At API’s WA State Conference in Perth last week, Tim Lawless executive research director at CoreLogic, treated delegates to a deep dive into WA’s housing sector and what’s in store going forward, here are some of the highlights.

Based on a macro outlook, we’ve moved into this surprisingly positive inflection in housing values since February, following a very short downturn, with values nationally down around 9%, but Perth and regional WA saw nowhere near that level of decline having been very resilient through the rate hiking cycle so far.

Similar to the national trend, we’re seeing the local (Perth) market rising again in value, reaching new record highs from month to month. Normally we’d be witnessing something happening in the marketplace and broader economy to be triggering this positive inflection.

But given that nothing like that has happened, this is really a story of supply generally being very low against a backdrop of demand coming back into the marketplace.

If we start to look at the trends across the country, this is a really broad-based upswing with values rising pretty much everywhere, with Perth up around 3% over the past three months, which is roughly a 1% month-on-month change.

Softening momentum

But the other thing we can see when we start plotting the data out in trend terms like this – looking at the rolling three-month change – is that a little bit of momentum has already left the growth phase. Back in May, Sydney values were rising 2% month-on-month, that growth has pretty much halved to around 1%, while Melbourne isn’t as strong either.

What’s noteworthy is that these two cities are witnessing the most significant rate of overseas migration, which is a pretty good reminder that overseas migration tends to flow more into rental demand than purchasing demand. We know that Sydney and Melbourne are also markets where affordability constraints remain quite pressing.

If we look a little more closely at the Perth market, we can see a little bit of evidence that momentum is leaving the upswing. But there’s still a reasonably strong growth rate with houses versus apartments performing very similarly, despite the fact that historically houses show a stronger rate of growth – reflecting the underlying value of land which is pushing prices higher.

But it could also be reflective of other things, for example, there hasn’t really been much of a supply response in the medium to high-density sector, and there is some scarcity in that sector of the marketplace. While Perth is a very affordable marketplace, maybe we’re starting to see some elements of affordability deflecting some demand towards that medium to high-density sector as well.

Affordability is a key driver

In terms of the different valuation cohorts across the market, it’s generally the more affordable end of Perth’s market that seems to be driving the stronger rate of capital gain at the moment. We saw higher-end properties falling further in value through the earlier part of the rate hiking cycle and now it’s clearly the more affordable end of the marketplace that’s leading the pace of growth.

You can also see this in peripheral factors, for example across WA, first home buyers are a larger portion of the market, probably attracted to the marketplace because it is quite affordable, especially compared to markets like Sydney and Melbourne.

You can also see these trends geographically as well, with upper-end markets showing a larger decline through the downturn.

Even over the past three months, you see those areas commonly associated with Perth’s high-end market – getting up towards Cottesloe, Dalkeith, Peppermint Grove and the Nedlands region as well – all still showing red on the map – meaning values have fallen in the past three months in those markets.

The dark blue areas on the map, where values are clearly rising rapidly tend to be in markets that are much more synonymous with lower price points, more active FHBs and better levels of affordability – at least based on a broader dwelling value income measure.

So markets around Gosnells, for example, and heading towards Canning to the south-east, down towards Rockingham and Mandurah, and to north up towards Wanneroo are clearly outperforming the marketplace.

Interestingly, these are also areas where a lot of greenfield land is being redeveloped.

By Comparison, we’re seeing more indebtedness and more stressed household balance sheets in some of those mortgage belts around Sydney and Melbourne, that aren’t showing the same performance dynamics that we’re seeing in the Perth marketplace.

It’s quite startling to note that while Perth was the most expensive capital city in 2006, it’s now the most affordable. But I don’t think this is going to last too much longer and I wouldn’t be surprised to see a more significant rebalancing in the league table of prices.

Perth median value is half Sydney’s

Looking at the medium value of properties across both houses and units highlights how affordable the Perth market is with a median house value at $630,000, roughly around half Sydney’s median house value – which is up at around $1.3 million. It’s quite startling to note that while Perth was the most expensive capital city in 2006, it’s now the most affordable.

But I don’t think this is going to last too much longer and I wouldn’t be surprised to see a more significant rebalancing in the league table of prices.

Based on other key measures, like household incomes and how much needs to be dedicated to servicing a mortgage, Perth also stands out as being more affordable.

On a dwelling value-to-income ratio Perth is still holding below six times, which simply means the typical household in Perth is paying [in this case] 5.7 times their gross annual household income to buy the median-priced dwelling.

Based on serviceability, a 35% portion of household income being dedicated to mortgage repayments does seem relatively high compared to 2019 (22%).

But Perth is by far the most affordable market to be paying off a mortgage as well (based on a median price, 20% deposit, 25-year term loan paying principal and interest). So affordability is still probably one of the best competitive advantages for Perth compared to other capital cities.

Broadly, we saw regional WA performing pretty much the same as Perth through the upswing of the pandemic growth phase, a little bit more resilient through the rate hiking cycle with value growth being reasonably strong in annual terms.

The last three months have seen growth generally confined to the Margaret River region, up about 2% over the most recent two months, with Manjimup and Bunbury up around 2% and the Pilbara region up around 2.4%.

Supply/demand imbalance

Overall, what’s underpinning the positivity in the (Perth) marketplace is the imbalance between supply and demand. The best way to measure supply is how many listings there are in the marketplace. We’re seeing Perth’s total number of listings continuing to trend lower, despite the fact the flow of new listings coming into the market is clearly rising with vendors beginning to test the marketplace again.

I think the smart money will start looking to WA for better investment opportunities, not only for cash flow but also for prospects for capital gains

But the fact we’re still seeing total listings fall tells me that the rate of absorption is very much positive. The number of properties being brought to the marketplace for sale is about 45% below the five-year average across Perth and across regional WA it’s exactly the same.

So while listing numbers are around 45% below average, demonstrated demand is tracking nearly 30% above the five-year average.

Clearly, this is a massive disconnect that’s placing upward pressure on prices and I don’t really see it changing any time soon, especially with population growth so strong across WA.

Investors are returning

You can also see another level of demand in housing finance commitments which are holding relatively strong. Lending came down a little during the re-hiking cycle, mostly due to a reduction in owner-occupiers.

However, investment lending across WA is high, currently accounting for 31% of mortgage demand, well above the 24% decade average. While we’re still seeing more investments concentrated in markets like NSW, buying prices are high and gross yields are extraordinarily low.

For example, while Sydney’s gross yield is 3.1%, in Perth it’s around 4.9%.

So I think the smart money will start looking to WA for better investment opportunities, not only for cash flow but also for prospects for capital gains.

Image: Tim Lawless executive research director at CoreLogic