Fringe benefits

Australia Perth birds eye view

Like many jurisdictions, Australia has found itself mired in a conflict between foreign investors seeking to enter premium markets like Sydney and Melbourne and local Australians trying to find affordable homes to live in. With those cities, as well as fast emerging Brisbane and the capital Canberra flirting with unaffordabilty and skyrocketing prices, far flung capitals like Perth in Western Australia, and Darwin in the Northern Territory, could be the Australian alternative investors are looking for.

Australia Perth boardwalk

A Tighter Year Ahead

It’s this expensive, difficult to enter market that prompted the Australian Prudential Regulation Authority (APRA) to implement new lending regulations in March 2017,  which is designed to address rising prices, household debt and slow income growth in a record-low interest rate environment. There was also an aim to control rapid price growth as a result of investor demand that
hurt first-time buyers and young families. APRA’s new rules limit interest only lending to 30% of all new residential lending, reduce lending where the LTV is 80%, and resist high risk lending among other measures. Investors can expect new serviceability requirements demanding an ability to meet both interest and principle repayments at higher interest rates, and property location to be a bigger factor.

Regardless, December research by CoreLogic found property prices fell 2.3% in 2017, the smallest year-on-year drop since May 2015, but nonetheless measured year-on-year growth in 2017 at a juicy 12.3% in Hobart, 8.9% in Melbourne, and a low (in positive growth terms) in Brisbane of 2.4%. Also in December George Tharenou, chief economist at UBS, told ABC that 2018 in Australia would be defined by “macroprudential policy tightening,” that would restrict borrowing. 

“The APRA measures are having an impact on investor demand in all markets, by making finance conditions much tighter for investors, particularly to obtain interest-only finance,” agrees JLL National Director, Research, Leigh Warner. “However, this is having the largest impact in those markets where investors represent the largest share of overall buyers and this is undoubtedly in the major East Coast markets of Sydney, Melbourne and, to a lesser degree, Brisbane. Perth and Darwin will be less impacted and investors appear to be looking more at other markets for value as the major East Coast markets cool.”

Australia Darwin

Go West

To that end, SQM Research predicts Perth’s 2018 growth to be as high as 4% if APRA makes no more cooling moves, the dollar stays steady against the greenback (currently around 77 cents), and if there are only marginal rate hikes. The city was only one of two capitals to record price drops in 2017, to the tune of 2.3%, but WA’s economy is finally stabilising after its resource boom slump. During its strongest growth years in 2010 to ’14, Perth could rely on its mining industry to buoy the city overall, and though it’s wait and see on whether export peaks return, 2018 is expected to be a year of improving economic conditions. 

“Perth and Darwin have both endured a tough period the last few years as resource investment has wound down and workers have left both regions. However, this impact is almost entirely over now and there is more optimism about economic prospects over the next few years, including in the resources sector,” says Warner, who estimates the labour drain (population stagnation is a major negative for Perth) may be mitigated, creating demand for housing. 

In the fourth quarter of 2017, data from Knight Frank put median apartment prices in Sydney at AU$741,000 (HK$4.6 million), AU$490,000 in Melbourne, AU$380,000 in Brisbane, Canberra at AU$429,000, and just over AU$362,000 (HK$2.3 million) in Perth, making it one of the most affordable markets in Australia. Only Hobart (AU$295,000) and Adelaide (AU$313,000) ranked lower. Not surprisingly, anecdotal evidence indicates investor demand appears to be on the uptick in the second tier. “Strong value relative to other Australian markets should also create some external investor demand and steady recoveries in the housing markets in [Perth and Darwin] should build over the next few years,” adds Warner. 

Australia Sydney

Northern Light

Perched almost on the northern tip of Australia, Darwin was the other capital to record a price drop last year, an Australia-high 6.5%. Since the 2014 peak, Darwin's house values had fallen by a cumulative 21.5%. SQM forecasts 4% here too, where median flat prices rank above Adelaide and Hobart at AU$445,000. Like Perth, Darwin is a resource and construction economy, and with the completion of Japan’s AU$45 billion Ichthys natural gas mining project, housing demand has plummeted, dragging prices, rental rates and occupancies with it. 

While investors are currently showing more interest in Perth, both cities’ price points relative to their first-tier counterparts and the growing optimism—Darwin is a port on the Timor Sea with a burgeoning oil industry—that they are over their respective humps have put them on investor radar with “counter-cyclical buying opportunities.”

As Warner sees it, the negative to low entry prices and high yields is high vacancy rates, making protracted void periods a real risk for domestic investors. However, “Many foreign investors do not rent out there investments and so are not exposed to this vacancy risk. For offshore investors, one recent detrimental impact on investment has been stamp duty surcharges introduced by various state governments on foreign buyers.” Beginning in January 2019, Western Australia will implement a 4% levy, and while the Northern Territory has no such duty, giving both considerably lower purchase costs than the approximately 8% in spots than Victoria or New South Wales, where duties can be 8% (or 15% in Hong Kong). “This does represent a cost saving for investing in these markets,” finishes Warner. Magic words for investors considering one of the world’s most expensive
property markets.