29/04/2010 - 00:00

Looming boom will increase pressure on Perth’s strained residential property sector

29/04/2010 - 00:00

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Housing affordability could become the victim of Western Australia’s economic growth.

Looming boom will increase pressure on Perth’s strained residential property sector

“IF people thought the last boom, where people were lining up at housing estates, was a thing of the past, they’ve got another thing coming.”

That’s the dire warning from Saracen Properties managing director Luke Saraceni, who said the Western Australian property market is on the cusp of a boom, but is in danger of entering it with an inherent undersupply of land.

And he’s not a lone voice, as the peak body for urban development, the Urban Development Institute of Australia, is also concerned about WA’s land supply.

UDIA WA executive director Debra Goostrey said that, 12 months before the last boom, when stock of developable land ran dry, there were 2,200 lots on the market.

According to UDIA’s December quarter statistics there are currently 1,719 lots on the market across the metropolitan area, including Mandurah.

Ms Goostrey said the numbers were more alarming because forecast construction before the last boom was three times as much as it is now, and demand was expected to increase considerably in 2010.

“If we boom, we really haven’t got enough land behind us to ride it out,” she said.

“It is one of those things where you can see the pattern emerging of undersupply of land, lack of forecast construction and the potential for recovery.”

Underlying demand for housing has been buoyed by the state’s resurgent resources sector, fuelling massive economic growth and drawing in thousands of new residents.

Australian Bureau of Statistics population growth figures released last month showed WA’s population in June 2009 had increased by 68,100 since June 2008, with 52,200 people moving to the Perth metropolitan area.

Those extra people are going to need housing, and according to research by property market analyst BIS Shrapnel, housing starts are predicted to have a bumper year, but supply will fall well short of demand.

BIS Shrapnel predicted there would be 23,000 new home starts over this financial year, up from 18,500 in the previous year, but underlying demand would remain around 25,000 dwellings.

The peak year for residential building starts was 2006-2007, when 24,418 new homes were started in WA.

The BIS Shrapnel research was more bullish than the Housing Industry Forecast Group’s December prediction that housing starts would increase to 20,000 in 2010.

In terms of demand, the HIFG statistics were similar to those of BIS Shrapnel, indicating underlying demand for housing in WA was currently 24,500 dwellings per year.

BIS Shrapnel senior economist Jason Anderson said WA’s fast rate of population growth meant that demand had been “absolutely gangbusters”.

“If we look in terms of loan figures for new dwellings, the December quarter was running up 100 per cent compared to December quarter 2008,” Mr Anderson said.

“That’s huge growth, and it’s leading the nation.”

Developer Cedar Woods’ managing director, Paul Sadleir, said a land shortage was inevitable if the WA economy kept growing at its current rate.

“In the metro area we don’t have a great volume of lots available at present and there is not a great volume due to come on in the next six to 12 months,” he said.

“There’s not a lot of stock there, so it’s a bit like the lead-up to the previous boom. If favourable economic conditions continue, we’re in danger of running into that land supply shortage.

“Rates are going to rise, affordability is going to get worse, and we do have that danger of a land shortage if the economy and population growth continue on at the rate they are at the moment.

“Demand responds more quickly to economic circumstances than the industry can respond by building more lots.”

Satterley Property Group managing director Nigel Satterley said demand for land in Perth was centred on employment nodes with high levels of established infrastructure.

UDIA statistics indicate the majority of lots under construction tended to be on the outer suburban fringe.

The UDIA’s December quarter Urban Development Index showed 914 lots would be delivered to market in the next year in Wanneroo, 611 in Rockingham, 603 in Mandurah, 350 in Armadale and 278 in the Shire of Swan.

According to Mr Satterley, during the past 12 months there had been 11,600 lots sold across Perth, with Baldivis leading the way with 1,007, followed by Canning Vale, where 801 lots were sold.

“What we’re seeing in the busiest corridors, like Wanneroo, the eastern corridor, the south-east corridor and then around the Cockburn area, the stock has tightened considerably,” Mr Satterley said.

“The only area where there is about 12 months supply is from Wellard to Mandurah.

“That’s worrying some of the new home builders, because some developers are now selling titles eight months out.

“There is only good supply in one corridor at the moment, the market has tightened, and as the market’s tightened, prices go up.”

Affordability

Australand WA general manager Richard Fulcher said basic economics would suggest a supply shortfall would result in increasing land values.

“It’s going to be a question of just how much,” Mr Fulcher told WA Business News.

“Clearly the WA economy continues to be one of the strongest in the nation and there’s nothing that I can see on the horizon that will change that, which fuels the population growth, which fuels the demand for housing.”

Any increase in pricing makes it harder for first homebuyers, who have defined the market in recent times, to get a foothold on the property ladder.

During the past 12 months, the residential property market in WA has been dominated by the presence of first homebuyers drawn in by state and federal stimulus packages.

With the stimulus decreased, and land supply issues taking hold, Ms Goostrey said there would be a natural increase in median house and land prices because of the different make-up of the market.

“When you’re looking at average prices they’ll go up because the middle market will become the stronger component and the first homebuyers will become the weaker component,” Ms Goostrey said.

“The first homebuyers, when they were in the market, there was some really strong sales through the more affordable areas of Armadale, Kwinana, and Wanneroo, they were experiencing growth.

“The market is just moving into transition and you’ll see some of the middle market product coming through, both in existing master planned developments where they can put out different types of product, and also you’ll see some other smaller developments coming to the market to meet the particular needs of that market segment.”

The transition is already evident, as first homebuyers in WA have already exited the market in large numbers, mainly due to the non-availability of a $21,000 federal stimulus incentive.

The latest housing finance statistics from the ABS indicate the number of dwellings financed for first homebuyers in WA in February was 1,165, down more than 50 per cent from the September peak of 2,457.

Since the ABS began tracking the statistic in 1991, the WA average has been 1340 first homebuyer dwellings financed each year.

While the economy grows, interest rates will inevitably rise, and it is these increases that are of particular concern to Mr Sadleir.

“Affordability has gotten worse, and will continue to get worse,” Mr Sadleir said.

“Every rate rise is significant for first homebuyers.

“People that have only just entered the market are obviously the most sensitive, but if you look at the affordability measures for people who are young, trying to get their first home and saving their deposit, things are definitely going to get a lot tougher.”

Research by Bankwest and the Mortgage and Finance Association released last week indicates 50 per cent of WA’s potential first time buyers think they’ve been priced out of the property market permanently.

MFAA chief executive Phil Naylor said lenders were tightening home loan criteria, which was pushing some first homebuyers out of the market.

This seemed to resonate with Mr Saraceni’s concern that future generations would be blocked from buying property.

“Unless we start to address this situation of allowing the supply chain to flow, the tipping point is going to be headlines in the paper where everybody recognises their sons and daughters and their grandchildren cannot afford a simple house,” Mr Saraceni said.

Funding

A stark reminder the WA economy is not far removed from the global financial crisis is the availability of finance for residential developments.

The market for finance is currently very tight, Ms Goostrey said, as the four big Australian banks are trying to maintain a maximum 10 per cent capital exposure to all sectors of property.

“Three of those banks are the major banks, and they are either at cap or close to cap, so they’re only lending on retiring debt,” she said.

“One of the banks has some headroom, but not much, so as far as the majors go, there is not a vast amount of flexibility there because they’re under obligation on the proportion of property they can have in their portfolio.

“There are emerging opportunities for alternative sources of finance, and some of the developers are quite sophisticated in their prospectus offerings.

“The market will gradually find ways to get funding, but it may not be quick enough to actually ensure the continuity of land supply.

“The underlying part of all of this is the developers are trying to get everything ready to press go, but if they can’t get the funding for it, they really can’t bring anything to market.”

Mr Satterley said big land developers, including Peet, Satterley, Cedar Woods, Stockland and Australand, were still able to source funding because of their track record, but it was smaller players and syndicates that were struggling.

“If you look in the last two years in WA, 40 to 50 per cent of blocks are built by small syndicates run by accountants, town planners and real estate agents who can’t get capital now from the banks because the banks want 50 per cent equity and a good track record,” he said.

“The capital market has tightened significantly so your top developers have got capital, but they’ve got to be careful. The tightening of capital is having a big effect on production.”

Although credit was still available, Mr Fulcher said a tightening of criteria meant it had become more challenging to advance new projects.

“Most of the major players have got their houses in order and its not really having a significant impact on their business at the moment,” he said.

“Certainly for new projects coming out of the ground, unless you've got a significant track record and pretty substantial backing, project finance is difficult to obtain.”

Mr Sadleir said the limited availability of substantial credit had placed a pause on Cedar Wood's growth ambitions.

“Credit is difficult to source and you can only get it in limited amounts,” he said.

“A lot of companies like us that perhaps a couple of years ago had growth ambitions at a certain pace have had to pull those back in a bit.

“We’ve got funding to do what we want, but we can’t go out and develop enough to satisfy all of Perth.

“It’s very much the financing side that is holding back development and I think that’s going to be another constraint for one or two years yet.”

 

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