Expectations are that the RBA Board will let a cash rate that has nearly halved over the last two years and a falling dollar that is down 15 per cent against the USD work their way through the economy, with the possibility of one more cut in March next year. But the RBA and Treasury don’t expect a rebound in non-mining sector activity any time soon. Both institutions downgraded economic forecasts once again earlier this month. GDP growth is expected to decline from 2.75 per cent in 12/13 to 2.5 per cent in 13/14.

In the state that is at the forefront of a slowdown in mining sector investment, the State Budget was far less sanguine than the mid-year update published in December last year. WA’s economy is expected to grow 3.25 per cent in 13/14, down from 5.75 per cent in 12/13.

The moderation in domestic conditions is expected to flow through to a softening labour market, with wage and labour growth easing back in line with the rest of Australia. Although unemployment is forecast to average 5.5 per cent in 13/14, in recent months the trend unemployment rate has steadied at 4.8 per cent. Meanwhile, wage growth appears to have already declined back to just above national levels after growing at its slowest pace in four years in 12/13.

Residential property market
Perth remains one of the standout property markets in Australia. The latest settlement figures showed that properties at the upper end of the market continued to change hands more often in the first half of this year.  The proportion of units sold for more than $500,000 has lifted from 30 to 40 per cent over the last 18 to 24 months, and the March quarter recorded the highest number of million dollar houses changing hands since 2007.

Although established property market listings have increased around 15 per cent in recent months, there are still relatively few dwellings priced in the first home buyer and investor range. Therefore, turnover in the sub-$500,000 range has slowed from levels this time last year.

All this is translating into higher prices, with the ABS House Price Index for Perth up 11 per cent over the last 12 months. Bear in mind though, this is not necessarily capital growth. On a positive note, unlike price growth last decade, loan sizes have crept up just 5.5 per cent (vis-à-vis 15-20% p.a.).

There will continue to be questions on the sustainability of the upswing, especially given the prospect of rising unemployment. This is reflected in recent house price surveys that are far less optimistic than 12 months ago. However, to date, the established market remains healthy, with housing finance figures maintaining a steady upward trend and REIWA agents recently reporting a lift in sales after a marginally subdued winter period.

Residential construction
Western Australia has been leading the dwelling construction recovery in Australia, with approvals for the construction of homes in WA up 27.5 per cent in 2012/13 compared to just 1.9 per cent in the rest of Australia.

New dwelling demand has been driven by strong household formation rates, namely first home buyers leaving the rental market over the last 18 months. This looks set to continue in the near term, with FHOG applications continuing to strengthen in the last few months despite easing rental conditions. The lack of established properties for sale has driven a stronger increase in first home buyers looking at new dwellings. The number of grant applications for new homes increased 30 per cent over the June quarter compared to a rise of 5 per cent for established homes. And recent grant changes are likely to accentuate this trend.

Given three-quarters of new dwellings in WA are built in Perth, conditions in the capital city have driven the recovery. Approvals in Perth have increased twice as much as regional WA, with the Pilbara the only regional area showing a solid upswing in building construction.

Within Perth, approvals are up across the board, which is consistent with strong land sales in all the growth corridors over the last 18 months. We are, however, seeing a gradual shift away from detached housing. Although detached houses still made up 77.7 per cent of approvals in Perth during 2012/13, it is the smallest proportion in five years. And whilst apartment construction in Perth has lifted around 25 per cent, approvals for semi-detached homes and flats/units have both doubled.

Throughout the last 18 months, owner-occupiers and investors have led the lift in new home demand. Dwelling finance for new homes for owner occupation reached record levels in June, with figures showing that the proportion of new dwellings being built for owner occupation is at its highest level since the FHOG Boost period. The value of investment finance for new dwellings is also up, lifting more than 40 per cent on 2011/12 levels. The state’s new dwelling sector has, however, yet to experience a noticeable lift in the third category, holiday home construction, which was a more common feature in the construction boom last decade.

Although there are downside risks, which includes easing economic and population growth in WA, momentum will continue to push dwelling construction upwards in 13/14 from an estimated 23,500 dwelling starts in 12/13 to around 25,000 dwelling starts (up 6.4 per cent) this financial year.

Any upside potential will be muted by low levels of titled land, building construction labour constraints and more conservative lending and investment practices.

Residential land development
In the Perth market, stock levels have declined to 2006 lows and this is translating into pockets of price growth. The number of lots developers had on the market as of June 30 was down 25 per cent over the quarter and 45 per cent compared to 12 months earlier. Approximately two-thirds of the 78 active developments in Perth had less than ten lots on the market.

At this stage, stock levels are not expected to fall to 2005/06 lows. There is still more than twice as much land available as during the peak of the boom last decade and developers in Perth are expected to increase the number of lots brought to the market in the second half of this year.

Five new greenfield projects bringing land to the market over the next six months will help, but any noticeable easing of supply pressures in Perth is going to have to be driven by reduced demand rather than any significant lift in supply. Developers are already bringing lots to the market at a considerable pace, with nearly all lots selling several months out from titles (some up to nine months from titles).

In recent months, higher priced lots have been selling more often, which lifted the average lot price 6.2 per cent in the June quarter. The affordable end of the market, however, continues to remain the strongest market in Perth.

Although mortgage rates are low and declining, if land prices lift substantially, first home buyer demand will quickly recede late this year and throughout 2014. Continued upward momentum will, therefore, only be maintained if sales to second and third home buyers and, to a less extent, investors take up the slack. To date, this seems unlikely; so demand will potentially soften in the land market in 2014 and this could translate to a peaking of construction around late 2014, early 2015.