For the past 12 months, anyone involved with the real estate market in the western suburbs of Perth, Western Australia has been aware that things have slowed considerably. The high number of properties on the market combined with the seemingly low number of buyers has created a selling environment akin to running in water; it’s very hard going.
Ask 10 industry experts why the market is stagnant, and you’re likely to get 10 different answers. That’s because there are several factors undermining market confidence at the moment; and all of them are playing a part.
No Investors
The fact that investors as a whole have shied away from the market in the western suburbs of Western Australia has impacted on market sentiment. In most residential real estate markets, investors typically expect to receive a 3-4% return on their investment, which providing they claim tax entitlements, makes the investment viable. Because of the incredible growth that occurred in Perth’s western suburbs in 2006, and to a lesser degree in 2007 and 2008, that return-on-investment for most properties is closer to 2%. As a result, investors have turned their attention elsewhere - where the number crunching works in their favour.
Rise in the Dollar
The rise in the value of the Australian dollar has certainly influenced the local market. Whereas in previous years, overseas investors could purchase (providing they met FIRB regulations) premium property in Perth’s Western suburbs at a discount, the price of Australian dollar relative to the British, European and American currencies has made property in Western Australia seem incredibly expensive. As a consequence, the section of the market comprised of overseas investors, has dried up.
Mining Tax
The proposed Federal Government Mining Tax has also affected market confidence. Although a lot of long-term investment resource contracts have already begun in Western Australia (one reason we’re perceived to have a strong economy), the rush to invest has been stymied considerably by the announcement in May that the Federal Government was intent on claiming its share of profits generated from mining in this state. In short, second tier companies, who probably would have invested in WA, are now looking to “park” their mining dollars in countries like South Africa and Brazil.
Stamp Duty
The Stamp Duty associated with buying a home in the western suburbs has contributed to the downturn of sales in the western suburbs. Stamp Duty for a property priced at $1 million is approximately $50,000. When the market was roaring along in 2006 and the price of property was increasing by that amount in the space of months, Stamp Duty (for a lot of people) was insignificant. The same is not true today. Potential buyers are balking at the cost to upgrade their homes. And instead of gaining additional living space by buying a new home, many are electing to renovate – exacerbating the problem of a lack of buyers in the market place.
Interest Rates
The rise in interest rates from 5.59% in December 2009 to the most recent 7.79% has not helped the local real estate market. Though interest rate rises traditionally have less impact on the spending habits of the higher income earners who live in the western suburbs, they do eventually take their toll on that section of the real estate market (albeit indirectly). That’s because interest rate rises create caution amongst considering buying in the lower end of the market, which as a result of the leap frog effect (people selling and buying more expensive property). In other words, if the market is not moving at the bottom, it prevents the next tier of property from moving as well as the tier beyond that. Eventually, that slowing in buying activity in the lower end of the market, impacts the top end, typical of Perth’s western suburbs.
Lack of Buyers
Finally, the disparity that exists between the number of properties currently for sale and the number of available buyers has also shaken confidence in Perth’s western suburbs. In a market that is moving, there is typically an equal number of buyers and sellers at any given time. Homes sell quite regularly. And they create a demand for the next property.
In a hot market, there are more buyers than sellers. The speed by which the market moves is related to the perception of buyers that if they don’t act, they will miss out. This belief is accentuated by buyers seeing large number of buyers at Home Opens, to the extent that a “stampede mentality” emerges.
In a slowing market, the reverse is true. Here there are more properties available than there are buyers. And as a result, there’s no sense of urgency on the part of the buyers. They feel they can take their time. And they feel that there will always be another opportunity around the corner should they miss out. That is the situation we’re currently facing. And it further contributes to the slowing market.
Clearly, there are a multitude of forces at work, shaping the present real estate market in Perth’s western suburbs. Eventually, the market will right itself (it always does). In the meantime, there has never been a better time to buy.
David Fear and Jamie Harrington, Directors Altus Real Estate