Western Suburbs From Hero to Zero?

The western suburbs of the Perth residential market has been the outstanding performer within real estate over the preceding 20 year period. However, since the peak of the market for the western suburbs in approximately March 2008, we saw values fall initially in the order of 20% plus, as the Global Financial Crisis gripped the world. It has now become one of the lowest performers over the last four years.

With Government intervention and the sharp lowering of interest rates, combined with other Government incentives, the market recovered through late 2009 and continued through to early 2010. The share market underwent a further correction in April 2010 and as uncertainties in the market of the US economy and the Euro Zone continue, this recovery was stalled, particularly within the higher end of the Perth market.

We consider that the western suburbs are currently in the order of 10% to 15% below the peak of 2008. This is compared to the average Perth market being approximately 5% below the peak. The overall market within Perth peaked in September 2006 when successive interest rate rises stalled the market.

We believe that the market is currently recovering and overall trending in the right directions. Total listings peaked in the order of 17,000 and based on current Real Estate Institute of Western Australia (REIWA) statistics sit at 10,398. This would be seen as equilibrium. During this time we have seen discounting decrease and also selling days decrease sharply over the preceding six month period.

The well publicised vacancy rate in Perth has also trended sharply down from 3.5% some two years ago and is currently at 1.8%. This decrease has put sharp upward pressure on rents throughout the Perth market.

The first home buyer market has been strong for some time and we are now also seeing good activity in the middle market up to $900,000 over the last three to six month period. Discussions with active real estate agents throughout the western suburbs have also confirmed increased activity, particularly in the market between $1 million and $2 million. The market above $2 million is still slow and while transacting, remains patchy throughout these suburbs.

The June 2012 quarter statistics showed that there were 1,025 transactions within the western suburbs, delivering a median price of $1,230,000. This showed a drop of 2.4% for the quarter and a 7.2% drop for the year. Annual growth over the last five year period was down 0.8%, however the ten year average growth for the western suburbs was still showing a strong 9.8% growth. This longer term result shows that sector the western suburbs has remained a top performer within the Perth market.

The following is a breakdown of the statistics for the western suburbs on an individual suburb basis according to the REIWA June 2012 quarter statistics.

SUBURBS Year to June 2012

% Annual Change in Last 12 Month

% Annual Change over 5 Years

% Annual Change over 10 Years 

Western Suburbs  -7.2% -0.8% 9.8%

City Beach -12.9% -1.1% 9.4%

Claremont 0.8% 0.5% 11.1%

Cottesloe  -8.7% -1.4% 9.5%

Daglish -14.8% -3.3% 7.4%

Dalkeith  -8.5% -1.1% 9.8%

Floreat  -6.1% -1.6% 10.3%

Jolimont  4.5% 2.5% 9.7%

Mosman Park  2.6% -1.2% 9.8%

Mount Claremont  6.7% 0.2% 9.3%

Nedlands  -9.4% 0.1% 10.5%

Peppermint Grove  -37.5% -5.5% 7.0%

Shenton Park  -14.8% -0.1% 8.8%

Subiaco  -7.4% -0.2% 9.4%

Swanbourne  -2.9% 1.8% 10.4%

Wembley  -3.6% 0.4% 9.1%

West Leederville  -4.5% 1.5% 9.9%

Our ‘on the ground’ analysis shows the most affected values throughout this market lies with vacant land or older homes at close to block value or in the need of renovating or demolishing in the short to medium term. There has been little appetite within the market for this style of product as the number of buyers wishing to build has declined dramatically. As there is likely to be only modest growth in the short to medium term, there has been little to no investor activity either.

On the other side of the equation, we are finding that well located modern housing with quality design and well laid out liveable floor plan, these properties are holding their value on a replacement cost basis throughout these areas and in some instances are showing slight premiums over replacement value in the order of 5% to 10%. This is due in some respect to the sharp decline in the value of land throughout the area, but is also a factor of the market willing to pay for a quality product and not having to go through the lengthy build and design process.

Modern housing with an ageless contemporary design appears to be the most sought after product. This could be a factor of a more conservative market through these areas but is also the perception that ‘fad’ style residences age quickly and become outdated. The market is paying for a quality floor plan, not necessarily a large size and a design that is of modern, timeless architecture.

We consider that this preference is now creating an opportunity as land values have mostly bottomed, builder activity is at record lows and the right product is selling at replacement and quite often with a premium. As this sector of the market improves with the flow on effect from the lower tier markets, all things being equal, we consider that there is further upside to this build scenario, as long as there are no further financial storms.

The key to success here is buying the right land in a good location, having a workable floor plan with a contemporary, ageless building style and to build to a budget that will meet the market. Cost overruns and excessive architectural detail can risk your cost to value ratio adversely.

A number of builders are coming to the forefront in meeting this market. Grandwood Homes, a part of the Zorzi Group, have released a series of homes known as the ‘Aspire Collection’. These are well laid out designs and are built to an affordable price, but with a level of quality and fit out to meet the market. Webb Brown-Neaves have also worked in this space for some time. There are also numerous other builders in this medium quality two storey product to choose from, as well as niche private builders. In the current market of declined activity, pricing is sharp and build times are shorter than normal.

In conclusion, back to the question, “Is it the right time to buy?” We believe all the factors are trending in the right direction. It appears that the market has bottomed and should improve, particularly with the lower interest rate environment and the recent improvements in the share market, which definitely create a flow-on effect to the western suburbs. There is still a reasonable level of product in the various price ranges on the market, which gives the buyer some choice and room for negotiation. This may not be the case in the next 6 to 12 months as the market recovers and tightens through these suburbs. We consider though that thorough research is required and that it is important to build a product that meets the markets requirements in order to maximise your value and return.

Written by Rod Davidson, Director LMW Hegney
Posted in Building for Investment