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A short history of WA housing cycles 14/03/2013

We are near on two years into Perth’s eighth property circle in the last 35 years. Each has been unique, driven by a different combination of local, domestic and global events.

'In this world nothing can be said to be certain, except death and taxes.’ But maybe we should add property cycles to Benjamin Franklin’s popular adage. 

Property cycles are as sure as night follows. It follows a logical sequence of upturn, boom, downturn, stabilisation and back to upturn again. But predicting when these logical steps occur is more of an art than a science.

Cycles don’t occur because a number of years have passed. They occur because of a combination of factors and influences such as the state of the economy, and social and political issues. In the last 35 years, the time between property cycle peaks in Perth has varied from between 3.5 and 6.5 years and this has largely been the result of property cycles taking on different forms.

The 1980s in Western Australia were marked by the globalisation of the Australian economy, but it was also a decade of contrasts.

Amid the economic downturn created by the 1982-83 recession the new Hawke government floated the Australian dollar and undertook a number of microeconomic reforms. Western Australia’s unemployment subsequently fell from over 10 per cent to 7.8 per cent by mid-1985.  

The Australian economy was booming again and people turned their attention to property.

The recovery in the couple of years following ’83 coincided with a dramatic increase in housing loans and declines in mortgage rates. In the space of just over two years (26 months), housing loans to owner occupiers would increase at a rate of 2.8 per cent per month, increasing by 74 per cent from trough to peak.

Loan volumes declined in 1986, but the downturn was short-lived. Amid high inflation (7-8 per cent p.a.), property was back in vogue by the end of the year.

Loan volumes would strengthen significantly over the next two years before hitting record levels in 1988. Increased confidence in property occurred in spite of – or in part, because of – international stock markets crashing in October 1987 – Australian share prices declined by 40 per cent.

And it was hard to fault property investment in the late 1980s with house prices running so hot. The median house price in Perth increased from $52,050 in 1985 to $102,500 in 1989.

Then boom begat the bust.

The pressure of high interest rates, which hit record levels in 1989 of 17 per cent, financial excess and an international recession in the early 1990s brought property transactions down significantly. Loan commitments would fall more than 40 per cent between 1989 and 1991 in Western Australia. Median prices in Perth had also fallen back below six figures in 1991.

After two decades of microeconomic reforms and a number of recessions, Australia was arguably more resilient to external shocks. The Australian economy would largely withstand the Asian financial crisis, the end of the dot-com bubble and the collapse of the US sub-prime housing bubble, recording uninterrupted growth over the next two decades.

The property cycle would however, remain.

The upturn in the early 1990s would be one of two interest rate led recoveries in the decade. The cost of servicing a mortgage halved between 1990 and 1994 driving renewed confidence and one of the longest upturns in WA history. From the low in 1991, loan commitments increased 120 per cent to the peak in 1994 with the median price in Perth hitting $126,790 in 1995.

Loan commitments fell 30 per cent between 1994 and 1996, with the central bank a key driver of this property downturn. To keep inflation in check, the central bank increased the cash rate dramatically in the second half of 1994, pushing mortgage rates above 10 per cent (inflation targeting was adopted by the central bank in 1993).

By 1996, inflation was in check and mortgage rates would again steeply decline. The upturn in the late 1990s was however, different to previous upturns.

Rather than mimicking the previous strong uplifts in sales volumes, loan commitments gradually increased by just 0.6 per cent per month over the next four years, increasing a total of 23 per cent from trough to peak. Loan commitments peaked in 2000 but at levels 14.5 per cent below 1994 highs.

After the dot-com bubble burst, Western Australia’s economy went from strength to strength. Western Australia was a beneficiary of a booming resources sector with prices of the state’s key commodities successively breaking records. The state’s unemployment rate would more than half, falling from 7.4 per cent in 2001 to 3 per cent in 2007.

The upturn of the property cycle started in 2001, but strong price increases saw sales levels briefly taper off in 2004 – the median price in Perth increased 48 per cent from 2001 to 2004, hitting $250,000 for the first time.

Then came the boom.

Amid record price rises and land shortages, hubris took over. And, for the first time, rising mortgage costs did little to quell property market activity. From mid-2004 to mid-2006, loan commitments jumped 36 per cent and the median Perth house price would eventually hit $470,000 in 2007.

What’s next?

Cycles are an inevitable part of property markets. The prospect of price rises and high rents will draw investors back into the market – savvy investors would already have got in early and bought at the bottom of the cycle – and higher priced properties will change hands more often.

In Perth we are already seeing signs of middle and premium market activity picking up rather quickly in 2013 and this is likely a reflection of several years of pent up demand and strong results in equity markets.

But will this cycle mimic the 1980s short booms and strong rises in housing demand? Will the cycle be prolonged like the 2001-2006 period which experienced the highest price growth on record? Or maybe something different?

The current cycle differentiates itself already from previous ones.

The mismatch between supply and demand in Perth – the number of listings in Perth has fallen dramatically from 14,000 to 8,400 over the past year – has dramatically shifted the market in favour of sellers.

This excess demand creates many opportunities for developers, and those able to provide the right product and price will reap the initial rewards.

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