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Perth’s four-year housing bust is nothing like what Sydney and Melbourne face

As house prices continue their downward trajectory on the eastern seaboard, property owners across the Nullarbor are watching on with interest.

Key points:

  • Perth's housing market collapsed at the end of the mining boom in 2014
  • Since then, it has been on a constant slide while prices surged on the east coast
  • But experts warn Sydney and Melbourne's bust will be more significant, and swift

Perth is more than four years into a housing downturn that is yet to bottom out after median house prices peaked at $585,000 in November 2014, according to Landgate figures.

As panicked owner-occupiers and property investors in Sydney and Melbourne try to predict what will happen from here, real estate observers and economists say the WA market may provide some clues.

Slow slide vs steep plunge

In WA, house prices were the casualty of a slump in population growth, triggered when a swathe of construction projects kicked off by the mining boom were completed.

That caused the Perth median house price to fall 14.8 per cent from its peak, according to CoreLogic data.

External Link: Datawrapper – Sydney, Melbourne and Perth house prices

For property owners, the past four years has been a constant stream of bad housing news, leading to a surge in mortgage stress.

But the decline has been gradual, according to Real Estate Institute of Western Australia (REIWA) president Damian Collins, in contrast to the wild fluctuations underway on the east coast.

"Sydney figures show that [prices are] down 9 to 10 per cent in 12 months alone, so it's much more significant and swift, the decline," Mr Collins said.

"The rapid downturn has certainly spooked a lot of people."

Perth house for sale and for lease signs

The reality is that Sydney has further to fall than Perth did, according to Bankwest chief economist Alan Langford.

"If you get that far out of kilter with incomes, you're going to have a steep fall," he said.

How households react to a property bust

In Perth, the retail sector took a hit as households cut back on spending.

"We've seen a big slowdown in retail trade on the back of this sliding housing market," CoreLogic head of research Cameron Kusher said.

"I wouldn't be surprised, particularly over the Christmas/New Year period, if we do see much weaker retail conditions than what we've seen over recent years, due to the fact that property prices are falling fairly rapidly in Sydney and Melbourne."

External Link: Datawrapper – Sydney, Melbourne and Perth unit prices

Economists say the reversal of the "wealth effect", created by rising house prices, is to blame.

"If you've got houses and share prices falling at once, a household that has equity in a house plus a share portfolio — either directly or through their super funds — they're not going to be as inclined to spend, which is why we're seeing soft household consumption growth coupled with modest wages growth even in New South Wales and Victoria," Mr Langford said.

"You're more inclined to run your savings down to finance consumption if you think your wealth is being maintained or growing."

However, Mr Langford said household consumption was holding up in Sydney and Melbourne.

"A little bit worryingly, including for the Reserve Bank, is that it is being sustained by a run down in savings, because their labour market's quite strong and people are confident in their jobs, which is great.

"But we just need to be aware that households are maintaining consumption in the face of subdued wages growth by running down savings."

Blocks of land amid a new housing development at Burns Beach in Perth.

And that has a flow-on effect to the broader economy.

In WA, unemployment remained relatively stable, but underemployment ticked up, while building approvals have more than halved since their peak in 2014.

"Certainly now, there is a big downturn in the housing construction sector," Mr Kusher said.

"It has, obviously, a flow-on effect to real estate agencies as well."

Missing out on $1 million

As potential investors sit on the sidelines, those already in the market stand to miss out on more than capital gains.

Property commentator Gavin Hegney said while prices may drop by up to 20 per cent from peak to trough, the real, risk-adjusted loss facing investors may be closer to 40 per cent.

That is due to inflation and the opportunity cost of having capital tied up in loss-making assets, which could be invested elsewhere.

A newly-built apartment building with for lease sign.

"You could have taken $1 million out [of Perth property] in 2014 and taken it over to Sydney and now be sitting on an asset worth $1.8 million," Mr Hegney said.

"In Perth, that would now be worth $800,000.

"That's the missing million."

The cost of moving sidelines buyers

In a downturn, capital losses are not the only consideration keeping buyers out of the market. It becomes harder for homeowners to stomach the considerable cost of moving house.

"When you've been in a market such as Perth, where a lot of people haven't seen any capital growth at all for 10 years — in fact, some people have seen negative growth — all of a sudden, those transaction costs really start to bite and it puts people off moving," Mr Collins said.

"It is going to be a while before we see a return to the turnover in volumes that we saw.

"Ten years ago, [sales] volumes in Perth were 62,000 properties a year, now it's about 32,000.

"That's been a big drop and I can't see it getting back to those turnover levels for many, many years ahead, if at all in the next decade."

Houses close to Perth's CBD

While prices are falling in Sydney and Melbourne, Urban Development Institute of Australia (WA) chief executive Tanya Steinbeck said policy makers should "not to expect the downturn to fix the housing affordability issue".

"In WA, over the last few market cycles, it's now become a structural issue, not necessarily a cyclical one," Ms Steinbeck said.

"That's because increased supply doesn't always meet the needs of those who are on low-to-moderate incomes.

"I anticipate that it may not meet that need in Sydney and Melbourne, given the significant increase in the median house price over there."

A stagnant market becomes the 'new normal'

In Perth, even after four years the decline in market sentiment has yet to reverse course, plunging to new depths in housing data released this week.

External Link: Home prices November 2018 Datawrapper chart

"[People] feel that's the new normal, that prices just stagnate or decline moderately," Mr Collins said.

"There doesn't seem to be any perception amongst anybody out there in the market, generally, that they're going to make any substantial capital gains, if any at all.

"Whereas you go back 18 months ago, in Sydney and Melbourne, there was the exact opposite. They just thought it was going to go up 15 per cent per annum as far as the eye could see."

Real estate observers say credit tightening, initiated by the banking regulator to tame investor activity on the east coast, meant Perth became collateral damage.

"Twelve months ago, it was actually starting to look like there was some green shoots in the market," Mr Kusher said.

"Once credit conditions tightened again at the start of this year, any hopes of a recovery in the market faded and that's why we've seen values falling again."

Making the most from a bust

However, the real estate industry says downturns can present opportunities, too.

"It's a great time to continue to invest in infrastructure in the downturn," Ms Steinbeck said.

"It's far more affordable for the state to invest in infrastructure in a softer market.

"You've got labour costs that are significantly lower, you've got more trade availability and it continues to boost the economy."

A 'sold' sign in front of a terrace home in Brunswick, Melbourne.

For now, CoreLogic expects prices on the eastern seaboard will continue to fall.

"Realistically, we see that the downturn's probably going to continue throughout most of next year and into early 2020," Mr Kusher said.

"Our view's always been Sydney and Melbourne will fall somewhere in the 15 to 20 per cent range and that's looking … very likely at this stage.

"People are still, in a lot of instances, well ahead, but I guess people have been accustomed over the last 25–30 years for property prices to go up, so when they're going down it's a bit of an uncomfortable situation."

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