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What does a changing Western Australia property market mean for investors?

If you have opened the newspaper or read any articles online over the past six months about the state of the WA economy or the Perth property market, it probably wasn’t the most uplifting experience.

If you have opened the newspaper or read any articles online over the past six months about the state of the WA economy or the Western Australia property market, it probably wasn’t the most uplifting experience.

These types of headlines can make even the most experienced property investor nervous and can sometimes make you second-guess your investment decisions or closely scrutinise your existing property portfolio. In the most extreme cases, it can make investors panic resulting in rash decisions within the investment property market.

At Investor Assist, we are not in the business of looking at the industry through rose-coloured glasses and we always take a frank and honest evaluation of the state of the Western Australia property market at any given time.  We don’t try to tell our investors it is apples if it’s not but we are also firm believers that there are successful investment opportunities to be found in any market – you just need to know where to look.

Outlined below are some of the most common reasons being thrown around at the moment, which may be making investors a little nervous about entering or remaining in the Western Australia property market. I am sure you have probably heard a few (or all!) of them:

  • The resource boom is over;
  • WA’s population growth is slowing;
  • The state jobless rate is increasing;
  • Property growth is slowing;
  • Rental vacancies are increasing;
  • Rental rates are decreasing;
  • More properties are for sale on the Western Australia property market;
  • Property values are decreasing.

Firstly, there is no denying any of the statements outlined above when you look at the latest Western Australia property market reports and statistics and if you look at them on face value, I would probably be looking to invest my money elsewhere too. But delve a little deeper and there are a few more factors to take into consideration.

For starters, is your money really safer elsewhere? Property is the most popular form of investment for several reasons. It is relatively easy to understand, it is less volatile than shares and property is tangible so you actually get something for your money. Plus, residential investment is shown to perform better over a ten and 25-year period than Australian shares so getting involved in the Australia property market is comparatively a smart idea.

It is also important to understand what effect a booming economy and an economic downturn can have on residential investment property prices.

Firstly, when the economy is booming, so are property prices. This pushes the median house price in the Western Australia property market out of the reach of many buyers including first homebuyers and first time investors. When the economy slows, so do the property prices returning them to more realistic levels and increasing the options for buyers.

When the economy is booming unemployment is low but it can also place stress on the job market. In recent years the resources boom was luring thousands of workers from other industries with promises of high wages and attractive rosters and this was detrimental to industries such as building, construction and hospitality which couldn’t compete with the incentives, making it hard to retain good staff.

This subsequently drove the prices of dining in a restaurant and building a house upwards because the cost of labour was higher in the booming market and employers had to pass this cost increase on to the customers. Now that employment in the resources sector is slowing, many of these workers are now returning to their original industries restoring the balance across the board. So, not only is it cheaper to buy a house in the Australia property market when the economy slows down, it is cheaper to build one too and you are more likely to source better trades with a quicker turn-around time!

Fewer jobs leads to slower population growth and the bullish population growth forecasts are now being revised to more sustainable figures. This will again ease the demand for housing and rental properties keeping prices at more realistic levels for both property buyers and tenants.

In a slower economy investors will not only benefit from more realistic property prices in the property investment market, but generally lower interest rates too. This is because the Reserve Bank will lower the cash rate to stimulate investment in the economy. This was seen in February when the Reserve Bank cut the cash rate by 25 basis points to a record low 2.25% which in turn creates ideal borrowing conditions for home buyers and investors. There has never been a more affordable time than now to borrow money to invest.

In addition to benefitting from low interest rates, investors are often surprised to find out there are always successful investment opportunities to be found in any investment property market. Unfortunately many investors are of the opinion that if the economy is in a downturn, there are no strong investment opportunities anywhere and this is simply not the case.

Investor Assist is always on the lookout for investment ‘hot spots’ within the investment property market and we continue to source investment opportunities in areas that are generating above-average annual growth. Some recent higher performers include up to 19.7% annual growth in Baldivis and 17.7% in Piara Waters which is often more than what investors can hope to achieve in a boom!*

So, it seems the people most likely to suffer when the market takes a turn are those who were bullish and invested at the peak of the market and overextended themselves. The investors I am talking about are those who were hoping to make a quick buck or stretched themselves without leaving any ‘fat’ in their calculations to allow for the ebb and flow of the Western Australia property market. 

Unfortunately some property investors take big risks and purchase a property (often off-the-plan) and hope it will increase in value prior to settlement or in a short space of time so it can be sold quickly for a significant financial gain. This can happen but is not the norm so should not be the primary motivation for investing.

Regardless of how long you have held onto an investment property, all investors should be aware that if the Western Australia property market softens, so does capital growth. This is a major consideration for investors as capital growth is the primary source of wealth generation over time. If the capital growth remains stagnant or goes backwards, investors need to be able to tread water until things start to improve.

Unfortunately, it is most often the bullish investors who have taken the big risks that don’t have the ability to tread water when the Western Australia property market starts to soften. They have stretched themselves financially and can no longer service the loan if rental income decreases or property prices drop in the property investment market. Usually these are the investors who get nervy and place their property on the market at the first sign of negative market sentiment, which then adds fuel to the fire (and fuels negative market sentiment) as it drives up the number of properties on the market, which is usually an indicator of a slowing economy.

At Investor Assist, we stress to all our investors that any investment in the Western Australia property market should be for the longer term and for a minimum of five to seven years. If you are looking to invest for a shorter period of time, you are doing it for the wrong reasons.

When you make the decision to invest in property, you need to invest based on the ‘worst case scenario’. You need to hope for the best but be prepared for the worst. You need to be able to cover the difference if the market drops, rents decrease, your property is without a tenant for a few month or weeks, or be in a position to hold the property for a few years if it drops below purchase price.

History has shown time and time again that the economy and the Western Australia property market will always have its ups and down, booms and busts, ebbs and flows. The important things to remember are this:

1.       Do your research

2.       Have a clear investment strategy from day one

3.       Invest for the longer term

4.       Always be prepared for the worst case scenario

5.       Be willing to ride out the peaks and the troughs

6.       Don’t lose your nerve as a result of negative press or public sentiment

7.       Recognise there are successful investment opportunities to be found in any market

8.       Stick to your strategy

9.       Be brave – there is no better time to invest than now!

 

For further information about investing in the Western Australia property market, contact Investor Assist on (08) 9200 7200 or email info@investorassist.com.au