4 December 2017

Investment options for real estate

Boom. Bust. Bubble. The real estate market always appears to be defined in extremes. Rather than simply adding to the drama, let’s compare the long-term history of the property market between Perth and Australia’s flagship investment capital – Sydney.

In 1974, the average property price in Perth was 67.3% of the average property price in Sydney ($18,850 to $28,000). In 2015, that ratio had increased to 71.1% ($604,822 to $850,194). As you would imagine, the annual growth rate for both regions is fairly similar 8.68% per annum for Sydney and a slightly better return of 8.83% per annum for Perth.

So that’s the 40-year growth of both markets’ average property price, but at any given time a particular market can be well below or well above that average. So where are Sydney and Perth at present? Sydney’s median house price is $1.15 million when it should be around $1 million, so the Sydney market is 15% above the historical average. Perth prices currently languish at $525,000 when historically they should be close to $716,000, so Perth is almost 26% below that historical median after close to three years of steady declines in prices.

Why you shouldn’t buy in the Perth market

Just because Perth prices are only around three quarters of what they should be, you shouldn’t anticipate a dramatic jump anytime soon. The end of the mining boom was a contributing factor in the decline in the Perth market. With thousands of workers no longer needing accommodation, supply has outstripped demand in recent years and while markets tend to revert back to the norm, the current economy in WA will need some time to recover. So if you plan to borrow, do a quick renovation and flip the property for a massive profit in order to repay the loan, I would strongly advise caution.

Why you should buy in the Perth market

However, if you are in position to hold onto the property for an extended period of time (a few years at least), and don’t need to spend large sums on renovations and repairs, you are likely to be well rewarded for your patience. From 2002 to 2007 the median property price in Perth increased from just under $200,000 to more than $450,000, or roughly 19% per year. To make a profit in that market all you really needed to do was buy and then sell the same property – unaltered – a year or two later. From 2008 to 2015 Perth median prices increased by an average of just 2% per year. Even with major (read costly) renovations, you really weren’t likely to see a significant short-term increase in price.

Consider Sydney’s prices. The median price is $1.15 million (meaning home ownership is moving further out of reach for many buyers) and while prices have increased by 13.1% in the last year according to Domain Group, growth of 13% per annum – or the 19% per annum that Perth saw in the early part of the century – appears to be unsustainable from a historical perspective. Which means at some point individual markets will be drawn back towards the average. Yes you would have made a fantastic profit investing in the Sydney market in 2013 where the price jumped from $700,000 to today’s $1.15 million as opposed to an essentially static price in the Perth market of the same period. However, the opposite was true between 2004 and 2007 when Perth and Sydney prices ended up practically identical. Perth’s median almost doubled in price from just under $300,000 to around $560,000 while Sydney’s dropped from $600,000 down to $560,000.

When a property market is averaging less than three quarters of the price you should expect it to be averaging, you can be fairly confident that it will rebound at some point. While WA is still recovering from a downturn in the mining sector, markets tend to recover back to towards that historical growth at some point. Whether it be through a rejuvenation in mining, or growth in another industry, the state’s population will continue to grow and when demand is greater than supply, prices will jump.

So, what should you be looking to achieve by investing in the Perth property market? Aim for a medium- to long-term investment, as it is very unlikely that the economy and accompanying housing demand is going to boom dramatically in the near future. There is a reason that interest rates are at historic lows – the RBA is looking to stimulate interest in the property market amongst other things.

And what about a Sydney investment? While it is possible that prices will continue to confound the experts and jump year after year, it is more likely that you have missed that particular mini-boom and could be left with limited growth – or even a slight loss – should you look to jump on an investment ship that is well out of the harbour.



As published in The West Australian