Slow and steady Perth may win the race

As Sydney and Melbourne grab the business headlines with their soaring property prices, investors seeking value are increasingly identifying Perth as the capital city with the greatest potential for medium-term upside.

It was only a decade ago that Perth challenged Sydney as the most expensive real estate in Australia, but prices are today around 20 per cent off their peaks. According to recently released CoreLogic figures, Perth’s median house price sits at $458,582 – less than half that of Sydney.

The extremely low cost of debt and improved borrowing capacity has contributed to Perth recording its fourth successive month of median house price increases, albeit at a modest 0.3 percent last month.

Perth’s rental vacancy rate also dropped to just 2.2 per cent, the lowest it has been since March 2013 and another important indicator that the worst was over for the declining property market.

James Nihill, Managing Director of Patrick Leo, said the signs were positive for continued steady growth.

“Perth continues to be a slow mover compared to other capital markets but it is steadily moving in the right direction,” he said.

“Now that we are seeing signs of the start of its recovery, it is a great time for keen investors seeking medium to long-term growth to seriously consider Perth.

“It really is a buyer’s market right now, with auction clearance rates at only around 40 per cent.”

Leading property market researcher and Chief Property Consultant at Property Power Partners, John Lindeman, said Perth’s dilemma revolved around a lack of population growth.

“The city’s overseas migration intake has virtually come to a standstill, with a net annual increase of only 10,000 new residents from overseas, but this is balanced by a similar number of people who leave each year for the eastern states.

“Nearly all of its population growth now comes from natural increase, that is to say, babies, which results in more demand for bedrooms, but not for more dwellings.”

Supply excess

The rampant housing overdevelopment that took place after the end of the mining boom resulted in huge stock overhangs both of inner urban high-density units and first home buyer homes in outer suburbs.

There are now many well-located suburbs in Perth where first home buyers can purchase a house for under $350,000 or a unit for less than $300,000.

“Many areas still have oversupplies that need to work their way through the market, but as this process continues, prices can be expected to rise and the slump of past years appears to be over,” said Mr. Lindeman.

Real Estate Institute of Western Australia Council Member Hayden Groves said it was time for investors to carefully consider what they buy in Perth without rushing it.

“Perth is the only capital where mortgage activity is positive, according to Core Logic’s month-on-month trend scale showing a 0.5 per cent movement compared to Victoria’s and New South Wales’ trend of minus 4.5 percent,” he said.

“Gross yields are strong at 5.2 per cent comparative to other capital city markets.”

As well as attractive rent returns and high demand from tenants, sales activity also increased in February across all sectors from a normally sluggish January.

Mr. Groves said buyers were most active in the mid to upper price brackets, leading to higher median price outcomes. Core Logic reported Perth’s dwelling price increased for the fourth consecutive month, breaking 62 months of moderate falls.

“Perth remains around 21 per cent below its peak value but is now clawing that back with expectations of between two and six per cent growth this year,” Mr. Groves said.

“With shortening of supply due to prolonged low commencement activity, investors, lured by record low interest rates and promise returning to the market, may over-shoot in a search for value and buy investor grade stock without thorough consideration, so there’s opportunity there but it needs to be done thoughtfully.”

Evidence for this sense of caution was spelled out clearly in the December mortgage performance index from ratings agency Standard & Poor’s. It found seven of Australia's worst postcodes for mortgage arrears were in WA, and six of those in Perth's metropolitan area.

Byford topped the charts with 5.86 per cent of loans in arrears. The south-eastern suburb of Maddington came in fourth with 4.96 per cent of loans, and Cloverdale and Clarkson sat at fifth and sixth respectively.

Despite recent monthly gains, Perth house prices had still dropped four per cent in the past year, driven largely by the outer metropolitan areas.