On tour with Dr Matt: Perth, part two

On tour with Dr Matt: Perth, part two

After looking at the pros, cons and opportunities currently available in the Sydney market in part one of this three part series, let's now turn our attention to Perth:

OK I must admit Perth is one of my favourite places in Australia right now, both to visit, and for property investing.

Perth - The Pros 

Like Sydney, Perth has the advantage of being a city with great natural beauty, being nestled on the Swan River and the bulk of Perth’s population wanting to live along, or nearby, their extensive Indian ocean coastline. And with the City of Rockingham having amongst the highest number of days of sunshine every year (https://www.currentresults.com/Weather/Australia/Cities/sunshine-annual-average.php) the outdoor lifestyle enjoyed by Perth’s residents are the envy of many.

W.A is a state rich in natural resources, and in fact when it comes to iron ore for example, in 2014, W.A accounted for 95% of Australia’s supply and 37% of the worlds supply. Additionally, W.A accounted for 100% of Australia’s nickel, 91% of our diamond, 85% of the Liquid Natural Gas (LNG), and 70% of our gold supplies.

W.A also has a very strong agricultural base, is popular with tourists, and a relatively broad based economy including a robust housing market.

W.A also operates on the same time zone as much of Asia, making trade and commerce that much easier than for those states on the eastern seaboard for example.

Perth’s population is predicted to reach 3-million by the end of the 2020’s, according to data analysed by McRindle sourced from the ABS. The city will grow to 4-million people by 2042 and by 2055, 5-million people will call Perth home.

Whilst Perth may have a way to go to become a truly international city they have made some very big steps forwards over the last few years, despite a few hiccups.

The billion-dollar transformation to turn Perth Airport into a world-class gateway has been marred by problems, including an 18-month delay and significant cost blowouts.

And taking a leaf out of the Victorian Governments playbook for Melbourne, the W.A State Government, via their planning document Perth & Peel @ 3.5Million, have highlighted the need to centralise,  and increase housing density & diversity, rather than to allow for continued urban sprawl. 

According to the most recent ABS data, the trend estimate for total number of dwelling units approved in Western Australia rose 1.1% in March and has risen for two months. The trend estimate for the number of private sector houses fell 0.7% in March and has fallen for 13 months. 

Domain senior economist Dr Andrew Wilson said the ABS figures reflect what looks to be the bottoming out of the Perth housing market following two years of steady decline. “Confidence is gradually returning to the market,” Dr Wilson said. “I think that is because affordability is activating buyers."

The recent drop in official cash rate, quickly passed on to my surprise in full by most of the banks, should help to hasten the recovery of the Perth property market.

Figures from CoreLogic RP Data released this week show Perth recorded a minor lift in prices in the March quarter, with the median house price rising 0.8 per cent to $523,500. Prices were down 2.1 per cent on the same time last year, but CoreLogic RP Data research analyst Cameron Kusher has been recorded as saying sales volumes were now steadying. The numbers suggest we may be at the bottom of this cyclical correction in prices. “Our forecast shows that we still expect values to be slightly lower by the end of this year and then pick up a little bit into next year.”  he said.

Perth - The Cons

The biggest challenge facing the W.A housing market has undoubtedly been the slow down in mining, and the lowered terms of trade Australia has endured over recent years. With the loss of jobs from the mining sector after a significant slowdown in capital expenditures, the Perth property market has undergone several years of decline, as rents fall back into line after years of what I would argue was a period of above average wages spawned from the mining boom.

Perth, perhaps as a result of its relative isolation historically from its eastern cousins, and the flow on effect from the bloated wages mentioned above, also suffers from a relatively high cost of living, relative to other cities in Australia.

For example the website http://www.numbeo.com says that other than rents people in Perth pay more for pretty much everything relative to say Melbourne.

  • Consumer Prices in Perth are 13.26% higher than in Melbourne
  • Consumer Prices Including Rent in Perth are 8.52% higher than in Melbourne
  • Rent Prices in Perth are 0.91% lower than in Melbourne
  • Restaurant Prices in Perth are 31.70% higher than in Melbourne
  • Groceries Prices in Perth are 13.75% higher than in Melbourne
  • Local Purchasing Power in Perth is 10.13% lower than in Melbourne

At a macroeconomic level the commodity prices seem to have stabilised over recent months, and the W.A state government has worked hard to bring its budget in line via containing costs and finding efficiencies. However, no matter which way you slice it, the health of the W.A economy will fall heavily on what happens in the coming years in China, and other emerging Asian economies. My personal view is that yes, China has some significant headwinds in managing the transition of its economy from largely export based to a burgeoning middle class consumptive economy, but to date the Chinese government has shown every indication that it is up for the challenge of doing everything in its power to become the worlds largest economy in the years ahead. Furthermore, China, whilst certainly the most important, is not the only game in town. The establishment of the ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) represents Australia’s most ambitious trade deal to date and came into effect in October 2015. The countries of ASEAN - Brunei, Myanmar, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand and Vietnam - constitute one of the most dynamic economic regions in the world and offers significant trade opportunities over the next few decades as these emerging markets mature.

Perth - The Opportunities

As founder of hotspotting.com Terry Ryder has previously written successful investors buy when markets are down.  The others (the majority who struggle) buy when markets are booming.

What he is highlighting is that perhaps the biggest opportunities lie in that part of the cycle where others are not aware of, or not willing to take advantage of, the investment opportunities that abound. I must admit it takes a certain degree of education, and confidence, to invest before the herd jumps back in.

Right now, I personally see that the Perth market represents some terrific opportunities for the astute investor and we are actively developing in this area, and also positioning our members for retail investment opportunities that will come on line over the next 6-12 months.

An example of the types of property we are targeting is our www.cottesloecove.com.au project with 2 bedroom units starting at just $299,000.

Recent infrastructure, such as the $5M surf club renovations, and a $53M shopping centre upgrade in this suburb that will see both Coles & Aldi join Woolworths in this maturing suburb underly the investment fundamentals. Following on from the Perth & Peel @ 3.5M planning document, the City of Rockingham council, has been incredibly supportive by the introduction of this affordable, medium density,  8 star energy rated quality development. 

We are actively looking for other similar development sites now in this market and have a strong focus through those areas south of Perth and down into the Peel region.

Perth - The Strategy 

Potential for off-the-plan buying opportunities now with settlements due in say, 6, 12 or 24 months time, given that the consumer sentiment is currently sitting below the medium-long term market conditions throughout most of Perth. As a result, developers may be willing to discount stock to assist with sales targets, which are subdued especially in those ares of over-supply such as in and around the Perth CBD. However, we would be recommending that you look outside the CBD for affordable, unique properties. Similarly, we are targeting a range of small-medium subdivisions/development sites ($3M-$30M) that will be ready to hit the ground within the next 12-24 months. If the numbers work in today’s market, chances are there will be an uplift in values (and development profits) by the time construction is completed.

My Final Verdict: Perth is at or near the bottom of its cycle and selective buying opportunities abound.

 Be sure to look out for part three of this series, where Dr Matt will be discussing the pros, cons and opportunities surrounding the Townsville property market.

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