The Perth market has been going through a substantial correction, dropping in price since it’s peak. Investors have been sitting the sidelines waiting for a good time to jump back in. There have been some positive signs, but how do we know if the market has finished it’s down turn?
The early 2000’s up to the end of 2008 showed everybody what the Perth property market could produce. Property prices soared on the back of a boom in the mining sector, as resource investment brought in additional demand, producing thousands of jobs in engineering, construction, labor and countless supporting industries.
Fast forward to the end of the March quarter of 2018, Perth prices experienced a cumulative decline of 9-10% since 2008. First the market began a natural correction phase and then when the market should have begun its growth phase, engineering and construction jobs declined as mining projects came to an end and people moved interstate to seek employment prospects.
This market trend also illustrates the importance of job diversity. A city’s economy being upheld predominantly by one sector can cause a market to either boom (if the conditions are right), or crash once jobs taper off in that one industry when underlying demand is lost.
Perth Vacancy rates peaked at 6.5% in March 2017 and today sit at 4.1%. There has been a slight improvement in the rental market however a strong oversupply is still in place as tenants are spoilt for choice. This is reflected in the poor rental yields currently being offered in Perth to investors. The gross rental yield for houses is currently sitting at 3.4%, and units at 4.4%. One sign that the property market is close to the bottom of the cycle is a yield for units of 5.2% so there may still be some improvements in the rental space.
Although Perth has been in recovery mode and vacancies rates and yields have been improving since their peak in 2017, the Western Australian market still has an excess of property and completions continue to flow into the city. Economist group BIS Oxford Economics estimates a dwelling stock excess (oversupply) of 18,600 dwellings existed in Perth at June 2017.
Looking at RP data monthly indices, Perth house prices have continued to drop -2.31 in the 12 months to April 2018, showing us the correction phase may not be over yet.
One positive for the Perth market is affordability. According to BOE an estimated 20% - 24% of disposable income is being spent on the average mortgage repayment in Perth. This represents the 'sweet spot' for affordability within a market and shows that the local demographic can afford to push property prices up. Now we need to deal with the other key underlying fundamentals.
SGS also reports Perth is the most affordable city in Australia to rent.
But, has Perth hit rock bottom?
With poor rental yields currently in place, high vacancy rates (excess supply still present), accompanied by a peaking unemployment rate in Western Australia (peaking March 2018 quarter) reaching a whopping 6.9%. Population growth rates have slowed to as little as 1% in the last financial year. Perth clearly is yet to exit the recovery phase and into its next growth cycle but we will keep you informed when the time is right!
In our latest episode of Coffee & Property HERE we talk about this topic in more detail.