PERTH'S housing market has been through a difficult few years.
PERTH'S housing market has been through a difficult few years. The current global financial turmoil clearly points to more tough times ahead.
However, for those with a longer view, there are some promising developments hinting at a revival down the track.
Both prices and activity have been under pressure over the past two years.
After doubling between 2003 and 2006, house prices stalled flat in 2007 and have slipped back about 2.5 per cent over the past year.
This is despite significant boosters from the state government. Various stamp duty concessions over the past two years have effectively increased the purchasing power of buyers by about 5.5 per cent of the median-priced house.
The implication is that prices might have been down more than 8 per cent from their peak if it hadn't been for these concessions.
Construction activity has moved into a significant downswing with dwelling commencements off 15 per cent.
Unfortunately this mostly predates the full impact of the currently global financial crisis. Although the crisis is now into its 16th month, events have been slow to affect local activity.
But there has definitely been a hit.
The tightening in wholesale funding markets has already pushed mortgage interest rates up about 75 basis points over where they would otherwise have been and restricted new funding, most notably via non-bank lenders.
On top of the official rate tightening since late 2007, this has contributed to a sharp slump in housing finance approvals, which are down by more than one-quarter since January.
This drop off in buyers has yet to be fully felt, with prices holding their ground reasonably well so far.
Clearly, there is more weakness to come. WA faces a double whammy as the global financial crisis spills over into commodity markets. Australia's commodity prices are off sharply from their peaks earlier this year as prospects of a global recession deepen.
But we suspect the falls have been overdone. Westpac analysis suggests much of the decline is a speculative blow-off; that is, speculators switching from betting on price rises to price falls.
As such, only part of the decline reflects softer demand from end users. We also think some of the pessimism is overdone - while the world economy is undoubtedly headed for a period of much weaker growth, we remain more constructive than most on China's prospects through the downturn.
The outlook remains particularly positive for sectors like infrastructure works that remain key drivers of demand for Australia's bulk commodities.
There are also reasons to expect a fairly minor knock on impact on the WA economy. The hit to profits is being mitigated by a lower Australian dollar.
More importantly, the impact on investment is likely to be minimal over the few years.
For WA's housing markets, mining profits are a significant influence at the luxury end of the market; but for the rest, the most important channel is via job prospects. A resilient minerals investment performance points to continued strength on this front.
Meanwhile, we may actually see some improvement in the underlying supply and demand fundamentals in Perth's housing market.
Part of the problem through 2007 and 2008 - aside from interest rate/affordability situation - was an overhang of housing stock.
After averaging 18,500 a year over the previous two decades, dwelling completions hit 25,600 in 2007.
Although there had been a surge in population growth through this period - from just below 30,000 a year to over 40,000 a year - building was outstripping requirements, which we pegged at around 22,500 a year. This resulted in some modest excess housing stock that continues to this day.
More recently, population growth has picked up strongly suggesting the excess may soon become a shortage.
With aggressive interest rate cuts and additional fiscal boosters, housing market conditions could be quite a bit brighter by this time next year.
Clearly there are major caveats. These are extraordinary times - even the most pessimistic would have been hard pushed to predict the events that have unfolded in the global financial system over the last 16 months. And housing markets remain vulnerable short term, especially if credit turns out to be more tightly constrained or if there's a bigger hit to the economy.
But assuming Australia manages to withstand the worst of these shocks, housing markets are relatively well placed for a revival medium term.
- Matthew Hassan is a senior economist at Westpac
