Door opens for forecast gradual recovery in battered market

Property experts tell WA Business News forum they see signs of a more sustainable and realistic sector emerging in the state.

WESTERN Australia’s battered housing industry is looking to unlock doors to a more sustainable and ‘normal’ market. 

This comes amid low property stock levels, tight lending conditions and weak consumer confidence, which has been sapped by gloomy economic assessments, volatile equity markets and softer house prices. 

Developers also claim they have been hindered by inefficient government approvals processes and difficult access to funding. 

The sector faces further challenges as Western Australians increasingly move away from traditional family homes and buy more apartments because of lifestyle and affordability changes. 

Top WA residential property figures told a WA Business News forum they feared the state faced a severe shortage of new land and housing stock; a situation made worse by a slump in property listings so far this year, indicating buyers were wading back into the market. 

Between June 2011 and June 2012, properties for sale listings dropped a third from 17,760 to 12,156.

Homes are also selling more quickly, down from about 80 days to 70, indicating demand was increasing.

Property valuers Herron Todd White director Brendon Ptolomey told the forum the tight rental market was indicative of the growth in property demand to come.

“It’s a lead indicator that things are going to tighten up in the owner-occupier market … but it’s probably not flowing through as quickly as we might have thought,” Mr Ptolomey said.

Figures from the Real Estate Institute of WA (see graph), show rental property vacancy rates dropped from 3.4 per cent in June last year to 1.9 per cent in June this year.

Median rents for houses and units have grown steadily since 2003, unaffected by the GFC. As vacancies drop and rents increase, renters are tipped to focus    
on buying rather than renting but it is expected there will not be enough land to meet this demand.

Housing Industry of Australia chief economist Harley Dale said there had only been two periods in the past 15 years where the total number of national dwelling starts had been lower than their current level – during the introduction of the GST and the GFC.

In the June quarter, WA experienced the second-largest drop in seasonally adjusted dwelling starts in the country, with activity falling 6 per cent. (See Doubts on strength of new homes recovery).

Mr Ptolomey said that “in other periods of time, these stock levels would have been front-page news, they’re pretty much at record lows”. 

“It’s a reflection of the pessimism in the market out there that people aren’t shouting from the rooftops,” he said.

The WA Business News forum also expressed concern over the negative effect tight debt markets were having on consumer confidence.

Valuation firm m3 Property managing director WA Gavin Chapman said homebuyers and the residential real estate industry were being stifled by the tight finance market.

It was holding up the progress of developments and blocking homebuyers from buying new properties.

Australand general manager residential WA Tony Perrin said “one of the critical things that I’ve seen since the property boom is the investor market has changed significantly”.

Mr Perrin said the ‘liquid’ financial market six years ago allowed investors to buy blocks of land with no intention of building. 

Now, however, the forum agreed, the big four banks had over-corrected their previously more generous loan policies and it was having a detrimental effect on developers looking to get projects off the ground. (See Tight finance changes the market)

Mr Chapman said negative media reports had also contributed to a drop in consumer confidence.

“The majority of the population is scared … people are being driven by the sentiment they pick up from the press and lately the press sentiment has all been negative,” Mr Chapman said.

He cast doubt on statements WA had a strong economy. “I don’t believe this hype about our strong mining-driven economy is actually a reality,” he said.

“In a state that’s supposed to be booming, we’ve seen businesses that have been here for 30 to 50 years in steel manufacturing closing down … because the fundamental problem is money’s not staying in the state.

“A lot of the wealth is going to the mining sector and the top 2 or 3 per cent of the population the vast majority have seen their asset values going down and they’re sensitive to borrowings because their equity in their home is being eroded.”

Mr Chapman said many people treated their family homes as a major part of their retirement strategies.

“If we look at what’s happened over the last five years we’ve had declining property values,” he said.

“If you read the press and do the research you’re probably not going to expect much growth for the next four to five years.

“So out of most people’s retirement plans, say they’re on a 20 to 30-year retirement plan, one third of that has just disappeared, with no growth.

“At this point in time they have higher borrowings than they have ever had in their lives.”

Herron Todd White’s Mr Ptolomey said he was not entirely convinced there was enough consumer confidence and that there was a risk the market could take another step backwards before it moved forwards.

“The market is patchy … one week we’ll be picking up work in the first-homebuyer category, the next week we’ll be working at the top end of the market and then the next week we’re back to the median house price bulk of the market,” Mr Ptolomey said.

“These days you’ve got to make sure that you’ve got your information right because it’s a very tough market to value in.”

Realmark managing director John Percudani said the increased discernment of homebuyers and a tighter financial market could have a positive effect on the sector. 

“One could think that the medium-term will be a lot more beneficial and a lot more sustainable, rather than the peaks and troughs that we’ve had in the past,” Mr Percudani said.

“We’re probably heading into a more healthy property cycle because it’s a more educated, stable and rationally managed market.”

Before the GFC, access to credit was significantly higher, which enabled people to buy properties they could not afford. 

“When you look at the pre-GFC period, there were 18,000 properties on the market because a lot of people had properties that they shouldn’t have had,” Mr Percudani said.

Changing attitudes

Mr Percudani said buyers were not only considering the purchase price of a home, he had noticed they were becoming more attentive to the environmental ratings of a property.

 “The affordability to operate a home is a really defining factor … I think it’s going to change the nature of properties people want to have,” he said.

 “We’ve seen it previously in the commercial sector and that whole dialogue has now come through to the residential market.

“Homebuyers are now asking how much a home is going to cost to run because they are worried about the cost of power and the cost of transport.”

Electricity prices have jumped over the past two years and this week the Economic Regulation Authority said the price of electricity would have to rise a further 20 per cent to cover the cost of energy production.

Mr Chapman said: “We’re going to have to have more affordable, smaller homes … and we’ve got to stop the inner suburbs being resistant to density change.”

Strong growth in demand for higher-density, infill developments was a major trend highlighted at the forum.

“I think we’ve seen a permanent shift in the maturity of our city,” Mr Ptolomey said.

“Acceptance of dense residential developments in some areas has gone from virtually zero, to a really high level.” 

Mr Ptolomey said developers in Subiaco and East Perth already regretted not building higher developments around the train station. 

Demand for medium-high density developments has largely been driven by generation Y, who want cosmopolitan lifestyles near public transport nodes.

Pindan director of development and management Nick Allingame said people were very aware of the lifestyle they were getting when they bought a property.

 Mr Allingame said generation Y was not the only age group opting to move into denser residential areas.

 “What we’ve noticed a bit in the last six months is a lot more people are downsizing ... baby boomers have moved out of their traditional family homes into medium-high density properties,” he said.

 “We’ve got a project in Subiaco where we’ve sold 80 off the plan in just under six months and they ranged in price from $400,000 to $1.1 million.” (See Gen Y driving high-density build)

Measuring value

A reliance on the median price as a value guide for properties was a major concern for Mr Chapman.

“I think that the median price as a tool is actually wrong … the median price is a function of what’s selling and, if you look at any suburb within 10 to 15km of Perth, you’ll probably have seen a 20 to 25 per cent drop in value,” he said. 

“Median values tell you Perth prices are not too far dissimilar to what they were at the peak of the market.”

The Real Estate Institute of WA’s median house for June 2007 is just under the June 2012 median house price, which sits at approximately $480,000.

Mr Chapman said the inaccuracies of the median price were caused by the reduction in the number of sales since the GFC, which had slashed the sample base, and by different parts of the market being active at different times.

“We’re comparing apples and oranges … in 2005-07 the main driver of the market was first-homebuyers and they were skewing the median price to a lower range,” he said.

The current market was experiencing more activity in the higher price brackets. 

“Wealthier people are buying properties at the higher end of the market and that’s skewing the median price up,” Mr Chapman said. 

“We need to get over this fact that our values have been maintained ... people aren’t committing to buy because they’re still scared.

“The real fact is that people’s property values have dropped by a minimum of 15 per cent.” 

Mr Chapman said the Landgate Value Watch system was a much more accurate measure of property values.

This system measures the value of a sample of the same sub-$300,000 properties spread over 15 suburbs in June and December of each year. 

By comparing the change in values of the same properties, and the same number of properties, the system is able to reduce the effect of the ‘flux’ in high-end and low-end property sales numbers on the median sales price.