News & Media

Article by: Kim Macdonald, Journalist

Source: The West Australian

August 18, 2022

As this newspaper’s property editor with a close eye on the market, I disagree with east coast economists about their increasingly gloomy predictions for WA real estate.

A recent hysterical prediction by ANZ Bank claims Perth property prices will fall 13 per cent over the next year, swiping $70,000 from the median priced home.

In my view, Perth property prices will stagnate over the next year, rather than fall. And there are two very big reasons for this.

Let’s call them demand and supply.

Firstly, demand for housing in Perth is strong, shown in part by having the highest rents relative to property values in the country.

As independent property forecaster Gavin Hegney has long explained, high rents affect every property, because they act like an insurance policy underpinning market values.

High rents encourage renters to buy their own home, because a mortgage doesn’t cost too much more than a lease. This boosts entry-level demand.

From the landlord’s perspective, high rents improve profitability. Not only does it help them weather interest rate rises, but it encourages them to pay more for the investment property in the first place.

Perth’s high rents will continue attracting investors, including many from the east, feeding another pool of demand.

New demand will also come from an anticipated increase in skilled migrants, who are expected to come to Perth for its ample job opportunities.

Housing supply however, is not growing fast enough. Based on the State Government’s own population projection, the Real Estate Institute of WA estimates the existing shortage of 8000 homes will more than double within four years.

There is another big reason why properties won’t fall in value as they will on the east coast — our homes are already undervalued.

While house prices are hotly overinflated over east, Perth is selling below replacement cost in many cases, especially following a 20 to 40 per cent hike in construction costs over the past year.

The market is slow to reflect change, but pressure is mounting for higher build costs for new homes to translate into bigger prices for established ones.

Mr Hegney has done the sums on Perth’s property values based on a complex formula used by the Reserve Bank of Australia. By his calculation, Perth dwellings are undervalued by 10 per cent.

Again, this supports the notion there is pressure on prices to increase — not drop.

The real impact interest rate rises will have on property prices will be through borrowing capacity.

I’ve heard some cases of borrowing capacity dropping by a third. Less money in hand means people can offer less for homes, and this is where the downward price pressure kicks in. But in my view, it’ll only counteract other pressures that would have otherwise driven prices up.