasonable amount of the market upturn and subsequent capital growth. We are already seeing savvy investors adding to their portfolios as they see the upturn coming, and some smart first time investors also taking advantage of the opportunities in the market.

This Newsletter has been kindly provided by www.MomentumWealth.com.au, if you would like to discuss any  matters arising from this newsletter or are interested in property investment or development, then call Mark Casey, a client of Mercia, on markc@momentumwealth.com.au or call  Momentum Wealth  on 9221 6399.