The most affordable capital city houses in the country are enjoying ultra-low interest rates, improved economic conditions, and strong government incentives, paving the way for the long-awaited recovery of the property market
The Western Australian housing market experienced, prior to COVID-19, some improvement in buyer confidence along with signs of improvement in housing finance commitments.
The Perth housing market is now enjoying strong government support as a key driver of improved economic conditions and renewed demand for housing.
Since the peak of the mining boom, the WA economy has experienced low economic growth, higher unemployment that was well-above the 10-year benchmark, and consequently, very low population growth and negative interstate migration that resulted in low demand for residential properties.
This led to continued price reductions, making Perth the most affordable housing market in Australia with a median house price of $456,000.
The WA state government has provided a $444 million housing stimulus package to support the local economy. This package includes $319 million for social housing, which will refurbish 1,500 homes, build and purchase approximately 250 new dwellings, and deliver a regional maintenance program to 3,800 homes. Other parts of the housing stimulus package include a $20,000 (additional) grant for first home buyers for new residential homes as well as a 75 per cent rebate for stamp duty that could take the available Federal and State grants for first home buyers close to $70,000.
The combination of the improved economy, government incentives, the recent reductions in interest rates, (with some lenders offer home loans with an interest rate below the 1.90 per cent mark), make WA substantially more attractive market, particularly for owner-occupiers.
For owner-occupiers with interest-only loans, ultra-low interest rates make it typically cheaper to buy than to rent a house from a cashflow perspective in all areas of Perth.
Units, however, particularly rental apartments in high supply areas, carry a higher level of risk.
The improved economic conditions, the generous government support and the fact that it is simply cheaper to buy than rent houses in WA, materially reduce the risk for houses.
It is highly likely that the much-anticipated price increases of this very affordable market, will be eventually delivered in 2021, in the range of 4 to 8 per cent, particularly for the mid and high end of the market.
Popular areas that have shown resilience in the past 12 months, such as Perth-Inner and Perth-North East, are highly likely to enjoy stronger demand in 2021.
However, at the affordable end of the market, price increases might be contained to 3-6 per cent due to the additional first home buyer grant and stamp duty rebate outlined above. Those generous government grants are likely to increase the supply of new affordable houses, applying some downward pressure on house prices.
In addition, the demand for housing in most regional areas in WA is relatively low. In the absence of strong growth driver and with sufficient supply of housing, the capital growth in those areas is likely to be modest.
Rental apartments often continue to carry a higher level of risk of delivering poor or negative capital growth, due to the combination of localised oversupply, lending restrictions and low demand as they are generally not attractive to families or owner-occupiers. The Perth – North East area has the highest rate of unit oversupply in WA with 753 units in the pipeline (a 6.9 per cent uplift to the established stock).
The COVID-19 outbreak has further increased the risk associated with rental apartments, with investor demand likely to shift towards detached houses.
For the foreseeable future units in WA, particularly new apartments in ‘danger zone’ areas (such as Perth 6000), carry a higher level of risk.