How will COVID-19 pandemic impact Western Australia property market: HTW residential

How will COVID-19 pandemic impact Western Australia property market: HTW residential
Staff reporterDecember 8, 2020

Consumer sentiment is a big driver in Western Australia's property market and due to the recent COVID-19 outbreak, at the time of writing, consumer sentiment is fragile to say the least, according to a recent Herron Todd White (HTW) residential report. 

The current COVID-19 pandemic is going to have a negative impact on key drivers, so it will be interesting to see what impact this may have on the property market in the short to medium term, the valuation firm said.

The report suggests there are many other key local, national and global drivers that influence the property market and these economic drivers are in a constant game of tug-o-war, continuously shifting along a scale between supply and demand - the result of which creates price movement within the property market.

"In Western Australia, our economy is most heavily influenced by the mineral and gas resources industry. The resources boom has been mentioned in almost every Western Australia segment of the Month in Review in recent years as it has impacted the state so significantly and will continue to do so for the foreseeable future," the valuation firm said. 

Mining projects throughout the state create thousands of jobs through construction work, maintenance, cleaning, machine operation, management etc. These jobs bring in hundreds and sometimes thousands of interstate and overseas workers in what can be relatively short periods of time, due to the enticing remuneration packages offered by large companies that compete for a limited workforce.

Conversely, when projects come to completion, net migration can turn negative rapidly. The fluctuation of job vacancies and unemployment plays a large role in Perth’s property market as it influences our overall population in significant waves.

"Net state and overseas migration statistics are directly linked to median house price and rental trends. We observe the nearly direct relationship of net migration and median house price growth, the effects of which have an approximate one-year delay," the valuation firm said. 

Not only does resource sector employment influence migration, it also plainly affects total unemployment. Net migration partially determines the number of people moving into Western Australia to soak up housing stock and unemployment shapes how many residents are in a suitable financial position to make purchases within the property market.

"As we touched on in our September 2019 edition, increased resource investment in 2006 influenced the mining sector across the whole state," the valuation firm said. 

Mineral exports were ramping up as the amount of iron ore Western Australia was capable of exporting quadrupled in value from 2006 to the peak in 2012. This enabled businesses across Perth and regional Western Australia to find space for a number of new job vacancies and in 2006 we saw 31,000 migrants flock to the state, including both net interstate (3,100 persons) and overseas migration (28,070 persons). It didn’t stop there though.

Migration figures increased again, then had a lull and eventually peaked in 2012 when we saw a total of 58,600 people travel to Western Australia to get their share of the revenue from the resources boom.

As mining investment declined, so did the availability of jobs. Some mining construction projects came to completion and this began the increase in unemployment rates. The construction phase had ended, temporary contracts did not get extended and we started to see a significant level of redundancies.

Suddenly businesses were consolidating their workspaces as they employed less and less people. Many office buildings, apartments and land developments were under construction and now coming to completion, however there were no tenants or home buyers to lease or purchase these spaces, the report noted. 

The CBD office vacancy rate skyrocketed to over 20 percent and supply severely overshadowed demand, reversing the economic cycle. From here consumer sentiment began to slip and less access to finance stopped any interest from investors and owner-occupiers. Residential rents, office rents and house prices started their slow descent to their current position.

Net interstate migration has been in the negative since 2014. In 2017, 14,000 people left Western Australia for other Australian states, however since then, both interstate and overseas migration has improved slightly.

The trends mentioned above are demonstrated in Figure 3. BHP recruited over 10,000 new employees and contractors between 2008 and past the peak in 2012 as the construction phase progressed to operational.

When many construction projects came to completion, there was a significant shedding of employment forces. Figure 3 does show that BHP has been ramping up Australian recruitment again in recent years, which aligns with the commencement of its South Flank iron ore development in 2019, and other companies are doing the same.

"The data is not as transparent as it once was, due to the level of employment via third party contractors, hence the clarity of the current situation is difficult to demonstrate," the valuation firm said. 

Recent investment into Western Australia’s natural resources has come as positive news for our property market and economy as a whole.

There are several projects already underway or awaiting commencement in Western Australia and iron ore is dominating the mining sector with an estimated $17 billion worth of projects that will or are generating around 11,000 construction jobs over the next few years, some of which started back in 2018.

These projects will also employ an approximate 3,000 continuing operational jobs. Many experts have suggested that this will create a mini-boom such as the one seen in the early 2010s, however on much smaller scale.

Net interstate and overseas migration has reverted to positive figures again and this has helped to stabilise property values in the Perth metropolitan region.

"So how is Perth faring at the moment? Greater Perth’s median house price settled at $478,000 for the December 2019 quarter, falling by 1.2 percent," the valuation firm said. 

Negative house price growth has been easing off for some time now, however the disparity between Perth’s inner and outer suburbs has caused some confusion for homeowners on where we currently sit. A very positive sign for Western Australia is the rebounding of vacant land prices.

Between the March and December 2019 quarters the median price of vacant land saw three consecutive increases, rising 3.4 per cent from $236,000 to $244,000. Perth hasn’t seen an increase in median vacant land prices since mid 2017 and that only lasted for one quarter.

Perth’s apartment sector over the past 20 years has been very cyclical, but is maturing rapidly. From 2012 to 2015, Western Australia saw a boom of apartment construction, fuelled by the resource sector.

During this time, demand was high and developers of all kinds jumped in to fill the void with mainly investor grade products and several prestige developments that commanded high values as the market matured. Unfortunately the timing of completion of these was poor and on the downward part of the cycle.

Today Perth’s apartment market is still reeling from a large oversupply in some areas and it does not appear that this supply line will be going away any time soon, with an estimated 1600 new apartments completed in 2019, as well as 800 more anticipated by the end of 2020.

Beyond then, 3,100 apartments are expected to reach completion in 2021 and 2022 (JLL, 2020). This coupled with the 2,400 units currently on the market could mean further price corrections in this segment which is exacerbated by current state government policy directing demand to new supply.

First home buyer locations such as Baldivis, Byford, Ellenbrook and Alkimos have all experienced continued value decreases over the past few years, the report noted. 

Vast land development alongside Perth’s suppressed population growth has spelt disaster for this market segment. Advice from our valuers suggest that there has been little improvement in these areas recently and we don’t hold much hope for the short term either. We do expect to see diminishing rates of negative growth over the medium term as long as economic conditions improve, however recent events have now cast doubt on this.

Moving closer to Perth, upgrader locations are faring slightly better than their outer rim counterparts. There has been a mix of value increases and decreases amongst various suburbs, however some recent positive signs include improving selling periods and declining vendor discounting. This can mostly be attributed to home owners heeding advice from their agents and pricing homes correctly from the get-go. 

Kingsley is a suburb located 16 kilometres north- west of the CBD and is considered an upgrader location. The median house price in Kingsley decreased 0.3 percent during the December 2019 quarter, settling at $543,250. Negative house price growth has diminished over the past four years and hopefully we will see values increasein the medium term.

A four bedroom house in Kingsley is currently on the market with a price guide of over $579,000.

The 7 Chauncey Court home (pictured below) comes with large family living, two bathrooms, home office, updated kitchen and double carport. 

It is situated close to shops and schools. 

Previous news of positive economic conditions has been a big driver for sales in established suburbs as owners take up the opportunity to upgrade before prices increase.

In the south-west part of the state, the recent uptick in activity in the resources sector has seen the number of fly-in-fly-out workers begin to increase for the first time since the winding up of the mining construction boom. While the numbers are a far cry from the previous peak they are definitely improving.

There has been significant investment in the growth of the Talison lithium mine in Greenbushes (north of Bridgetown) as well as the associated infrastructure in the past few years.

On top of this there is a $1 billion lithium processing plant under construction in Kemerton (north of Bunbury). This was expected to bring a large number of workers to these regions however the reduction in the price of lithium has slowed these projects down.

The south-west region relies a lot on local and international tourism. There is much anticipation for the start of the interstate direct flight from Melbourne to Busselton which started in March. The timing, however could have been better as the slow down caused by the reaction to the spread of COVID-19 is likely to limit the number of travellers and tourists visiting the region at a time when it was hopeful there would be a significant increase in this sector.

There are a number of large residential subdivisions on the outskirts of Bunbury, Busselton and Margaret River which hold a large number of affordable properties.

A three bedroom unit in Bunbary was sold for $215,000 in April.

The 10/180 Forrest Avenue (pictured below) unit comes with open plan kitchen, meals and family room, outdoor patio area and double garage plus storeroom.

It is situates closed to shopping centres, schools and parks. 

The report notes first home buyer activity has been on the increase in these areas however this is also likely to stall due to the uncertainty over the outcome of the effects of COVID-19. It is anticipated that new building construction is also likely to stall as a result of this.

The residential market in Cowaramup has outperformed most other towns in the region. As the number and quality of houses in the suburb increases and the town becomes more established, demand has also increased. Land sales were at their lowest level in ten years in 2019 which is an indication of the low levels of residential land now available in Cowaramup. With good demand and low supply of land, values are expected to increase in the short to medium term.

Kalgoorlie is the major city within the eastern goldfields region – located some 600 kilometres east of Perth. Known for its gold mines, there have been many excavation projects of all sizes here. KCGM Super Pit produces up to 800,000 ounces of gold annually. The Kalgoorlie-Boulder area has a median house price of $290,000, falling three percent over the December 2019 quarter, however the region has seen some positive signs of late as Piccadilly, South Kalgoorlie, Kalgoorlie and West Lamington experienced quartlerly increases between 0.2 percent and 14.8 percent.

Hannans, Kalgoorlie and West Lamington also showed annual improvements between 0.8 and 4.2 percent. The price of gold has a direct impact on this town’s prospects as many of the workers live in the region.

The report notes gold has been a relatively stable long-term investment over the past 20 years. The recent COVID-19 outbreak could potentially see gold prices increasing further due to investors selling stocks and moving to a safer venture in gold. Conversely, prices could also drop in the short term due to a lack of demand from Chinese manufacturers and jewellers.

In 2019, China held the largest portion of demand in the world for gold at 33 percent, so it will be interesting to see which direction the market shifts towards.

"COVID-19 will no doubt have significant negative economic outcomes. Historically in times of uncertainty investors look to consolidate their capital instead of growing it through new ventures, and this will certainly slow the market down further.

"Government subsidies and cash rate cuts may come in hopes of stimulating the economy, although it will be hard to curb consumer sentiment when we are faced with a global pandemic.

"It’s not all bad news though - investors and residents with secure jobs may be able to find great value in the property market over the coming year," the valuation firm said. 

Note regards COVID-19
This edition of Month In Review had its topic defined in late February with submissions from our offices collated through to late March. During this period, shifts in the social and economic landscape due to COVID-19 became increasingly dramatic, as demonstrated by the varied information provided by offices over the course of three weeks.
This month’s residential theme on baseline property market drivers remains a common thread, and provides an indication of what influences to monitor as the property sector recovers post-crisis.

 

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