The Market Now
The atmosphere of Perth’s residential housing market is one of ‘cautious optimism’ with several indicators that it is heading for a period of sustained growth. Median prices are rising, sales are up, listings down, rents are rising dramatically, consumer confidence is growing, and the credit supply is increasing with record low interest rates. We could remove the ‘cautious’ and be in the throes of a period of strong growth if it were not for the global pandemic and abnormal market influences such as the range of government interventions. The current lockdown is unfortunate but given there has been no new cases thus far (3/2/21) we should be back to business as usual very soon.
The number of residential property sales in December 2020 across Perth were up a massive 42.5% compared to the previous year despite listings dropping by 16.5%. The increase in sales activity and reduced stock is now fuelling market growth with CoreLogic reporting a 1.6% growth in the Perth home value index for January and 3.8% over the 3 months to January, making Perth the fastest growing major city in Australia, second only to Darwin (6.6%).
Throughout 2020 apartment sales in inner suburbs of Perth were initially being driven by buyers downsizing, seeking the lifestyle, cost and reduced maintenance benefits of an apartment over a larger home and grounds.
Elsewhere, more bullish investors could see that after 10 years of no growth, the Perth market was overdue for an upward cycle and were primed to take advantage of the upswing.
The State and Federal Government stimulus led to a surge of first home buyers eager to take advantage of the savings and jumping on smaller one and two bedroom apartments. Well placed developers also had a strong year particularly with the larger two bedroom and three bedroom dwellings bought by downsizers
Outlook for 2021?
Sometimes looking back helps you to look forward:
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ce: Michael Yardney, Yahoo Finance
The first of two key leanings from the graph is that whatever is thrown at the property market, the overall trend is growth. Secondly, there was a brief period (O6/07) when Perth was the second most expensive market in Australia, beaten only by Sydney. It is currently the cheapest capital city in Australia. If you then add our recent population growth, growing economic standing and overall desirability (where else would you rather live in the world right now?), we are set for a strong year. The major bank and research forecasters are consistently supporting this view by predicting Perth property to be the top growth market over the next one to three years, with ANZ predicting 12% growth, AMP 10% and Westpac 8%.
There is just one key factor missing. As a collective, buyers must believe in growth and that’s where neuroscience plays a role. We each have a set of cognitive biases; flawed personal beliefs that can lead to errors in decision making. For example, when there has been no growth for 10 years, some believe it will always be stagnant just as when the market is rising, many believe it will continue to rise. Without believing in future growth, many potential investors will stay away but we need to get them back to the market. Investors have been responsible for less than 10% of all transactions in WA, whereas in some eastern states the figure is 40%.
Investors need to see high yields, high capital growth, or ideally both. We are at the tipping point; growth has started and investors are returning. Demand for property will fuel a flood of sellers as homeowners realise they can sell their properties potentially for more money than they paid and buy something more suitable. Take OP Properties Montreal Commons apartments that I’m about to launch in Fremantle, the average rental yield on purchase price is 5% so with the cost of finance less than half that they will be cashflow positive day one, so for a brand-new apartment it’s a bit of a no-brainer. These dynamics won’t last and will over time will be what pushes up prices as more investors return to the market.
Investment Fundamentals
Keep it simple with a few basic principles.
You need to be adequately exposed to a growth market. Trying to time the market is almost impossible, but you need to be there when it rises. If you look at growth over the last 60 years, property has, on average, doubled in value every eight years. Next time it doubles, the average Western Australian will benefit to the tune of $450,000 (current median value).
Then leverage to a point you are comfortable with. You may only have $50,000 cash (or equity) in a $500,000 property, but you benefit from the full value going up. So even if the property increases in value by 10%, you already have a 100% return on your money invested. Of course the effect is the same in reverse in a contracting market so it is important to always position yourself to afford to be patient with property.
Finally, find locations that will exceed the average market growth. Buy where people want to live close to amenities and lifestyle options, transport and work.
Then hold on to it for dear life. The number of times I hear the same story ‘if I had kept that property in (inset suburb) I bought for (insert extremely low price) life would be vastly different now’.
House or Apartment?
Let’s dispel some common myths about houses versus apartments. Firstly, houses do not appreciate more in value because they have land. The last 40 years have shown that they grow at the same rate. A well located apartment will result in more growth than a badly located house and will have a higher rental yield. Secondly, apartments are not more expensive to own than houses due to strata fees because these additional costs are more than offset by costs associated with owning a house such as higher maintenance, land tax and rates. OP Properties soon to be launched Montreal Commons apartment development in Fremantle is using internal power trading to not only be one of the first carbon neutral apartment buildings in Australia but also leveraging this technology to create a passive income for the strata owners to offset the levy’s by 50%. A big win-win for landlords and tenants alike (not to mention the environment!) that will not only increase is attractiveness to tenants but also increase investor yield from lower holding costs.
New or Old apartment?
There is no definitive right or wrong; buy old and add value through renovation, but you need the time, inclination, expertise and more cash.
Generally as a longer term investment it’s better to buy new for the following reasons;
- Maximum tax offsets from depreciation. As a general rule depreciation of 2.5% can be claimed per year on the replacement cost of an apartment up to 40 years old. This will often mean you can offset over $10,000 p.a.
- attractive Government incentives particularly as the Government tries to kick-start the economy post Covid19
- attract higher rents and better tenants
- have lower running costs and maintenance
Alternative Investment Options
It’s well known, tried and tested that owning a passive investment rental property is a great way to build wealth without needing to be an industry expert or taking you away from your day job but it’s not the only avenue! One of the other options is direct investment into a property syndicate with other likeminded investors, managed by a professional fulltime property group. OP Properties specialises in these forms of investments both passive income producing and short-term property developments such as Montreal Commons.
For more information on upcoming opportunities reach out to Nick Shinner at nick.shinner@opproperties.com.au or enquiries@opproperties.com.au
By Nick Shinner
