Despite bearish property price forecasts over the past few years, capital city markets have proven to be very resilient. I note that Westpac joined other major banks last week by revising its property price growth forecast higher to 7% for the 2023 calendar year.
However, Perth is the outlier. Its median house price has only appreciated by 1.2% p.a. over the past 15 years according to REIA data. It hasn’t even kept up with inflation – in real terms, houses have fallen in value!
Is this market about to turn around?
A flat cycle is always followed by a growth cycle
I have updated this chart which illustrates that property markets have moved in two distinct cycles over the past four decades, being either growth or flat cycles. However, over longer periods of time, property capital growth is relatively stable i.e., most markets have produced circa 7.50% p.a. growth over the past 40+ years (which is approximately 5% p.a. plus inflation).
The table below sets out the level of capital growth that has occurred after very flat cycles in the past.
If history repeats itself, and it often does, this data suggests that Perth will soon enter a growth cycle that will probably last 5 to 10 years and deliver circa 12-13% p.a. compounding growth. That would be enough to see property prices double in value.
A prolonged flat period is usually followed by a prolonged growth period. Perth’s flat period has already lasted 12 years, so it’s possible its future growth period will be longer than usual.
Mean reversion is a clear observable and predictable trend that exists in all investment markets.
Positive investment attributes
In addition to the high probability that Perth will enter a growth cycle in the coming years, there are some other positive fundamentals that investors might like to consider.
High rental yields and tight rental market
Arguably, Perth has the tightest rental market in Australia. Its vacancy rate is only 0.6% according the SQM Research, which is an all-time low. Of course, there’s a well-documented “rental crisis” in Australia at the moment, so most markets are very tight. However, rising rental yields are often an indicator that a market will soon enter a growth cycle.
The reason for this is simple. Higher rental yields make investing in property more affordable (especially if/when interest rates fall in the future) and less risky, and therefore will eventually attract more investors into the market. Also, as I discussed earlier this year, the only way to solve the rental crisis is to attract more private investors, which governments will eventually need to come to terms with.
I came across a property that sold in Mount Lawley, Perth in July this year (I don’t know who the purchaser was – it wasn’t one of my clients). Mount Lawley is a blue-chip suburb approximately 4kms from Perth’s CBD. The property is a solid 3-bed, 2-bath family home on an 880 sqm block of land in a quiet street. It sold for $1.15 million and is being advertised for rent for $820 per week, which equates to a 3.7% gross yield.
It is unusual to see an investment-grade house in a capital city attract a yield over 3% and it could be an indication that the property is intrinsically undervalued i.e., its technical value is higher than what it sold for recently. The probability of this property being worth more than $2 million in 10 years’ from now is very high in my view.
Population growth
Perth’s population is projected to grow from 2.2 million in 2022 to over 2.6 million by 2033 – a growth rate of 1.3% p.a., which is the third fastest projected growth rate behind Melbourne and Darwin. However, with the recent influx of overseas immigration, its population could very well end up being higher than this. Whilst Perth is the fourth largest capital city in Australia, its higher growth rate should stimulate property price growth.
There are some downsides to investing in Perth
Industry concentration and employment opportunities
Perth’s property price growth cycle between 2002 and 2008 (16.3% p.a. growth) was, in part, stimulated by the mining boom. The mining and energy companies are large employers in Perth. This means that the Perth property market is susceptible to a downturn in mining.
Apart from the large energy companies (14 largest international energy companies have offices in Perth), most corporate head offices are located in the eastern capital cities. Management roles in head offices tend to attract higher salaries which, to some extent, support/underpin property prices.
Fourth largest population
Melbourne and Sydney’s population is over 5 million and Brisbane’s is around 2.6 million. Typically, the larger the population, the more diverse the employment opportunities are and the higher the salaries they attract. For example, most senior management positions for listed companies are in either Melbourne or Sydney. These employment opportunities help underpinning growing demand and affordability for blue-chip property.
Distance/isolation
Eastern capital cities benefit from being in the same time zone and in closer proximity to each-other than Perth. For example, interstate migration is more likely to occur between the eastern capital cities – Perth is considered a faraway destination. That said, the relative affordability, city beaches and weather are all big drawcards for overseas immigrants.
Investing in Perth is worthy of consideration
Perth wouldn’t necessarily be my first choice in terms of a recommended property investment location. I would usually suggest that people invest in larger, more diverse markets such as Melbourne, Sydney, and Brisbane, as I think they are lower risk because they are more likely to benefit from a greater imbalance between supply and demand.
However, I think Perth has a lot of merit mostly because it is likely to enjoy a strong growth cycle. Also, it is likely that its long-term growth rate will eventually revert to above 7% p.a. (remember, you only need 7.2% p.a., on average, for your property to double in value every 10 years).
If you are interested in investing in property, you’d be well served to consider investment-grade properties in blue chip suburbs of Perth.
That said, average growth in Melbourne and Sydney over the past 6 years of 2.5% p.a. and 3.8% p.a. respectively, has been well below the long-term average.
