We were recently lucky to catch up with Andrew Rankin of CBRE and the West Australian Treasurer, the honourable Dr Mike Nahan MLA, and have them run through the state of WA’s economy both now and what is forecast for the next 5 years. It was refreshing to hear that things aren’t as bleak as many commentators are suggesting. Here is a summary of that discussion;
WA peaked on migration in 2011 at a little over 80,000 new arrivals, we have enjoyed a 30% increase in population over the course of the mining boom, giving the state a current population of just over 2,000,000. In 2015 population growth is a little over 50,000 per year, with the bulk of that number made up from immigration on skilled migrant visas. There is no interstate migration to note at the moment, but that is expected to change into 2018 with the overall annual population increase figures expected to be just under 60,000 to 2019. This should give a little confidence in the local property markets ability to grow, plus create many construction and property investment opportunities.
The national average has been around 2.5% for the past three years, with this expected to trend upwards through 2016 & 2017 to level out to 3.5% in 2018. In Western Australia we are sitting currently a little over 3%, but this is a massive drop from around 5.5% in 2014. Unfortunately this downward trend is predicted to continue into 2016 bottoming out at 2%, but predicted to sharply rise back to 3.5% in 2017, from there it is set to moderate to just under 3% into 2018 & 2019.
From its peak of $76 billion in 2013, this will slow in its decline from just over $60 billion in 2015, easing to a predicted $46 billion to 2019. Exports of iron ore are set to continue to increase, it is heartening to note there has not been a reduction in iron ore exports since the early 2000’s. Other exports are set to hold relatively steady, but the big mover will be LNG as we are set to become the largest global exporter in this market, with exports set to nearly triple to $60 billion over the next 4 years. It is no wonder that Woodside and Chevron and all of the major mining players have positioned themselves in Western Australia, they get it right more often than not and see Western Australia as a business hub for many years to come.
Unemployment is set to peak in 2016 at a little over 6%, this is predicted to steadily decline back to just over 5% to 2019. Fortunately there has been an overall acceptance of lower wages post mining boom, which has allowed a lot of the returning workforce to be absorbed by the construction and retail industries and has fortunately led to unemployment rates remaining 2% under the forecasted rate, with a little luck this will continue to beat the predicted rate.
From the last peak in 2013, property currently is taking an additional 30 days to sell on average, current selling stock is up by around 6,000 properties, to around 14,000 properties on market. The median price is sitting around $420,000 currently, contracting from 2014, affordability is returning to the market. New houses are being built in record numbers, but new building starts are expected to drop closer to 20,000 per annum, slowing demand could limit property growth in the state.
Apartments continue to be massively over represented in the local market, it should be expected that prices will continue to soften in this sector, with the inner city suffering the most. So it could be a good time to negotiate hard on apartments if these fit your investment profile.
Prestige property ($1m plus) continues to drop from the 2007 peak and there have been some absolute horror stories in this end of the market, with some properties netting less than 50% their peak price in subsequent sales. The safest area of this market has proven to be the sub $1.3m brackets.
Rentals continue to ease with vacancies at near 5%, while rental yields are continuing to trend downwards, this is also something that is expected to continue for the foreseeable future.
The general consensus seems to be that we are near the bottom of the current property cycle in WA, with 51% of Australians wealth tied up in property, it will be most welcome when the local market returns to growth.
While we are nowhere near the highs we have previously enjoyed in WA, there is still $24bn committed to infrastructure over the current state budget period and many business sectors are expected to grow, such as; construction, agribusiness, education, administration, wholesale, accommodation, healthcare, food, arts and recreation along with professional, technical and scientific services. It still paints a pretty good picture for the state moving forward.
After hearing from key people within CBA this morning looks like we have an interesting ride ahead in Western Australia.
There is an expectation that the unemployment rate will get to 6.5% in 2015, as more workers become casualties in the iron ore war and gas workers move out of their construction and into their operational phase. But this increase in unemployment should largely be absorbed by the construction and retail sectors, as building approvals are trending substantially upwards. With an increase in construction activity, the retail sector will also help to ease the unemployment rate as homes are furnished and fitted out upon completion.
East coast workers appear to be leaving with interstate migration showing negative figures currently, but again this has been offset through immigration and natural growth, so there should be an increase in population of around 45,000 for WA in 2015, which should further aid the construction industry and help to support the rental market.
On interest rates, there is a strong view that there will be a further rate cut in March, with a possibility of further cuts in May/ June of this year. The low interest rate environment is expected to continue for the foreseeable future. Here is the ‘BUT’ though, with fixed rates at record lows, the chance to capitalise on this may be limited. There is an expectation as the US economy continues to recover and increases their domestic interest rates, the longer term money markets will become more expensive, and these record low rates will begin to evaporate mid-2015.
So what does this mean for you? There should be decent growth in the sub $800,000 housing market, as home owners are taking advantage of low rates to upgrade the family home. Money is cheap and the trends seem to suggest consumers aren’t afraid to invest that money into bricks and mortar currently. For the $800,000 plus market, growth will be flat for this area in the market, with limited activity and demand. But this gives rise to opportunities in picking these properties up at under market value, as motivated vendors looking to exit the market will need to discount, or accept a below market offer to move their property on.
If you choose to do nothing in terms of building, buying or renovating your current home, but still have a mortgage, be buoyed by the knowledge that with the aggressive pricing from 2nd and 3rd tier lenders, there has never been a better time to take a health check on your current borrowings, to make sure you are making the most of these extraordinary times we are in.
Contact us to find out more or discuss further.
The above is based upon opinion of economists, it should not be considered factual. Please undertake your own due diligence and consult the relevant professionals prior to making a decision on your finances and future plans
Having had some recent discussions with clients looking to purchase property, I have been interested to hear their opinions, with many people choosing to wait until the new year.
This surprises me and I have been suggesting these people pay close attention to the market this time of year, really taking time to try and uncover the vendors story from the real estate agent, as knowing the selling parties needs is key to an advantageous negotiation.
Most people are aware that what doesn’t sell this time of year will sit around until February 2015, without much interest over the holiday period. But in any market there are always those that are under pressure to sell, there are always a portion of sellers that are moving interstate for work, or even those looking to relocate to ensure their children get into a good school district. Some may be coming to the end of a working visa and may be moving offshore.
Whatever the circumstance may be, never ignore the property market. There are always sellers looking to get out quickly and happy to take below market value in order to move on with life. So if you are looking for a house, unit or villa in the foreseeable future, get out there now, take the time out to talk to the agent, put on a smile and say “Tell me a little about why the sellers on the market?”
Negative gearing essentially turns your property into a business, if it costs you money to hang onto that property throughout the course of the financial year, then that loss can become a deduction off your income.
I have provided the following as a rough example;
$400,000 investment villa, purchased in 2012, built in 2010, renting at $440 per week, $3,000 per year for rates and taxes, 1,200 per year for insurance, $420,000 loan with an interest rate at 5.29% 3 year fixed.
We will divide our expenses into two areas, physical costs such as interest, rates, repairs and insurance and virtual or non out of pocket expenses such as depreciation.
The property generates $22,800 in rent a year, the client receives around 90% of this after management fees have been deducted, leaving roughly $20,592.
The interest on the property is $22,218 per year, along with rates and insurances of $4,200 per year this takes the costs to $26,418 per annum in physical costs.
The result of the above is a loss for the year of $5,826, any loss will mean the property is negatively geared.
If we say the owner is making $70,000 per annum in income, they are currently paying around $14,297 in tax giving them a net income of $55,703. If we apply the above loss of $5,826 to the clients income, this takes them down to a taxable income of $64,174, reducing their tax paid to $12,404, resulting in having to pay $1,893 less in tax, reducing their out of pocket expenses on the investment property to $3,933 per year.
The loss of $3,933 per year represents just under 1% of the property’s value per year, so as long as the investment property grows at greater than 1% per year they are in front.
Now if we throw depreciation into the mix, we can further improve on the above figures. As the building was built after 1985, we can claim 2.5% of the building cost as depreciation until the building reaches 40 years of age. If the building cost $130,000 to build, you could claim $3,250 per year as depreciation on the building. Depreciation is a good loss in the sense that it has no physical cost attached to it.
So applying depreciation to the loss will take the $70,000 income down further to $60,924, resulting now in only $11,347 paid in tax, taking the out of pocket expenses down to just $2,876 for the year, equaling just .72% of the property’s value.
So applying the figures and gearing above we have taken a loss of $5,826 per year or $112.04 per week, to $2,876 per year or $55.31 per week. Halving the holding costs and giving every chance to the property to be a better investment.
It should be noted the above is a simple example, you cannot factor in the issues you can potentially experience as a landlord and you should always consult with your accountant prior to any investment purchase or speculation.
The opinions above are those of the author and do not constitute financial advice. Any decision on your financial future should be carefully considered, advice sought and relevant research carried out.