Smart Property Investment’s Phil Tarrant discusses the current market conditions in Perth and how it could affect property investors, with Momentum Wealth’s managing director Damian Collins.
They explore the drivers of Perth’s economy, outline what’s being done to stimulate growth, and determine whether or not now is the right time for investors to enter the market, and what they can do to prepare themselves for the long haul.
How would you describe Perth’s property market now?
Damian Collins: Well, the slashing of wrists has just stopped, but if you look back at the market over the last three years, some of the old hats around town have been in the game for 40 years. [They] tell me it’s the worst cycle they’ve ever seen. I think it’s because the average price is down about 7 per cent or 8 per cent over that period of time, so it’s not massive but it’s still a downturn. It’s also just the lack of confidence, and the lack of transactions.
We’re not going to see it run away, but we’re at the bottom of a decently lengthy long bottom of the cycle. The vacancy rate’s still high, it’s pushing high 6 per cent. Our rents have come off 25 per cent and that’s brutal. I’m a property investor myself, so it’s been a little bit painful.
We’re not seeing the exodus, people aren’t leaving the state anymore. Few coming in, not huge numbers, but the cycle of the home buyer building out in the outer suburbs is coming off too. So look, I think I haven’t seen Perth this cheap against Sydney and Melbourne since 2003. That was the last time. It was so cheap, same with Brisbane, so cheap compared to Sydney and Melbourne it’s glaringly obvious that they’re underpriced.
What kind of changes have happened?
Damian Collins: The real estate agents – well, the average number of transactions in WA in 2013 and 2014 was around about 60,000. Now they’re down to about 35,000. So the brokers have got 45 per cent less business. Obviously we had the end of the mining boom, and we noticed in 2015, particularly come into the second half, our tenancy, you know. We’ve got a large rent roll, and the number of people saying, ‘I’m leaving the state. I’m going back, I’m going back to Ireland, England, or I’m going back over’. It had suddenly turned from a massive influx of people. Perth was growing at nearly 4 per cent per annum. I mean, that was just unsustainable – 80,000 in one year – we grew so unsustainable.
Then the jobs and the construction phase of the mining cycles came to an end, and that takes a lot more workers than the ongoing operations, so we saw a big exodus of people.
The other thing was government policy. Sometimes they’re helpful, and sometimes they’re a hindrance, and the government decided to take away all the benefits for first home buyers in established properties and funnel it all to the builders. So the builders were pretty happy. At the same time, as we started seeing an exodus of people out of the state work-wise, we also saw a giant increase in new construction in terms of new properties. People just thought, ‘Oh well, I’ll get extra money, go and buy a new house and land package out in the middle of outer suburbia.’
At the same time, the double whammy for landlords was that, we had the same problem, and we’ve still got a little bit of that – we saw all these people going and buying new homes. So, that was what really caused the down turn over 2015, ’16 and into early 2017, and just a general lack of confidence. People were worried about their jobs. We’re not seeing $50 billion projects anymore.
What are those few things, other than mining, which is going to help stimulate growth in Perth?
Damian: Certainly, the agriculture sector is quite large in Western Australia, and people don’t realise that. It’s the bottom third of the state. When you go below Perth, and all the way down pretty much to Esperance, it’s the size of England. In fact, larger, and that’s all agricultural. So we’ve got a huge wheat exporting market. So, agriculture is a big part of it.
Also, tourism and education have been areas that they still need to work on. We don’t get as many foreign students as Sydney and Melbourne, but we certainly are well supported by particularly Singapore and Malaysia. They’re culturally on the same timezone, they’re quite culturally aligned.
What’s the current investment trend in Perth?
Damian Collins: We don’t think there’s going to be much short-term growth but take advantage of the infrastructure play and the rezoning.
The [big trend that is] happening in Perth is rezoning. They’re looking at Perth and it’s sprawled out 60 kilometres north, and 60 kilometres south. It very much hugs the coast, goes a bit inland on the eastern part. The government’s looking at that going well. We’re 2 million people now, we’re going to grow to four, four-and-a-half [million], over the next 30-plus years. Well, we just can’t keep sprawling forever. So they’re really starting to put a big focus on rezoning.
What are those handful of things that investors need to confidently play in the Perth market considering where it is right now?
Damian Collins: You’ve got to have a long-term outlook. If you invest in Perth in over 20 years, you’re going to probably see another brutal down cycle in that time. Perth is still a capital city, it’s going to be more volatile than Sydney and Melbourne, and to some degree, Brisbane as well.
You’ve got to have a long-term focus and you’ve also got to be willing to sustain the ups and downs. In terms of loans, you don’t want to cross-collateralise your loans because, you know, let’s say you bought in Perth 18 months ago, and you’re down 10 per cent. If that’s standalone mortgage, you can set and forget. If you’ve got it crossed with the other properties, you think, ‘Gee, I’ve made some gains here and I want to invest leverage on that.’ They’ll revalue all your portfolios. So, I’m certainly not a big fan of cross-collateralisation. Keep them stand alone.
If you’re a new investor, would you put all your eggs in a Perth basket right now?
Damian Collins: As long as you’ve got a longer term outlook, you know, that’s perfectly fine. If you think you’re going to make money in the market in Perth in the short term, you’re not, so be aware of that. But if you’re an investor getting into multiple properties, yeah, it’s a portion of your portfolio.
Perth was just ridiculously cheap and then it had a boom of its own. Probably overshot the mark. Went up nearly twofold over and nearly doubled, over a four-year period, caught up to Sydney. And then it had its 10 years of flat, like Sydney had its seven or eight years of flat.
If you’re amassing a larger portfolio, you’d want properties in your major four capital cities – Sydney, Melbourne, Brisbane, Perth – then after that, you might start looking at spec areas. If you’re going to have a decent-sized portfolio, Perth certainly would be a part of that if you’re going to look to invest and take advantage of what’s going on.
Tune in to The Smart Property Investment Show’s bonus episode on the “Secrets of the Perth Market” to find out more about what investors can do to prepare themselves for the long haul.