Perth’s housing market is still lagging behind and it will take more than a rate cut to fix things

Posted

October 01, 2019 07:29:01

Even before the board of the Reserve Bank of Australia met today, investors fully expected it to make history by cutting the cash rate to below 1 per cent — the third rate cut this year.

Key points:

  • Perth’s population growth is well below the 25-year trend, sparking housing oversupply
  • Experts say migration and jobs will do more for the housing market than rate cuts
  • But there are positive signs for the state’s economy, as business investment rises

In previous cycles, interest rate cuts have stimulated the housing sector, as lower borrowing costs tempt first-home buyers and investors into the market, with flow-on effects to building approvals over time.

But while house prices in Sydney and Melbourne are rebounding, a different story is unfolding in Perth, where median property values fell another 0.8 per cent last month to $436,008.

A housing oversupply and sluggish migration rates — a legacy of the mining construction boom — have trumped cheaper borrowing costs in the WA capital, according to Bankwest chief economist Alan Langford.

“Demographics and population growth trends are overwhelming the benefits of low and stable interest rates, although we are now seeing a little bit of an acceleration,” Mr Langford said.

The problem is that acceleration in the population growth rate — to 1 per cent in the year to March — is well below the 25-year trend of 1.7 per cent per annum.

It is also well below the state’s peak population growth rate of 3.5 per cent, recorded in late 2008, which coincided with a run-up in house prices.

During that time, spending by WA households grew at an average rate of 6.7 per cent each year (in the five years to June 2008), compared to just 1.1 per cent for the past five years.

“You’ve got to remember here in Perth, the last real surge in prices was between 2001 and 2007,” BIS Oxford Economics executive chairman Robert Mellor said.

“Prices went up nearly 200 per cent, so it was a phenomenal increase. Prices got to within 10 or 15 per cent of median prices in Sydney.”

Mr Mellor said while recent population growth figures were promising, the overhang of new housing was still being absorbed.

“It’ll be still some time I believe — at least another six months — before we’ll start to see some improvement in demand in response to the underlying population growth fundamentals, as well as a very attractive interest rate environment.

“[Perth] has been so severely oversupplied, you’ve sort of just got to let it run out. It takes a while to self-correct, basically.”

While building approvals for houses and apartments have more than halved since their 2014 peak, the decline in population growth left a supply overhang which is still being absorbed.

“We’re now well into our deepest and most prolonged downturn in dwelling construction since at least the early 1980s, and of course that means some of the oversupply has been absorbed by lesser new supply,” Mr Langford said.

“The demand side’s just coming on very gradually.”

Economists say migration, jobs the solution

According to the Real Estate Institute of WA’s deputy president, Lisa Joyce, there are four key drivers for Perth’s property market — the cost of finance, affordability, job growth and population growth.

“Unless we see all four of those drivers in play at one point in time, we really don’t see great growth in demand,” Ms Joyce said.

“The timing and the extent of the next growth in the property cycle will ultimately be determined by population growth.

“We really need to see migration, people, population growth for us to start to see any pressure on the supply of housing.”

The missing ingredient, according to both property forecasters and economists, is employment.

Figures from the ABS show WA’s unemployment rate was 5.9 per cent in the June quarter, behind Queensland and equal to South Australia among the mainland states, just months after it reached its equal worst level in nearly two decades.

Meanwhile, the underemployment rate rose to 9.2 per cent, more than double the rate recorded in 2008, just prior to the global financial crisis.

“You can’t suddenly attract a lot more people into the state without there being jobs here,” Mr Mellor said.

“It’s a long way to come if you’re from the eastern seaboard without a job opportunity.”

Curtin University professor of economics Rachel Ong said slow wage and jobs growth was a major impediment to the housing market’s recovery.

“There are more and more people on casual, short-term, insecure contracts and I think those labour market issues are actually quite important.”

Business investment points to slow turnaround

But despite the demographic challenges facing WA, market observers say there are positive signs for the state’s economy.

In the June quarter, business investment rose 0.8 per cent, underpinned by a 19.8 per cent increase in spending on machinery and equipment, according to ABS figures.

The Bureau noted that “continued investment in automation by mining” drove the spending increase.

“The economy in Western Australia is always driven by business investment,” Treasurer Ben Wyatt said.

“You are seeing the business sector doing what it should be doing, and what actually drives job creation in Western Australia, and that is the private sector getting back into spending on itself.”

Mr Wyatt said the State Government did not have “an enormous range of levers” to stimulate the subdued housing market but said it would consider using those within its control.

But some economists say economic stimulus for the housing sector is not necessary at this point in the cycle.

“In two years’ time, if there’s no signs of recovery happening in residential construction, I would say that might be a time where governments [have] got a job to do in terms of providing some stimulus,” Mr Mellor said.

“We’ll need to see a further pick-up in mining investment that’ll start to encourage stronger population growth into the state, and I believe that over the next two years, we’ll start to see that.

“But will there be a quick recovery? I would say unlikely.”

Topics:

housing,

economic-trends,

business-economics-and-finance,

perth-6000