Commercial sector cycles as home builds stumble

ANNIVERSARY SPECIAL: As Australia was emerging from the recession it had to have in 1991 and 1992, the commercial construction sector in Western Australia was at the tail end of a boom that would add 200,000 square metres of office space to the Perth CBD. This article is part of a special series to mark Business News' 25-year anniversary.

It was a period of growth that would not be seen again for more than a decade.

A year later, as 1993 started, Carmen Lawrence was premier of WA, but by February Richard Court was in power as the state absorbed the 1992 royal commission report into WA Inc.

In March, Paul Keating and Labor would win a federal election that had been considered unwinnable.

Economically, Australia was coming out of a recession – its last two quarters of successive negative growth was June 1991 – and Perth’s commercial construction boom had added QV1, Exchange Tower, Westralia Square and Quayside on Mill in 1991 and Central Park in 1992.

The next major CBD office tower to be completed would not be until 2004, when Deutsche Asset Management as developer and Baulderstone Hornibrook as builder, delivered 240 St Georges Terrace to major tenant Woodside Petroleum, despite industrial disputes on site and alleged strike payments by Baulderstone.

The next construction cycle arrived in 2009, with Enex 100 and Bishops See completed, and One40 William, Alluvion and the first tower at Brookfield Place all being completed within four years.

Tower two at Brookfield Place, the Old Treasury, the two office towers at Kings Square and the Golden Square building all arrived in 2015, before the new Woodside building was completed this year.

It is unlikely that Perth CBD will have any significant increase in office space until Brookfield and Multiplex complete Chevron’s proposed headquarters at Elizabeth Quay in 2023.

Struggling residential builders will not take any solace from noting that building commencements in 1993, at 23,380, were higher than we are seeing in 2018.

The total number of owner-occupier loans has remainedrelatively static (60,948 in 1993 and 60,422 in 2018) but average owner-occupier loan size has jumped from just $80,200 to $332,600 as median house prices in WA have grown from $87,250 to $465,000, based on CoreLogic data from July.

Twenty-five years ago, the average standard variable mortgage rate was 10 per cent, compared with the 5.2 per cent average reported in April this year.

Serviceability rates have only been tracked by CoreLogic since 2001, but with house prices rising faster than incomes, and average loan size broadly tracking in line with house prices, the percentage of annual household income required to service an 80 per cent loan to value ratio mortgage has increased nationally from 26.8 per cent to 35.8 per cent.

In that time, the serviceability rate in Perth has increased from 22.5 per cent to 31.2 per cent.

This is well down from the peaks experienced in June 2008, when the average Australian household was dedicating more than half – 51 per cent – of its gross annual income to mortgage repayments.

If measured against annual household income, Perth dwelling price to income has gone from 3.6 in 2001 to 5.8 in April this year. This compares with ratios of 9.3 and 8.0 in Sydney and Melbourne respectively.

In some good news for WA’s home builders, who are reliant on the first homebuyer market, WA has bucked the national trend when it comes to percentage of first homebuyers of new owner-occupier housing loans.

Nationally, first homebuyers reduced from 22 per cent of mortgage demand in 1993 to 17.4 per cent in 2018.

However, in WA, first homebuyers accounted for 24.3 per cent of owner-occupier loans in 1993 and increased to 24.9 per cent in 2018.