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Rising confidence in Perth hinges on the containment of COVID-19
Doron Peleg
21 Aug 2020

Weak confidence persists

Western Australia came into 2020 with consumer confidence tracking at a low level. 

RiskWise CEO Doron Peleg said that with low economic activity, relatively high unemployment, and soft annual population growth of 1% - the third lowest in the country – had all contributed to a weak housing market in recent years.  

"As a result, the housing market, particularly units, has experienced continued weakness in recent years," Mr Peleg said.

"According to CoreLogic, house and unit prices in Perth declined by 2.6% and 2.0% over the year to July 2020, respectively. 

Perth prices continued their multi-year decline over the most recent quarter.

Mortgage arrears in Perth also began the year at elevated levels, with the delinquency rate having risen above 3% in 2019 following years of weak property prices. 

"The relatively high unemployment rate has also increased the risk of credit defaults" said Mr. Peleg. 

Limited number of suburbs delivering growth 

Mr Peleg said while Perth was "very affordable", there were a small number of suburbs where houses delivered reasonable capital growth in recent years, but these were exceptions rather than the rule.  

Mr Peleg said units have been considered less desirable than houses, due to the persisting oversupply, low demand, and state government taxes. 

"Also, units in some suburbs have been subject to voluntary lending restrictions by the major lenders, such as lower loan-to-value ratio (i.e. a higher deposit).

"In addition, the state government tax on overseas investors further decreases the demand for new units as investment properties."

Mr Peleg said despite there being no media coverage of incidents such as Sydney's Opal Tower have caused consumer confidence in units to take a hit, even though the high-profile instances were not located in Western Australia.

"The issues with construction defects in New South Wales and Victoria and the negative publicity they have received in the media mean this situation is unlikely to materially improve in the short term."

"While there have been no major construction defects reported in relation to high-rise buildings in Perth, the events in Sydney and Melbourne increased the risk of reputational damage and, consequently, lower demand for both existing and off-the-plan high-rise units."

With economic activity in Western Australia below its 10-year average and effective unemployment significantly above the 10-year benchmark, the property market, particularly units, has continued to experience weakness.

Perth confidence may rise from low base

Despite the poor performance of property over the years since the peak of the resources construction boom, several leading indicators suggest that property market confidence may now rise if the spread of COVID-19 remains contained in the state. 

The huge overhang of rental supply of recent years is now being absorbed, with SQM Research reporting a Perth vacancy rate of just 1.3 per cent in July 2020 (now well down from a peak of 5.5 per cent four years earlier in July 2016). 

Secondly, the export prices of gold and iron ore respectively have risen strongly as Chinese demand has ramped up again, with the iron ore spot price climbing to the highest level since January 2014.

Western Australia also has a potential advantage over the eastern capitals of Sydney and Melbourne if the state can maintain its excellent record on containing the spread of COVID-19.

With very few active cases reported across the state, the combination of housing affordability and a resurgent mining sector could encourage material interstate migration to Western Australia for the first time in years, thereby increasing the demand for housing.