Opportunities for some, pain awaits others

Calling the bottom of the market is fraught with danger for real estate agents and developers, but many in the industry are hopeful that the tide is beginning to turn. Emily Piesse reports.

IT'S the inevitable question that arises during any market downturn - have we reached the bottom of the cycle?

That's the issue property developers and real estate agents in Western Australia are currently grappling with, as the housing market endures its toughest period since the recession of the 1990s.

The groundwork for this sharp correction was laid in the overheated market of 2006, which was fuelled by mining wealth from the state's north-west and low interest rates.

In the June quarter, Perth's median house price ($443,000) was down more than 6 per cent on December last year, while the regional median price fell 8 per cent since March.

Sales also dropped by 11 per cent, to 9,200 properties - almost one third fewer than the same time last year, when the market had already cooled.

With the ongoing uncertainty created by the global credit crunch and interest rate movements, determining the state of the market is difficult.

Inquiry levels at WA's largest real estate agency, Ray White Real Estate, are starting to pick up, according to chief executive Mark Whiteman, although he acknowledges it may be a result of forced sales rather than improved market confidence.

"This has a similar feel to that broad timeframe [from 1996 to 1998] where, from our point of view, there was plenty of property available for purchasers to choose from and getting the buyers to make the decision was the challenge for us," Mr Whiteman told a WA Business News property forum last week.

According to Mirvac WA chief executive Evan Campbell, while the land market started to ease off about 18 months ago, it was the Australia Day long weekend in January when the western suburbs market succumbed to the slowdown.

"Since then, nothing has really changed that much. There's been a lot of negative sentiment in the press, and that's really impacting on people's ability to make a decision - they're very cautious," Mr Campbell said.

"That defies logic, in a sense, when you look at the fundamentals in Western Australia - the fundamentals have never been as good."

On paper, WA's low unemployment rate (2.8 per cent), rising wages and record high immigration levels, along with a shortage of housing stock, give weight to the idea that it's only a matter of time before buyers return.

"The housing market tends to have a time delay between what's going on and when people transact. We need interest rates to come off a bit more, we need some of this Wall Street action to die down, and then [the market] will start to return to normal," Cedar Woods managing director Paul Sadleir told the forum.

However, in contrast to the downturns of the 1980s and 1990s, credit markets have created significant uncertainty.

"The biggest issue here is the impact on availability of credit, which hasn't yet hit, in terms of its impact on the ground. That's the one that may significantly affect the nature of the recovery," LWP Property Group's Danny Murphy said.

There's little doubt that the tighter global credit environment has shrunk the pool of investors active in the property market, but the industry believes the owner-occupier segment is still there.

"In 2006 and 2007, we were selling out [projects] at 100 per cent. A lot of that was speculators. All the speculators have left the market now, and we're back to a normalised market, where you don't expect to sell out things at 100 per cent - we might sell 30 or 40 per cent to owner-occupiers, and that's a good result," Mr Campbell said.

"Some developers will have to change their product to target that owner-occupier market."

Companies that have the flexibility to adapt to the new environment - namely, access to finance - will do better than their highly geared counterparts, and with some developers struggling to get project finance, speculation has emerged over how the industry will look in a year's time.

"There's a number of developers with significant debt on their balance sheets and the value of their assets has been eroded, so their balance sheet positions could actually be in some doubt and they're reliant on the support of their banks to a large degree. It's just a matter of how long those banks are willing to hold off calling their triggers in terms of valuations," Ibex Capital director Charlie Robertson said.

"On a smaller level, I think it will start happening in the next six to 12 months. People who stretched themselves gearing land banks in the hope of getting developments under way [will be in trouble]."

For Mirvac's Evan Campbell, the sector is unlikely to see a large number of mergers or buy-outs, but rather acquisitions of projects.

"I don't think there's going to be a lot of companies buying other companies. [The] reality is, there's going to be a lot of projects that are going to be stalled and shelved. Why is that? Smaller players won't get the debt. The debt markets are extremely, extremely tight, and if you can get debt, it's extremely expensive and it's very onerous," he said.

"You won't see the physical evidence of that in terms of projects stalled halfway through, but you'll see projects won't start, and I think that will be a lot of projects in Perth.

"We haven't seen it yet, but you'll see it in the next [12 months]. From a developer's point of view, the big developers with strong balance sheets [will survive]."

As the consolidation unfolds, it's expected to deliver opportunities to those buyers that have cash reserves or underutilised debt.

"Logic is, you buy when everyone's selling, and you sell when everyone's buying, and there's a great opportunity to get a good deal out there now. I'd act, because Western Australia's fundamentals are very, very unique and I think there is a recipe of recovery - it's just about stability - and it could come back very quickly in my opinion," Mr Campbell said.

With land sales volumes at their lowest point in the June quarter since the GST was introduced in 2000, developers believe further price falls are necessary before buyers return in force.

"In development, you make 90 per cent of your profit in the purchase of land, so until we start seeing land hit the levels where there's good growth potential [transactions won't go ahead]. At the end of the day, it's all about timing your purchase right in the market," Mr Robertson said.

"Most people miss [the bottom of the market], and don't start buying until the rest of the herd has moved, so you'd have to think the time's about now."

If there's a silver lining to the downturn, it's to be found in the recent movements in labour costs.

An easing in demand for building trades has already helped to boost the pool of available labour, and there's an expectation this will translate to lower wages in the near future.

"Definitely in the projects we're involved with, we're seeing the availability of tradesmen [improve]. That's a good sign because there needs to be a real step change in construction costs, because nothing is going to happen if they stay where they are," Mr Robertson said.

"It's been hard to get a handle on how that was going to come about, because obviously the north-west is such a lure for anyone with any sort of skill...but I think that has probably cleaned out in the market now, and you've got the trades who aren't prepared to relocate and live in a donga for months on end."

However, any improvement in the price of labour is likely to be more than compensated for by rising materials costs, particularly steel, with construction costs expected to rise by between 12 and 16 per cent over the next year.