Extracts from 2007 Hegney Property Outlook report

(The Outlook - Perth: written by Gavin Hegney, Executive Chairman, Hegney Property Group)

In recent times, the Perth property market has been operating on a higher plane than other Australian states.  Incredible growth fuelled by the aligning of several key economic drivers has set new benchmarks.  Whilst still fundamentally sound, the growth witnessed in the last two years is no longer sustainable or apparent as we return to long term growth rates.

The Market in 2007

2007 will be a settling year with select locations continuing to increase in value.  Supply will continue to remain a key issue and if the economic climate stays the same, we may still see the pressure build on prices and particularly on rentals.

The first half of 2007 will allow for the digestion of the drastic increase in the supply of properties available for sale.

The Perth median house price will continue to grow but at a more steady rate than the exponential growth experienced over the past couple of years.  However, the overall median price may not truly reflect what is actually happening in the market as growth will be extremely selective across various locations and suburbs.  This in part is due to the erratic growth rates amongst various suburbs in 2006.

Price growth in the premium property sector should grow at 10 to 15% whilst low price property is predicted to move very selectively. 

Again, there will be a shortage of titled lots coming to market, although there should be more supply towards the end of 2007.  We predict land price growth in the vicinity of 5 to 10% depending upon the supply that is available to be released.

With lower investor activity and strong rental demand pushing rents up, we predict a probable rent increase of 15% plus and the creation of a two-tier rental market with the new lettings being on higher level to that of existing tenancies.  This growth rate may be conservative if the purchasing pressures of 2006 transfer to the rental market in 2007.

There has also been a significant decline in first homebuyer activity now making up only 8 to 10% of the market in Western Australia as distinct from the levels of 17% nationally.  Already at the lower end of the market, first home buyer affordability has reached record lows and looks set to fall further in 2007.

All performance indicators point to continued growth, however a degree of trepidation now exists as many question how far the momentum of recent years will carry the property market.  At some point, affordability will play its part in restraining values.  The startling fact that Perth is now the eleventh most expensive city in the world (on the basis of medium house price compared to medium income) only confirms that the issue of affordability will come into focus.

Strong conditions look set to continue but the need for more educated, strategic decisions will be critical.

Market Sentiment

Whilst the statistics show what has happened, its people who drive the market.  The most important factor is market sentiment.

In 2006 the sentiments was one of limited supply, a fear of missing out and to some extent greed.  Late in 2006 this turned somewhat to fear as owners began to believe – ‘if I could get that price for it, I think that I will sell it!’

On came a supply of property available for sale and stock levels rose three-fold, albeit only to longer term levels of about 2% of total property.  This change created some fear and panic as the number of properties for sale increased, buyers began to baulk at prices, interest rates rose and selling periods pushed out to the normal 6 to 10 weeks selling time.

Properties that were never worth what they were asking had to come back to market levels and we saw price reductions for the first time in our market for 2006.  This increase in supply incidentally coincided with the holiday season when most people are just not interested in real estate unless it can be eaten or given as a Christmas present!!

Today, the sense of urgency is out of the purchasing market but the media talk is of rental increases, a topic which we started back on October 2006.

Some people today believe that if the market is not ‘booming’ it must be ‘busting.’  For those who feel that they can’t afford it, have missed the boat or that the market is set to bust, are opting to rent property.  Those moving into the state from interstate or overseas find our rental market cheap and the purchase market more expensive.  Their demand will mostly go into the rental market in 2007.

Simultaneously, some investors are selling property to cash in on the new superannuation rules whilst others are tempted to hold off from investing or invest elsewhere, counter-cyclical buying into the Sydney, Brisbane or Melbourne markets.

Hence, rental demand increase whilst supply falls and rents go up, increasing yields to investors.

It is said that market fundamentals start a trend and speculation ends it, and speculation was rife in the purchasing market in 2006.

In 2007, we are likely to see 5 years of normal rental growth in one year.  That is almost a normal market cycle of growth in one year.  The fundamentals to purchase could well be back by late 2007.

The growth in prices in 2006 was fuelled by lack of supply whilst demand was strong.

Factors to resolve the inability to approve and develop housing lots remains today.  Therefore the surge in prices may abate only to transfer to rental prices before transferring back to the purchase market.

Today, uncertainty and fear are prevalent.  Each year the growth continues, it becomes more challenging to predict more growth as all markets go in cycles.  Yet the fundamentals of lack of supply, ongoing demand and growing returned remain.  Meanwhile, where else can the market go but up.  But it won’t last forever, and depending on what causes it to end depends on whether it will just taper or whether it will crash.

Assessing and understanding market sentiment is a valuable indicator as we look ahead and attempt to predict future trends, shifts and changes.

Whilst not a definitive science, the value of being in touch with community sentiment offers a level off understanding and an opportunity to plan accordingly.

The Complete 2007 Hegney Group Property Outlook Report is available to purchase via their website at www.hegney.com.au