Date: June 6, 2016
You might be caught thinking that Perth has been the worst performing city in Australia with recent figures indicating growth of -0.9% for Q1 2016 and annual growth of -2.0% for the past 12 months. And you would be right!
Perth actually lead the country with negative growth, lower than Darwin with -1.8% growth. Sydney and Melbourne continue to lead the country with 7.4% and 9.8% growth respective for the 12 months to Mar 2016 (source: Corelogic RPData) but are unlikely to sustain this growth.
So the questions now arises, is the Perth market now dead? What are the projections of future growth ahead? Is it better to sell or hold?
We look into what lies ahead for the resource capital of Australia.
The New World economy
Over the past 10 years, the world economy has been lead by the economic growth of China as their economy grew rapidly with unprecedented growth.
As with any developing country with continuing economic growth, a process of transition occurs from being an infrastructure & manufacture led growth to growth driven by domestic consumption and this is exactly what is happening in China. BHP’s CEO, Andrew McKenzie, elaborated further recently by saying “China is in transition from a heavy industry led economy to more of one that is more services based growth” (sydney morning herald, Apr 2016).
So with so much influence from China on the rest of the world, what will happen to the middle kingdom coming up soon?
According to the Office of Chief Economist (see Resource & Energy Quarterly) the Chinese economy is expected to slow to 6.0 % in 2017 and then rebound in 2019 to 6.3% to remain steady until 2021. In addition, the report forecasts the world economy to increase from current 3.4% growth to 4.0 % in 2021. This shows a modest growth projection for the world ahead and can only be things for the WA economy ahead.
So what about the Australian economy?
Overall the Australian economy will remain steady with an annual GDP growth rate of 2.4% and expected to reach 2.9% by 2020.
The rate of population growth in Australia has continued to slow however we are expected reach 25.6 million by next decade up from the current population of 24.1 million.
Nationally the unemployment rate is 5.7%, unchanged from March and remaining at its lowest level since Sept 2013.
CPI figures released in Mar 2016 showed it fell by 0.2% over the quarter to be just 1.3% higher over the year with underlying inflation at 1.5% over the year.
Both of which were well below the RBA’s target range of 2% to 3% and this seems to have had an impact on interest rates (read more about this)
Investors should look to growth signals that indicate that property prices are on the rebound.
Of the many, I would look at the supply of houses, population growth, lowering unemployment and in particular for Perth, commodity prices. The Perth economy can be considered broadly to be a mining economy and the impact from commodity prices can not be underestimated. In a way, higher commodity prices drive the WA economic recovery and the flow on effects of higher commodity prices relate to increase in migration from overseas and interstate, wage growth and decreases of unemployment.
And what is the single most influential commodity for the WA economy?
The answer is of course is iron ore. This red dirt accounted for the 47% of the total value of states resources in 2008-09 and was followed only by petroleum and LNG combined with 21% of total state revenues.
"The Perth economy can be considered broadly to be a mining economy and the impact from commodity prices can not be underestimated"
The Power of Iron
Iron ore price charts are closely watched by businesses it is clear that record high prices were recorded during the boom time in Perth’s economy circa 2004-2011.
However ever since 2014 there has been a steadily decline in iron ore prices and this is partly due to increase of iron ore production and decreasing demand growth around the world.
But before you pack away your shovels, there are signs of light and since Jan 2016 we have seen a sharp increase in iron ore prices. Now economists are bullish about prices for the next five years and projections seem to be up, up up!
According the Office of Chief Economist, the long term forecast for iron ore is to be $77/t by 2017, $85/t by 2018 and keep on rising to $90/t by 2021. The current price for iron ore is circa $65/t at the time of this blog so it represents a considerable gain. Note all prices shown in AUD and so a lower USD/AUD rate will have impact on future trends!
Furthermore trend lines for iron ore charts show that the recent growth by iron ore may have finally bucked the downward trend and that the bottom of the market may finally behind us.
Bring on the Asian Buyers
The wild card for the property market is that opportunities are now arising for Chinese buyers to see Perth as the capital city that hasn’t seen the extreme prices of Sydney and Melbourne. The decrease in the Australian dollar recently raised the prospect of good buys to be had nationwide by foreign investors.
With uncertainty in Chinese share markets, cashed up Chinese are looking to secure their equity in offshore investments, rather than seek out investment returns.
An increase of Chinese buyers in Perth would see property price increase as a whole even though this might be limited to the high-end apartment and housing market.
Investing is about considering all factors that may and could impact future growth such as housing supply, unemployment, population growth and commodity prices to name a few. Recent economic signals may indicate that the bottom of the market is behind us and smart investors will know to be counter-cyclic to the trends and seek out those opportunities that arise.
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Andrew Caetano is a property guru, blogger and engineer (no, he doesn’t drive trains). Having bought and sold over 12 investment properties over the years, Andrew continues to debunk the myths about property investing to insight into the Perth property market. In his spare time he provides talks, workshops and coaching students.
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