Property market update: Perth, July 2020

Some areas are expected to rebound faster than others when it comes to prices since they have not been hit as hard by the negative impacts of COVID-19 as other capital city markets. These areas include Perth, Adelaide and Canberra.

From June to July, the rate of decline eased across Perth, from -1.1 per cent to -0.6 per cent, but deepened across Melbourne and Sydney, CoreLogic data showed.

According to Smart Property Investment’s Phil Tarrant: “So, this cliff may see impact in some markets but not all markets. It comes down to how good you know your markets to know where and where not you should be doing anything.”

Moving forward, the banking sector has committed its support to consumers in order to avoid the September cliff, including a new extension to loan deferrals for another four months for customers who have been impacted by the COVID-19 pandemic.

“This next phase of bank support will avoid a ‘cliff’ for customers in September and give them the breathing space they need to work with their bank and get back on their feet financially,” he said.

Property values

Over the quarter, house prices across Australia have fallen by 2 per cent, while unit prices are down even further at 2.2 per cent, according to the latest edition of the Domain House Price Report.

All major capital cities have seen unit prices fall, while house prices fell across most cities except Adelaide, Canberra and Hobart markets.

In Perth, house prices fell by 1.5 per cent, bringing the median house price point to $522,414 – a reversal of the growth trend observed during the March 2020 and December 2019 quarters.

Unit prices are down significantly more, by 4.9 per cent, bringing the median price to $334,284.

Despite the pause in the recovery of the Perth housing market, Domain’s senior research analyst Dr Nicola Powell said that prices remain relatively stable considering the economic impact of the current health crisis.

“Improving commodity prices, particularly the state’s two biggest exports, gold and iron ore, will be a pillar of support for the economy. A rapidly shrinking supply of advertised listings will also [help rebalance] the market,” she said.

Ultimately, despite the losses, the impacts “have been minimal” across capital city markets as the more drastic potential price falls have been buffered by significant government stimulus, mortgage holidays and the continued low-interest rates supporting home values, which have also kept distressed and urgent sales low.

Rental market

Perth’s overall median rent price was stable in the three months to July, holding at $350 per week, according to the Real Estate Institute of Western Australia.

In terms of houses and units, this broke down to $370 per week for houses and $340 per week for units – up $5 per week compared with June.

Looking into suburbs, Applecross saw an 8.2 per cent increase to $595 per week, which was followed by South Perth (up 4.2 per cent), Wellard (2.9 per cent), Cloverdale (up 2.9 per cent) and Belmont (up 2.9 per cent).

“With the WA property markets returning towards normality, now is the time to consider the current emergency period tenancy legislation for residential and commercial properties and allow it to end at the current proposed time of 29 September 2020,” REIWA president Damian Collins said.

In terms of leasing activity, the Perth metropolitan area saw a decline of 9 per cent over the month, and of 13 per cent over the three months to July.

Tenants remain very active, as proven by listings for rent declining by 7 per cent compared with June and by 48 per cent compared with July 2019,

REIWA data found that certain suburbs are set to see an increase in leasing activity growth, including Leeming, Victoria Park, Stirling, St James and Halls Head.

Moving forward, experts are predicting a “major blowout” for rent prices in the capital city once the ban on rental increases lifts in October.

The ban on rental price increases for established tenancies was implemented earlier this year as part of a “nationwide moratorium” in response to the COVID-19 pandemic, leaving the median weekly rent in Perth at around $350 for a long period of time “even though the rental vacancy rate has dropped dramatically over the past two years to below 3 per cent and continues to shrink,” Property Club Western Australia branch manager Troy Gunasekera said.

During June 2020 alone, the number of vacant rental properties in Perth fell by 15 per cent. In the last 12 months, the total number of vacant properties in the city has dropped by nearly half.

Ultimately, rents at this level are likely to be unsustainable moving forward, according to Mr Gunasekera.

In fact, Property Club is already seeing properties that have become vacant over the last month being leased to new tenants with rent increases of at least 10 per cent.

“The ban on rental increases during COVID-19 will result in a pressure cooker environment for a blowout in residential rents later this year,” Mr Gunasekera said.

“Landlords with existing tenants are being forced to suppress rental increases during COVID-19 even though the demand for rental properties is outstripping demand in a growing number of Perth suburbs.” 

He argued that, without substantive policy changes in the near future, “lending to investors in Western Australia will continue to dwindle to a trickle”.

“This will lead to a blowout in Perth rents once the COVID-19 emergency period ends and market forces come into play,” he warned.

Supply and demand

Strong market activity has been reported in Perth, with selling volumes across both dwelling and land sales up 68 per cent in July compared to April 2020, according to REIWA.

While sales activity was quiet during the initial stages of the COVID-19 lockdown restrictions, levels are picking back up to where they were before the pandemic hit, Mr Collins highlighted.

“While there are no surprises with the increase in land sales for the month, which saw a 121 per cent increase compared to April, it was pleasing to see that both houses (up 58 per cent) and unit sales (up 51 per cent) also saw a significant increase,” he said.

“With the increase in sales activity, it is good to see a slight increase in the number of listings for sale, which demonstrate those who were considering selling their property are looking at the favorable market conditions and choosing to now sell.”

There are five areas that saw particularly strong sales activity in the month of July, including Byford, which was up 92 per cent; Port Kennedy, up 88 per cent; Quinns Rocks, up 50 per cent; Heathridge, up 42 per cent; and Banksia Grove, up 38 per cent.

Year-on-year, the number of properties for sale was found to be 25 per cent lower than July 2019.

2020 outlook

According to Domain senior economist Trent Wiltshire, the outlook for Australia’s property market is much stronger now, but conditions are likely to remain subdued in most parts of Australia in the second half of 2020.

Prices and sales volumes appear most likely to rebound in Perth, Adelaide and Canberra, but inner-city Melbourne, inner-city Sydney, Hobart and the Gold Coast are more likely to see prices fall due to a heavy reliance on international tourism and migration.

However, even in areas where price falls are expected, declines “will likely be modest, and much smaller than predicted at the height of the COVID-19-related shutdowns,” according to Mr Wiltshire.

“There are two clear downside risks to the property market: [a] second wave of COVID-19 infections, which could slow the economic recovery and will weigh on the property market, and the possible end of government financial assistance and mortgage deferrals in September, which has already started to weigh on the market,” he said

“But the government would be foolish to withdraw support too rapidly, so will likely continue to provide more targeted support, and banks have indicated they will try to avoid forcing people to sell.”

Mr Wiltshire said that buyers may seek to take advantage of record-low interest rates if confidence improves due to a strong economic recovery.

Further, immigration could rebound in 2021 faster than expected due to Australia being an attractive destination for skilled migrants and international students.

“The property market has stabilised over the past couple of months and the economic outlook has improved,” Mr Wiltshire noted.

“At the peak of COVID-19 fears in early April, predictions of price falls of 10 to 20 per cent were common and seemed reasonable, and property sales had plummeted due to buyer caution and restrictions on selling. But the economic downturn and the impact on the property market due to the pandemic [are] likely to be less severe than forecast in April.

“Business and consumer confidence have rebounded, employment and job advertisements have started to recover and business output is rebounding. The OECD expects Australia’s economy to perform better than most other countries in the year ahead.”

Still, even with the better-than-expected recovery, economic conditions will remain subdued, as unemployment rate and underemployment are expected to remain elevated until at least 2022, according to him.

For investors eager to jump into Perth, Mr Gunasekera encouraged vigilance as the WA state government rolled out a $20,000 grant for property investors who built a new house as part of its $117 million “Building Bonus” scheme.

According to him, while the grant is welcome for property investors, they still need to exercise caution in signing up for a new house before the $20,000 grant expires prior to the end of the year, noting they could be chasing “fool’s gold if they did not undertake careful research before making a decision to buy a property in Western Australia”.

Mr Gunasekera’s top tips for Perth investors right now are:

1. Don’t buy property in mining towns

As the resources sector of Western Australia starts to boom once more due to surging commodity prices, demand for housing in mining towns has also risen over the past year. As a result, house prices have also increased.

In fact, the best-performing area in Western Australia at the moment is the mining town of Newman, with a 25 per cent annual growth in house prices, according to Mr Gunasekera.

However, “[history] shows that these areas are very high risk and unsafe for investors because when the mining sector booms, the value of homes in these mining towns surge, but collapse very quickly when there is a downturn in the mining sector,” he noted.

2. Take a long-term perspective to buying an investment property

While the $20,000 grant for investors is attractive, property investors need to take at least a 10-year perspective to buying an investment property, Mr Gunasekera advised.

“A difference in just 1 per cent performance in your investment property compared to the overall property market can mean thousands of dollars in capital growth or loss over a 10-year period,” he said.

Prior to purchasing a property, he encouraged investors to search the overall capital growth rates for that area over the past 10 years.”

“For example, while the median price of home in Newman jumped by 25 per cent over the past year, during the past 10 years the annual median price in the town has declined on average by 9.3 per cent per annum,” he explained.

3. Consider the infrastructure

New infrastructure can play an important role in driving future capital growth of an area, which is why investors are advised to look at new capital expenditure planned by the state government before purchasing a property.

In Western Australia, the state government plans include significant transport infrastructure, such as new train links and road to outer suburbs, which will make commuting time faster to employment hubs. As a result, homes in suburbs near the infrastructure will be more desirable.

“A major trap for investors is to buy new homes in outer suburbs which have poor transport infrastructure. Then, they are often forced to sell later at a loss because of a lack of demand for these homes,” Mr Gunasekera said.

“So, property investors should only focus on areas where there are good levels of transport infrastructure or newer areas where major transport links are planned in the next few years in Perth under the ambitious state government METRONET transport program.

“The rental market in Perth is now running hot with very low vacancy rates. However, like capital growth rates, well-informed investors will achieve above-average rental returns if they choose the location of their investment property carefully.” 

4. Look into proper property management

Most first-time investors purchase a property they would like to live in, but Mr Gunasekera strongly advised them to avoid making emotional decisions and remember that the investment property must appeal to a tenant who will be paying the rent.

Further, avoid trying to manage the property personally, especially for first-time investors.

“This is the number one reason why many first-time investors never go onto buying a second investment property because they select a poor-quality tenant without undertaking the necessary background checks. Selecting a poor-quality tenant can result in thousands of dollars of lost income and damage to the property. This is a big financial setback that many first-time investors cannot recover from,” he said.