How far is Perth property going to fall?

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Not very far according to Domainfax:

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…The latest figures provided by REIWA state that Perth’s median house price had dipped to $530,000 in June 2015 – plunging by $20,000 in six months.

Property investor and founder of Property Club Kevin Young said harsh policies pursued by banks will put further strain on Perth’s property market.

“Property investors are now walking away from the Perth market due to the double whammy of higher interest rates now being imposed on property investors by the banks as well as much tighter lending requirements for property investors being set by the Australian Prudential Regulation Authority,” Mr Young said.

…”Property Club is predicting that over the next year the median house price in Perth will fall by $50,000 to around $480,000 due to the hard lending policies now being imposed on property investors.”

That’s about right. But that is only the beginning, I’m afraid. Picking a figure is talking out your arse I would not be surprised to see Perth property prices more or less halve (in real terms) as the WA economy enters an effective depression.

First, Western Australian mining capex hasn’t even begun to retreat from record high levels:

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As it does retrace over the next two years, it will cost tens-of- thousands of jobs.

To illustrate, the Roy Hill iron ore project will see 8,000 construction workers turn into 2,000 miners, and one wonders how long those numbers will hold up with the margin squeeze that’s coming. You can double the attrition when the iron ore juniors go under.

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Then there’s the giant LNG projects, Gorgon and Wheatstone. At Gorgon, 9,000 construction workers will turn into 400 gaseous technicians, whereas at Wheatstone, 6,500 workers will shrink to around 400 (if not less).

Add in multipliers, and Western Australia could easily see 50,000 jobs lost as mining capex returns to pre-boom levels (or below).

Then there is the Western Australian housing market, which is undergoing an almighty construction boom just as population growth crashes through the floor:

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All of which points to a sharp slowdown in dwelling construction and the loss of many more construction jobs over the next two years.

As shown in the next chart, Western Australian construction employment has doubled from its pre-boom level to 158,000 as at May 2015:

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With both mining capex and housing construction facing sharp downturns over the next two years, the Western Australian construction industry could shed up to 80,000 jobs, with cascading impacts on other sectors.

On an employment base of only 1.4 million people currently, this suggests a significant increase of unemployment – to 10% and beyond.

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The Western Australian economy is already incredibly weak. While rising export volumes are supporting gross state product, state final demand – which is a better measure of domestic activity since it measures the sum of “government final consumption expenditure, household final consumption expenditure, private gross fixed capital formation and the gross fixed capital formation of public corporations and general government” – has already fallen for 10 consecutive quarters:

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The situation is obviously set to go from bad to catastrophic over the next two years, given the massive construction downturn facing the state.

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If you are one of the 11.4% of Western Australian taxpayers (numbering 165,000 people) holding a negatively geared property, and losing on average $10,555 per annum, then you should sell-up while you still can, and before a horde of negatively geared mining-exposed workers hit the panic button:

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When housing cracks lower the unemployment feedback loop will intensify.

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There is no contemporary Australian experience to match the developing economic situation in WA. It has been in effective recession for two years already (excepting exports which do little for local activity). That domestic recession is set to deepen meaningfully in the next year and, with next to zero prospect of counter-cyclical spending coming from a broken state Budget, a depression cannot be ruled out in the medium term.

House prices are going to crash.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.