Although land development and residential construction activity is unambiguously strong, the state’s economy is undoubtedly not running as hot as 15 months ago. Economic activity and employment growth in particular has slowed. But this is no surprise as is it was largely expected that record resource sector investment would ease. It was always a question of how much investment levels would decline and what effects this would have on the broader economy and labour market.

Dire predictions of a mining cliff, however, have so far been premature. The state’s economy has been rather resilient over the last six months.

The volume of capital expenditure in WA increased for the second consecutive quarter in September and this has been driven by a solid stock of projects that are under construction in the state and are expected to remain under construction for at least the next few years.

The labour market has also improved in recent months. Western Australia’s unemployment rate has trended down from 4.9 per cent in May to 4.5 per cent and is one of the lowest in the developed world – well below the State Government’s forecast of 5.5 per cent.

One sector that hasn’t seen a reversal in fortunes is retail. Retail turnover in WA has barely increased over the last year – declining on a per capita basis – and growth is at its lowest level in over a decade.

However, if you combine low unemployment with an extended period of low interest rates and strong population growth then it’s hard not to be sanguine about the short-term prospects for the new dwelling sector in Perth.

There are strong figures coming through for the development sector. Developers had the strongest November month since 2005. Our weekly Land Snapshot showed that developer lot sales in Perth during November lifted 16 per cent over the month and 22 per cent above levels this time last year.

This is supported by a lift in short-term lot construction intentions. A number of new projects coming to the market in Perth as well as more bullish developers producing larger stages helped push our index measuring short-term lot construction up 23.2 per cent over the September quarter.

Housing construction is also understandably strong. Detached house approvals in Perth are up 33 per cent over the year and on par with 2006 highs; and they are on track to surpass these highs in the coming months. The medium and high density sector is also improving somewhat, albeit less than the detached housing sector.

The established property sector in Perth also experienced a pickup in sales in November. Compared to 12 months ago, REIWA agents reported that house and multi-unit sales had lifted 24 and 34 per cent, respectively. Turnover is, however, still 20 per cent below mid-2006 highs.

We’ve seen easing migration (as well as strong first home buyer levels) helping to take the pressure off Perth’s overheated rental market. Rental listings have doubled and the vacancy rate has lifted to a more normal level, up from 1.8 to 3.1 per cent over the past year. Perth is now experiencing more realistic rental growth than the double digit increases experienced in 2012 and this looks set to continue for some time as record migration levels ease.

Regional markets, meanwhile, have experienced mixed fortunes, with the South West the only region to have experienced a sustained lift in new dwelling activity (land sales are up 30 per cent year-on-year).

Industry is, however, constantly looking further ahead and asking when the music will stop.

The housing market can turn quickly, especially the land development sector. In mid-2003, vacant land sales in Perth lifted to an average of 1,600 per month then declined 40 per cent in six months. And three years later vacant land sales declined remarkably once more; sales declined more than 50 per cent over a 12 month period just as developers significantly increased the volume of new stock brought to the market.

Whilst we can’t discount the effects of easing migration and slowing economic activity, of all measures, affordability is the biggest driver of a decline in turnover. And it is interest rates that inevitably have the largest impact on the cost of buying a home.

The good news for the industry is that interest rates are expected to remain at these low levels throughout 2014. The cash rate will, however, eventually increase back towards what the RBA considers neutral levels (circa five per cent).

When the RBA lifts rates, it generally does so over a short period. The futures market is already pricing in interest rate rises throughout 2015 and 2016 and 3-year fixed mortgage rates have increased in recent months to reflect this.
So whilst the sun will shine bright over 2014, rate hikes thereafter are a risk.