Perth house prices the subject of a great national guessing game

The page has turned to 2023, and the national story is the economy, with house values in Australia’s three largest cities recording the fastest falls on record.

It is a correction, of course, after a correspondingly vertiginous rise; but in the west, the story is different.

Perth house prices are a far cry from what’s happening in the eastern states.

Prices in Perth, according to CoreLogic’s latest data, are just 1 per cent behind the peak, recorded in August 2022 – three months after the Reserve Bank’s first in a steep series of rate hikes – whose terminus is the subject of a great national guessing game.

Why is WA (again) different? Three reasons.

One, the COVID-related price surge of 2020-2022 happened in Perth, but was more moderate than Sydney, Melbourne, Brisbane, and indeed Adelaide.

The five-capital city increase in prices from the trough to the COVID peak was 34 per cent, according to Domain – 40 per cent in Sydney, 42 per cent in Brisbane and a staggering 47 per cent in Adelaide.

Whereas Perth recorded a comparatively modest 24 per cent increase.

Two, Perth was starting from a lower base and remains comfortably the most affordable capital city property market on the mainland, with a median value of $560,000 compared to $646,000 in Adelaide and $716,000 in Brisbane.

Three, rental vacancy rates remain extraordinarily and historically low – sitting at 0.4 per cent according to SQM Research data, compared with 1.5 per cent in Melbourne, 1.4 per cent in Sydney, and 0.8 per cent in Brisbane.

Perth is an undersupplied market for both sales and rentals, something analysts believes will provide a floor under prices.

Additionally, the outlook for WA’s mining economy remains strong, providing further ballast, about which more shortly.

There is some little-understood psychology in the west which has served to moderate the mania experienced in other capitals’ property markets these past two years.

It is often forgotten that at the height of the first mining boom 15 years ago, Perth prices were the second most expensive in the nation at a median of $502,000, just 5 per cent shy of leader Sydney’s $526,000.

Perth’s median price grew towards a record of $616,000 in late 2014 – and then prices cratered for next six years.

The period coincided with a deep domestic recession – countercyclical to the rest of the nation – as commodity prices slumped and major resources companies slashed their staff.

Many homeowners, particularly in the first-home buyer outer suburbs, found their properties worth substantially less than they paid for them.

For many, the pandemic surge merely got them back to even or just above.

The collective scar tissue seems to have been a moderating factor in WA property price growth.

On the other end of the spectrum, smaller mortgages than those required to live in Melbourne and Sydney (despite higher median incomes) mean the pain of RBA rate hikes may inflict less pain in the west than among the east’s relatively more indebted households.

With border closures well and truly in the rearview mirror, this is Mark McGowan’s pitch to eastern staters.

“We have the cheapest housing comparatively, the highest average weekly earnings, a great lifestyle and secure work,” the premier said last year.

“When I was in Sydney … I saw lots of people who have very ordinary-paying jobs yet the average price of a house there is 1.2 million dollars — I don’t understand how people live.

“They could move here and have a much better and more affordable life, own their own home and have money left over. It’s a no-brainer as far as I’m concerned.”

WA’s last big surge in interstate migration came around 2012-2014.

Again it was because WA’s mining economy was out of sync with eastern Australia.

As infrastructure and construction lagged on the east coast, billions of mining expansion projects sucked labour west.

Once the cycle turned, most left as quickly as they arrived, but now the resources demand for workers is on again.

This time there is no national surplus of workers.

Infrastructure markets are running red-hot in every capital city, due in part to COVID stimulus and state government construction budgets that run into the tens of billions.

This time, if labour is to be attracted it is likelier to come from overseas.

In any case, the jobs are there and the people are needed – and they in turn need somewhere to live.

WA’s domestic housing construction market is in turmoil, industry participants say.

The genesis of the crisis was COVID-era first home builder bonuses, where state grants worth tens of thousands of dollars were stacked on top of those also offered by the Commonwealth.

The fuelled a record surge in housing commencements – the deal was that you had to have a slab down to access the money – without anything close to a corresponding workforce to get the houses completed.

It is why build times have blown out, in some cases by years. The analogy most often used by the industry is a “pig in a python” – visualise a python trying to digest a pig – being the surge in commencements – and having a hell of a time doing so as the lump of (over) stimulated demand works its way down the snake.

The phenomenon explains the surge in building company receiverships and insolvencies, with those in the know anticipating many more over the first six months of 2023 as cash flow continues to be crunched.

Ironically, this will further exacerbate housing shortages and may put further supports underneath established house prices because surging building costs – and time – make a ready-to-go existing house even more valuable.

There are no easy solutions to the crisis and it bears watching as 2023 gets under way.

Zooming out, and the macro picture looks if not bright, then at least comparatively favourable compared to national and certainly international conditions.

While macroeconomists debate whether a soft landing is possible amid record contraction of monetary policy in the United States and Europe, in WA the commodity cycles seem again to look favourable.

All of a sudden sentiment toward China is bullish, with trade relations warming and COVID restrictions consigned, which might tend to favour not just iron ore but smaller exporters of wine, crayfish and barley too.

The war in Ukraine is continuing to roil energy and food markets, so give a tick to WA’s gas exporters (despite some domestic system concerns around supply and a tricky phasing out of coal) and grain growers – who have had the good timing to reap an all-time record harvest.

And WA’s emergence as a world-leading lithium province, amid surging demand globally for an electric-powered future, adds another string to the commodities bow.

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