Perth Real Estate Tests Home Buyers’ Limits

Housing affordability is stretching budgets in Perth – and the pressures aren’t about the disappear according to Tracey Joynson for the API Magazine in Australia – Feb ’07 edition.

Housing affordability in Perth has been declining amid soaring real estate home prices, rising interest rates and high government fees. While surging property home prices are driving the drop in affordability even further, according to Housing Industry Association (HIA) executive director of housing and economics Simon Tennent.

“Until the supply of new Perth housing catches up with the current shortage the outlook for real estate house prices, even in a higher interest rate environment, is for further increases thus putting Perth housing further out of reach of many families,” Tennent says.

Three years ago, Perth house prices were less than half of those in Sydney, Australian property Monitors says. The margin now is less than 6 per cent with Perth’s September quarter median house price at $491.587 and Sydney at $520,253.

HIA WA’s executive director, John Dastlik, says affordability deteriorated for the third consecutive quarter in September, sending it to a three year low and not far from the bad old days of the late 1990s when mortgage interest rates for real estate property in Perth reachd 17 per cent.

“The unacceptably low levels of housing affordability in Australia are restricting home ownership, constraining residential construction of real estate and exacerbating already very tight rental markets,” he says. “since the national housing cycle hits it speak it has been readily apparent that the triple whammy of spiralling land costs, excessive fees and charges and planning red tape was making a tangible recovery in real estate housing Perth Affordability virtually impossible.”

Macquarie Bank’s head of research Rod Cornish says Perth affordability will affect both first homebuyers and real estate investors. “There’s still quite a lot of investment into the real estate market, that’s what’s helping to drive the price growth,” Cornish says. “If you look at the proportion of investors in Perth in WA, its’ higher certainly than it is on the east coast now.”

Perth’s median house price has risen from $250,000 in June 2004 to be approaching $440,000 in the September 2006 quarter, according to the Real Estate Institute of WA (REIWA).

Perth Real Estate Investors Withdrawing?

REIWA president Rob Druitt says first homebuyers have hit the wall and are finding it difficult to get into the real estate market with the number of loans to first homebuyers falling in September. “We’re seeing a change in the real estate market in WA after the tremendous growth of the last, say, two years and it’s mostly affecting the lower and middle end of the market in Perth,” he says.

“The higher end of the real estate Perth market still seems to be travelling very well and that’s all about affordability. For investors in real estate here in WA, there’s been incredible capital growth over a relatively short period – that seems to be levelling out now but what hasn’t kept up with that growth is the rental real estate market.

“We’ve seen growth in Perth rentals for the September quarter – we saw around a $10 a week increase in the rents across the board. However, this is still not keeping up with the rapidly rising real estate property market so we’re looking at around a 3 per cent gross return on Perth property in WA at the moment which is clearly a yield below normal market conditions. Our yield in WA is normally 4 to 4.5 per cent.”

Anecdotally, because the yield isn’t that attractive, Druitt says some real estate investors in Perth are starting to look back to the east coast because relatively it seems like cheap real estate now and better value for money. ANZ chief economist Saul Eslake says investors in Perth may cause real estate house prices to fall depending on how significantly they’ve been contributing to the price rise.

“If Perth investors in real estate decide that there are more profitable places to park their money such as the share market or superannuation then their exiting of the real estate market, if they’ve been significant buyers, might cause prices to fall in Perth,” he says.

But Druitt is predicting a boom in rental prices because some catch-up is needed to make the yields realistic in relation to the real estate value of the properties and there’s also underlying demand – “particularly as people shift perhaps from buying to renting because they’ve been frozen out of the market price-wise”.

“They’ll be renting longer so that they can save more to get into the real estate market and that’s going to add some pressure on the market,” he says. “There’s probably been some drop-off in real estate Perth investors now just purely because of the price level and with a shortage of rental properties that’s going to push up rental prices quite significantly.”

The median rent for houses in the September quarter in Perth rose 4 per cent to $260 per week while the rent for units climbed 4.3 per cent to $240 a week, according to REIWA. Hegney Property Group chairman Gavin Hegney says rate rises can decrease real estate demand because home buyers can afford to borrow less and they also deter some buyers, particularly investors in Perth.

“If investors are deterred from the real estate market at all, then an already low rental vacancy rate will become lower which means the probability of rents rising further becomes far more likely,” he says. “The big difference with Perth is that these interest rate rises come during a strong growth period.

“What this means for owners in Perth who’ve bought real estate property as little as six month ago is that they’ve increased home equity which allows for refinancing to help smooth out their cash flow if they need it.

“For home owners in say Sydney, where their home values have been static or declining it means that there’s nowhere to turn if they’re already fully geared. This means the interest rate rise will be more easily absorbed in Perth.”