• Markets put chance of August rate cut at 64 per cent.
  • Housing investment surges in May.
  • House price expectations decline, but remain optimistic nonetheless.
  • Perth and Pilbara rental listings increase.
  • New dwelling finance at 19 year high.
  • First home buyers increasingly look to new dwellings.
  • Medium density construction pushes dwelling approvals to 24,000.
  • Strong demand and short supply is flowing through to higher land prices (approx. $30,000 higher) in Perth

The RBA kept the cash rate target unchanged for the second consecutive month, as forecast by most market analysts. The RBA judged that although economic growth is ‘a bit below trend’, the falling dollar and record low borrowing rates should continue to drive non-mining sector activity. Many economists expect the RBA to continue cutting the cash rate later this year as the terms of trade falls, unemployment edges higher and mining investment declines. The futures market was pricing in a 64 per cent expectation of a 25 basis point rate cut in August and a full chance of a rate cut by October. All eyes, however, will be on inflation numbers published on Wednesday.

In WA, the state’s unemployment rate was pegged back in May and again in June, but the trend throughout the last 12 months has been up (4.9 per cent compared to 3.7 per cent 12 months ago). The number of unemployed has increased roughly 35 per cent, or 18,000 people, over the last year and is consistent with figures that indicate job advertisements are in decline and job applications are increasing.

The Perth residential market is now firmly in the upswing stage, which is characterised by growing confidence and capital growth. Supply is relatively tight at the affordable end of the market with signs of buyers paying above asking price, but listings have increased in recent weeks.

First home buyers in Western Australia are still taking advantage of these historically low interest rates on offer. There were over five thousand more FHOG applications in 2012/13, and nearly double as many applications as two years ago. Meanwhile, existing home owners that have been sitting on their hands for several years are buying and selling properties more often, but turnover in the higher priced bracket still has some way to go before reaching the highs of last decade.

Housing investment finance increased strongly in May and over the last 12 months. The value of housing investment loans written in WA is up 19.4 per cent (approx. 3k-4k properties) compared to 12 months ago, but still sits 20 per cent below 07/08 highs. The sustainability of improving housing investment will be tested by news that rental markets in WA are easing and surveys that show capital growth expectations easing.

The Perth rental market has experienced a dramatic change over the first six months of 2013. The number of rental vacancies in the metropolitan area has doubled in six months. The lift in listings has pushed the vacancy rate to 3.2 per cent after hovering between 1.8-1.9 per cent in 2012. The lift in listings has put a stop to strong growth in median rents that were increased more than 10 per cent in 2012.

Pilbara rental markets also continued to ease in the June quarter, with the number of rental listings increasing and average asking rents declining in Karratha and both Hedland markets. The easing of rental conditions and a notable increase in supply of new dwellings has seen sales prices and volumes come down over the last 9-12 months in the Pilbara.

Looking ahead, house price expectations in WA are less optimistic than three months ago, but confident nonetheless. Property professionals were more measured with regards to future house price growth, expecting capital growth of 2.3 per cent and consumer price expectations took a big knock in WA also, falling from a very bullish +82 in April to a much lower but still positive +41 in July, which suggests fewer respondents expect strong capital growth over the next 12 months.

The new dwelling sector is going from strength to strength on the back of record low mortgage rates. Dwelling starts in 2012/13 are likely to have surpassed the 22,500 dwellings forecast by the Housing Industry Forecast Group in April. Preliminary estimates published by the Bureau of Statistics showed that construction started on 17,672 dwellings in WA over the nine months to March 31, 2013, which suggests starts reached 23,500 if they remained at these levels in the June quarter.

The forward looking building approval figures showed that there is a number of dwelling construction projects in the pipeline as well. Approvals increased for the tenth consecutive month after increasing to 2,258 dwellings in May.  May’s result brought annual levels to 24,000 dwellings, which represents a 26.6 per cent increase on levels 12 months ago.

Multi-unit construction has been the standout, increasing 73.7 per cent over the year compared to 13.3 per cent for private sector housing approvals. Multi-unit or medium density construction represented 23 per cent of all approvals in Western Australia over the last 12 months, which is the highest rate since 2008.

And a significant number of these new dwellings are being sold to owner occupiers. Loans for the purchase and construction of new dwellings increased 4.7 per cent, with more than 19,000 loans for new dwellings for owner-occupation written over the past twelve months, which is 30 per cent more than levels a year ago. These are the highest levels since 1994, surpassing the 09/10 peak driven by the Commonwealth Government’s temporary construction stimulus and the mid-2006 peak.

Figures published this month confirm that strong demand and short supply is flowing through to higher prices of land in Perth. The Institutes research shows that a higher proportion of sales in the $280k plus range are changing hands more often in Greater Perth. HIA/RP Data, meanwhile, said that Perth land prices increased $22 per square metre to hit a median lot price of $250,000, or $558 per square metre in the March quarter – the highest in the country. This is supported by REIWA estimates that said the median price of Perth vacant lots sold in the March quarter increased 13.6 per cent over the year, with the majority of the increase in the March quarter. Prices are expected to have increased further in the June quarter, with liaison suggesting prices of blocks have increased by $30k-40k in areas of tight supply in 2013.

Whilst prices have increased, developers recorded softer sales levels in late June/early July (25 per cent below the Feb/Mar peak, but 27 per cent up on levels 12 months ago). This is largely a seasonal decline, with sales typically down from June till late August.

The latest subdivision figures, however, revealed an unexpected decline in lots given final approval in the March quarter, but this was likely just an aberration, due in part to seasonality and given that December quarter approval levels increased more than 21 per cent. Overall, average quarterly subdivision levels in the nine months to March were up 18.8 per cent in WA and 15.6 per cent in Greater Perth on 2011/12 levels, but remain well below levels experienced in the middle of last decade. With the majority of lots sold selling months out from titles, subdivision volumes are expected to increase throughout the year.