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6 reasons Perth investors should be smiling

Wednesday, 7th Aug 2013
Categories: Market News, Newsletter

happy investor

Property investors in Perth might be wondering how changes in the mining industry might affect the property market. Here are some of the reasons why Perth’s strengths as a property investment destination are unquestionable and why I am extremely confident about the future.

There’s no denying the fact that job prospects in some parts of the resources industry have taken a hit of late, as major projects transition from a construction phase to a production phase. This has resulted in a number of publicised redundancies across the state.

Naturally, property investors in Perth are wondering how these changes will affect the property market. The rental market may already be reacting, with the vacancy rate steadily increasing over previous months.

However, despite present conditions, Perth’s strengths as a property investment destination are unquestionable and I am extremely confident about the long term prospects of the market. Here are some of the reasons why:

1. Mining will continue to power the economy

Fears about the so-called end of the mining boom are nothing new. The industry has always had its ups and downs and these cycles will inevitably be reflected in the broader economy and our property market.

The key is to understand what drives the demand for resources and how WA, with its strategic location and immense wealth, is perfectly positioned to leverage the inevitable economic bonanza.

The demand for our resources is a result of the ongoing expansion of major economies in Asia and the Indian Ocean rim, which are trying to lift the living standards of very large populations. This will go on for many years. Countries like China and India remain, on the whole, poor countries, so there is clearly a lot of catch-up potential ahead.

Although recent falls in commodity prices have caused some companies to re-evaluate their investment plans, the future is still bright. According to the Department of Mines and Petroleum, WA still has an estimated $177 billion worth of resource projects under construction or in the committed stage of development.  A further $120 billion has been identified as planned or possible projects in coming years.

Even if we have seen the peak of mining investment, when did ‘past the peak’ mean the same thing as ‘bust’? The investment pipeline is massive and the prosperity that will come from the production boom will last decades and should not be underestimated.

2. Population growth

Over the past 5 and 10 years, WA’s rate of population growth has surpassed that of all other Australian states, with Perth being the main destination for new arrivals. The WA population increased by a whopping 3.5 per cent over the course of 2012 to reach 2.47 million.

This pattern of growth isn’t expected to change anytime soon. The Australian Bureau of Statistics (ABS) predicts that Perth will have the highest percentage population growth over all capital cities over the next 15 and 45 years.

With population growth coming primarily from overseas and interstate arrivals, the pool of potential renters and buyers continues to swell, putting consistent pressure on the real estate market.

3. Strong economy

A strong economy is the cornerstone of a healthy real estate market. For most of the past 15 years, the state has had a lower rate of unemployment than the national average and in recent times has recorded the highest weekly average earnings.

Across a broad range of economic indicators, WA continues to outperform the rest of the country. According to CommSec’s most recent State of the States report, WA remains at the top of the economic leader board, despite the easing in mining related investment. WA comes out top on 3 of the 8 indicators, including retail trade and housing finance, and is second on another 3.

3. The new face of Perth

Within Perth, there is a vast array of major construction and rejuvenation projects currently in progress, recently completed and planned for the near future. From new hospitals and stadiums to major upgrades in housing and transport infrastructure, these projects will create jobs, inject money into the local economy and enhance the city’s overall liveability, while also creating a number of real estate hotspots.

4. Performance of the property market

The property market in Perth has performed strongly in the last 12 months and particularly during 2013. Stock levels have remained below equilibrium and the average time to sell a property has shortened, so it’s no surprise we’ve also witnessed strong price growth.

Importantly, the property market has shown its strength and resilience over the long term. According to RP Data, capital city property values have increased at an average annual rate of 4.5 per cent over the ten years to June 2013. Perth, however, has experienced the highest average rate of 8.5 per cent over this time.

There is nothing to suggest the Perth property market won’t continue to show nation-leading growth in the future, driven by a powerhouse economy and strong population growth.

5. Old reliable

People in Perth have deep-rooted confidence in residential real estate as an asset class. It has widely been seen as a reliable provider of retirement wealth, particularly for the Baby Boomer generation. As the population ages and the popularity of Self Managed Super Funds increases, more and more money will find its way into residential real estate.

6. Interest rates

Though it’s impossible to predict the long term pattern of interest rates, the current low interest rate environment looks like it will continue over the coming years. Cheap credit will encourage people to buy and help to further strengthen the market.

Conclusion

With the varying view points in the media and the natural cycles of the market, it’s easy to see how Perth investors can occasionally lose confidence. But the positive long term prospects of the city outshine the negativity. The market has navigated successfully through far worse situations than we are experiencing at present. In fact, if you focus on the ‘raw numbers’ that are present and not the ‘changes’, you can’t help but be encouraged.

Sure, if you go looking for the next hot spot and take a short-term view, you may very well get into trouble. But if you buy and hold for long term capital gain and choose the right locations, you’ll have little to worry about.