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WA Property and Economic Report 2012

WA Property and Economic Report 2012

The Current Shape of Things - Nationally

You would not have to be Einstein to understand ‘things still have room to improve’ across many sectors of Australia, including the property market.

We continue to see consumer and business confidence bumping along at the lower levels of relevant scales. This lack of confidence is also reflected in a limited desire by households and businesses alike to seek additional credit which, when combined with increased levels of household savings, means the limited flow of money in many areas continues to hinder any significant upward momentum in property markets. This is one reason why investors currently pursuing a capital growth strategy should be looking towards value adding strategies over a simple buy and hold ‘cookie cutter’ property at the present moment.

On a national level we continue to see very weak levels of housing construction. Current construction activity is comparable to levels experienced during the early 1990’s recession. This reduced housing construction is more than offsetting a slowing population growth rate, to such an extent the shortage of properties across Australia continues to increase.  This scenario is most prevalent in Sydney, Perth and Brisbane. This is all happening at the same time as we are seeing wages increasing and affordability rates improving. An improved affordability rate could lead to an increased number of property transactions in the short to medium term.  With economic experts predicting further reductions in interest rates over the next 6 months (or so) affordability conditions should improve in the foreseeable future.

The Western Australian economy has been the stand out performer in Australia for many years.

The key driver of the WA economy has been the high level of mining investment over an extended period of time. It is expected that the continuing strong demand from Asian countries seeking reliable, cost effective natural resources such as Iron Ore and LNG will continue to drive the WA economy above national averages in both the short and medium term.

While much of the focus has been on the Chinese economy, Japan has also increased its level of imports out of WA. A significant part being LNG imports which are increasing on the back of more recent Japanese decisions to reduce their reliance on nuclear power in the wake of the 2011 Tsunami which wreaked havoc on the Fukushima Daiichi reactor.

The strength of the WA economy is, in part, reflected by the extremely low levels of unemployment that have been experienced in WA over an extended period of time. The current low level of unemployment (3.5% in June, 2012) is also a result of by extraordinary increases in job opportunities. In other words the economy is expanding, attracting more people to WA and it continues to fill vacancies.

While there have been some recent downgrades to marginal and start-up iron ore projects the major players, BHP and Rio Tinto, continue to deliver high export levels of iron ore and continue their expansion plans, albeit at a reduced investment level. Those companies in the start up phase, where infrastructure is still being developed, have some exposure to spot price fluctuations and will probably experience some reduced market sentiment while unsteady market conditions prevail in some markets.

Counter to this is the ongoing expansion of LNG projects in the Pilbara part of WA. Gorgon and Wheatstone continue to move ahead on the back of increased world demand for LNG. Underpinning the significant levels of investment in LNG is a large number of 20yr supply contracts to parts of Asia. These contracts are not dependent on the Chinese economy.

Interestingly enough investment in LNG projects is almost 7 times greater than the investment level for Iron Ore. The unhealthy amount of media focus on Iron Ore does distort perception of the current realities of mining investment in WA.

The surging WA economy is particularly attractive to people seeking employment and improved career opportunities. In recent years WA has experienced an almost unprecedented surge in overseas and interstate population growth, maintaining growth rates in excess of 2%/annum. Much of this increase has been from overseas. In 2011 WA was the state with the highest percentage population increase and was the second fastest growing state, marginally behind NSW, in real terms

We note the ABS is reporting 16 of the 20 fastest growing suburbs in Australia are all located in Western Australia. The list of suburbs includes an equal smattering of metropolitan and country locations.

Interestingly enough WA’s rapidly increasing population comes at a time when housing construction in WA continues its steady decline from 2010. WA building approvals now sit around half the level they were in 2010 and 2006. These two reasons are leading to supply constraints in the Western Australian property market. Current stock levels are below long term averages and with relatively small stock levels in the pipeline it is reasonable to expect supply constraints to lead to upward price pressures.

Disposable incomes in Western Australia have shown a significant upturn in the last 3 years with surplus income approximately 12% higher than it was in 2009. The strong growth in WA household incomes and weak house price growth in Perth has seen Perth property become more affordable than at any stage since the GFC.

Vacancy rates in Perth hit an all time high in early 2009 when vacancy rates above 4% were recorded. Since then vacancy rates have continued their steady decline and with rates now below 2%.  Instances of rent bidding and “above asking rent” offers being made by prospective tenants are being more commonly reported in the media.

Looking Forward.

A key long term outlook indicator for the likely direction property prices may take is the long term availability of Englobo Land, larger pieces of land suitable and zoned ready for development. Clearly availability of land in the short, medium and long term will be a key driver of property prices.

In 2011 WA recorded a population increase of 3.03%, with ¾ of all new residents choosing to live in the Perth metropolitan area. Over the next 20 years the ABS has predicted WA will have the second fastest population growth rate of all Australian states. At an estimated 2.6 people/household it is predicted that an additional 280,000 new dwellings will be required to house this population increase.  Should households further reduce to 2.3/household then an additional 316,000 dwellings will be required.

In a market largely driven by supply and demand is only 5 years supply of englobo land in the Perth metropolitan area with most of the land available being located in the outer suburbs. The shortage of long term land supplies is, in part, reflected by a 10% increase in residential land in the period leading up to March 2012.

Summary

It can be seen that a combination of factors are likely to positively impact upon on property prices over the medium term in WA.  Continued population growth demanding accommodation, improving affordability, strong employment prospects and limited supply all tend to drive property prices up. Couple this with an environment of decreasing interest rates and increasing rent returns tends to see some renters becoming buyers and investors being drawn back into the market.

Sources

1. Australian Bureau of Statistics – Series 32360

2. Englobo Land – Residential Market Overview, Knight Frank

3. Australian Housing Chartbook - ANZ Bank

4. Otan Investment Report - Prepared by MacroPlan Dimasi