Perth is potentially gearing up for only its third big boom in more than a century.
The clues to this incipient takeoff are there for all to see.
Jobs in WA grew by the second-highest monthly increase on record and the highest since March 1993 over June.
The key iron ore price is way above forecasted expectations due to strong demand from China and supply issues in Brazil.
Many explorers had to shut shop from March until June due to COVID restrictions. But growth in mineral exploration expenditure across Australia is now increasing.
And of course, the largest contributor to the increase is WA.
Perth’s last epic boom lays out a perfect guidebook
The local state infrastructure boom is going to keep WA’s economy going strong. It will be accompanied with wage growth and increased employment.
And as per Ricardo’s Law of Rent, land prices will take these gains. But there’s another reason I can be so confident.
Perth’s last epic boom lays out a perfect guidebook for what we should expect. Let me tell you the story of this epic run.
I can find no other real estate boom globally that was on the same magnitude as the one that occurred in WA between the early 2000s and roared past the GFC to a 2013 peak.
Perth’s median property prices rose 113%. Many individual property prices trebled (and more) in the same period.
By comparison, median values grew 30.2% in Sydney over the same period.
And no wonder Perth property skyrocketed…
Between 2003 and 2013, direct mining employment in Perth rose from 44,491 people to 101,698.
That’s an increase of 128%.
At the peak of the boom, wage growth grew at almost 5% per year.
No office market in the world benefited more.
West Perth was the second most-populous area for most of the ASX’s junior mining companies (after Sydney).
It became the first major market in Australia to record a 0% vacancy rate just prior to the GFC (mid-2007).
Perth experienced the highest population growth of any city in Australia and eclipsed Melbourne to become the second most expensive capital in Australia.
I bring it up for a specific reason…
The riskiest strategy at the time was to chase the market that one demographic of buyer — that was investors — dominated.
I’m talking about the mining towns. Why? Most miners resided in Perth but commuted as fly in/out, drive in/out workers in areas such as Port Hedland, Isaac, Karratha, and Gladstone.
Investors got the ‘golden egg’ of property speculation
The concurrent investment in infrastructure to cater for this — new mines, processing facilities and transport — drove the remote mining real estate markets into the stratosphere.
Investors got the ‘golden egg’ of property speculation — capital growth and positive yields (some at least a net 10%). Vacancy rates plummeted.
However, here is the clue that’s relevant for today. Price increases in the mining towns gave a leading indicator (of around two years) to increases in Perth’s real estate prices.
That’s where we are now! Some of the iron ore mining towns such as Karratha and Port Headland are recovering strongly since the bottom in 2017.
Between 2018 and 2019 markets in the East Pilbara (Newman and Marble Bar) have increased some 30%. Rental yields in these areas currently sit around 14% net. That’s enough to attract new investors and speculators — and demand will extend into other areas.
Especially as bigger projects are unlocked. COVID won’t stop that. The economy in WA is going to recover quicker than other states. It’s already coming through in the data…the first indication of a turn is evidenced in the falling vacancy rate.
It’s sitting around 1.5% (compare that to 3.7% in Melbourne and 3.8% in Sydney). Demand from renters needing shelter is starting to outstrip supply. And it also indicates that new construction is not having a meaningful impact on those figures.
That means the oversupply from previous years is being absorbed. Low vacancy rates feed into a rise in rents and increasing yields. That stimulates building activity and demand for land and increasing property prices.
This is the first step we look for to kick us into the second half of the cycle. We also have the raft of first home buyer (FHB) incentives.
We’re looking at over $100,000 if we add them up. Some of those grants are open to all home buyers. Plus, eastern state FIFO workers are also eligible for a raft of buyer benefits if they agree to relocate. No doubt some will. This is important.
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