WA property market remains in the doldrums: RiskWise's Doron Peleg

EXPERT OBSERVER

With economic activity in Western Australia well below its 10-year average and effective unemployment significantly above the 10-year benchmark, the property market, particularly units, continues to experience weakness.

However, according to the latest RiskWise Property Research Risks & Opportunities Report, buyer confidence is on the increase in the state, particularly Perth with housing finance increasing 15.1 per cent since February 2019 after a reduction of 2.4 per cent relative to August 2018.

With low economic activity and high unemployment, Western Australia’s annual population growth of 1 per cent was the third lowest in the country.

As a result, the housing market, particularly units, has experienced continued weakness in recent years. According to CoreLogic, house and unit prices in Perth have declined by 8.6 per cent and 9 per cent in the past year, respectively.

Western Australia is still in a long transition process from a mining-oriented economy and while unemployment has slightly improved from 6.1 per cent in April to 5.7 per cent in October, it is still projected to deliver low economic growth, a soft job market and low population growth.

Mortgage arrears are at an alarming level with the delinquency rate sitting at 2.75 per cent. While this has improved from 3.05 per cent as reported in August, this number has grown over the course of several years and is now well above the Australian average. The relatively high unemployment rate also increases the risk of credit defaults.

Negative equity also remains a major risk especially for lenders who have a concentration of loans in this market. These risks are compounded by this high rate of arrears. High-risk borrowers, combined with properties that suffer from low demand, require special attention in relation to credit provisioning.

While Perth was ‘very affordable’, there were a small number of suburbs where houses delivered reasonable capital growth in recent years. However, these were exceptions only.

Despite lower interest rates (with another expected in the new year) and some loosening of credit restrictions, houses still carried a medium level of risk due to Western Australia’s economic conditions.

House prices have declined by 9 per cent in the past year and in Perth, house and unit prices declined by 8.6 per cent and 9 per cent, respectively.

Low-performing areas for houses in the past year include Perth - North East (with -8.8 per cent capital growth), Perth – Inner (-8.4 per cent) and Perth - South West (-7.3 per cent).

However, the risks associated with units is even higher as they are expected to deliver poor or negative capital growth due to the combination of oversupply, lending restrictions and low demand as they are generally not attractive to families or owner-occupiers.

Also, units in some suburbs are subject to voluntary lending restrictions by the major lenders, such as lower loan-to-value ratio (i.e. higher deposit). In addition, the state government tax on overseas investors further decreases the demand for new units as investment properties.

Perth – South East has the highest rate of unit oversupply in the state with 1900 units in the pipeline (a 6.7 per cent increase to the current stock).

The issues with construction defects in NSW and Victoria and the publicity they have received in the media mean this situation is unlikely to materially improve in the short term.

While there have been no major construction defects reported in relation to high-rise buildings in Perth, the events in Sydney and Melbourne increase the risk of reputational damage and, consequently, lower demand for both existing and off-the-plan high-rise units.

DORON PELEG is the CEO of RiskWise