When will the market peak?

A fundamental law of physics dictates that what goes up must come down. Property markets do the same albeit end up significantly higher over a prolonged period.

Three of the major four banks recently forecast the next fall in Australian property markets with the Commonwealth Bank the most pessimistic of them predicting Perth property values will fall 10 percent in 2023. Westpac’s Bill Evans predicts a smaller retraction of 5 percent for Perth the same year.

It is noteworthy that CBA predicted a catastrophic 20 percent fall in Australian property values in 2020. They were about 40% out.

It feels like Perth is an afterthought when national economists predict property value movements. Predictions of double-digit market corrections in Melbourne and Sydney in 2023 after further (albeit more modest) gains next year are probably quite accurate. The rationale of Perth’s property values following the east coast city trends seems reasonable, but it is often completely wrong.

The current market conditions present the perfect scenario for Perth to buck future national trends of falling property values. Here’s why:

Firstly, rents continue to rise in Perth at a faster rate than values. Vacancy rates across the city are less than 1 percent and with little investment activity, despite favourable market conditions, supply of rental stock will remain low. Low rental stock is exacerbated by investors selling to owner occupiers at alarming rates, there’s a dearth of new investor stock built since 2015 and demand from re-patriating West Aussies will continue to see rents increase eventually attracting new investors.

Secondly, interest rates remain low and Perth is affordable. Banks’ expectations of increasing rates in 2023 is behind the predictions of falling property markets and in mortgage-stressed markets like Sydney, that makes sense. But that is not the case in Perth. We remain (aside from Darwin) Australia’s most affordable city to buy a home. Perth’s median house price of $525,000 at the end of September is less than half that of Sydney’s. Contrast this with 2005 when Perth’s median was $480,000 and Sydney’s was $485,000. On average, a Sydney-sider commits 43 percent of their income to service their mortgage, whilst in Perth its 24 per cent; enviably more affordable. It makes no sense for Hobart’s and Adelaide’s median house price to be higher than Perth; city’s where average wages are substantially lower than ours.

Thirdly, population growth is returning to more normal levels with fewer people leaving the state than eighteen months ago. WA Treasury predicts increases in population growth for this year thanks to increased migration, new mining projects creating more jobs and it is predicted 50,000 West Australians are looking to return home after the relaxation of border controls.

WA’s economy and unemployment rate are the envy of the remaining states and with affordable housing and enviable lifestyle, eastern states’ folk will look west to relocate their families. This demand pressure will help keep property values stable despite any future downturn in east-coast markets.

My prediction for 2023? Property values up 2 percent across the year.