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Earlier this week I was in Perth speaking with a variety of industry participants about housing market conditions. Through late 2017 and early 2018 there was firm evidence that housing market conditions were improving. The rate of decline has been easing over the second half of 2017 and values even edged higher over the first quarter of 2018. But since that time the Perth market has lost momentum and the downwards trend in values has gathered some pace. For Perth property owners, as well as industry professionals in the finance and real estate sectors, the ongoing weakness in the Perth housing market is troubling.
To put the housing market’s weakness into perspective, over the ten years to October 2018, dwelling values in Perth have fallen by -1.1%. By comparison, other capital city housing markets have recorded a 10 year change in dwelling values of: 81.4% in Sydney, 74.7% in Sydney, 16.1% in Brisbane, 23.7% in Adelaide, 42.9% in Hobart, -3.1% in Darwin and 35.4% in Canberra. Of course the ongoing declines in the Perth housing market have occurred since the middle of 2014 and after a substantial rise in values throughout the early 2000’s due to the mining boom. While values have continued to decline recently, between September 2017 and April 2018 values were either unchanged or higher on a monthly basis for six of the eight months. Since April 2018, values have declined each month with falls of at least 0.5% over each of the past four months. Over the past year values have fallen by -3.3% and they are now -14.2% lower than their June 2014 peak.
At the same time as we were seeing some positive movement in dwelling values, transaction volumes had also begun to stabilise. While transaction volumes are still relatively steady compared to last year, the combination of increasing values and steady sales volumes a year ago suggested that the weakness may have been behind the Perth market.
12 months ago when things were starting to look a little more positive, the volume of housing stock advertised for sale had started to fall relative to the previous year. As the above chart shows, the volume of stock for sale is currently 3.1% higher than it was a year ago. 12 months ago the volume of stock was still high but was moderating substantially, especially compared to 2016 stock levels, and was getting close to levels in 2015. Throughout early 2018 stock levels remained below 2017 levels however, since July the volume of stock for sale has either been similar to or above levels from a year ago reflective of both more stock for sale and properties taking longer to sell.
While the housing market has weakened over the past year, there are signs that housing demand is increasing and this is becoming evident across the rental market. While dwelling values in Perth have fallen by -3.3% over the past year, rental rates in Perth are 1.5% higher over the past year. While that may not sound that much, it is the fastest annual rate of rental growth for the city since August 2013. After rental rates peaked in May 2013 they fell by -21.6% to their low point in November 2017 and have since increased by 1.6%. Although rents remain well below their peak there is now some evidence of a sustained but moderate increase in rental demand.
While things were looking more positive for the housing market a year ago it now looks as if the recovery remains at least 12 months off. From discussions I had with many in the industry the feeling was that things were improving as migration rates started to recover and commodity prices were rising and then availability of credit was tightened once more and it quickly choked off any potential recovery. Credit conditions remain tight and we’ve seen nationally that these conditions are leading to less activity in the market place and subsequently values have declined in many regions and growth rates have slowed almost everywhere throughout the country. This view is reflected in housing finance data for WA. In September 2018, the value of WA housing finance commitments was recorded at $1.9 billion which was -18.1% lower than the previous year and the lowest value of commitments since January 2011.
The other main challenge for Perth and WA as a whole is attracting new residents to the state and keeping those residents they have. While the outflow of residents has slowed a little, WA still recorded a net loss of 12,040 residents to net interstate migration over the year to March 2018. Furthermore, net overseas migration of 13,381 persons over the year is higher than recent lows but well below the long-term average of 18,452 persons.
Perth clearly now has a significant affordability advantage compared to other capital cities across Australia however, that alone is not enough to result in increasing housing demand which in-turn would likely lead to an increase in dwelling values. If the housing market is to recover demand will need to be created through sustainable employment opportunities in industries which are more stable than the somewhat volatile mining and resources sector which the state economy has been so reliant on. Furthermore, while credit conditions remain as tight as they are currently a recovery in the Perth market is likely to remain fragile.