Property Development Forecast in WA with Rising Interest Rates

General consumer confidence has really gotten a rattle at the moment, and its creeping into the property market all over Australia. The recent Interest rate rises are front and centre of people’s minds, and the knowledge that there is more to come. Cost of living is rising sharply, with CPI rising 3-5 times faster than wage growth. Overleveraged households are either feeling the pinch or planning on feeling the punch. There is a distinct air of fear and uncertainty.

What I would like to remind Property Developers in WA is that this is actually a time of immense opportunity for them over the next 3-6 months. What people are actually fearful of is uncertainty and change, not the interest rate or living cost rises. Humans always adapt- it’s about getting used to the new normal. I’d remind people that a fair chunk of WA’s last boom was conducted in a climate where interest rates were between 7 and 10%, so this isn’t new territory. It’s simply forgotten territory.

Cast your eye back to the panic and fear when covid started- all the experts said that the market would fall 30%. It did practically the opposite. The climate was the same – one of fear and uncertainty. It important in these moments to sit down and look at what is actually happening (or likely to happen) and trim your sails accordingly. There are opportunities in every market, and the next one is coming. For property developers, it’s about adjusting product offerings to the lifestyles that consumers will have to adjust to.

Let’s talk about what things will look like in WA in the near and long term so you can pursue the right property development opportunities.

Cost of living and rate rises are here to stay, so deal with it. Rates are going to keep going up, as will living costs, and fuel. I paid $2.40 for a litre of diesel the other day, and $6 for a celery. You need to ask yourself, where will people be able live and where will they want to live? The answer is that people will be starting to consider the cost of their commute and other livng expenses seriously, so transit-oriented infill development in areas close to work and play, will become important and desirable for consumers.
Interest is not the issue, it’s the size of the principle sum in the consumers debt facility. People still need places to live, so it’s going to come down to affordability for the broadest segment of the population. A small part of that is the rate and lending terms, a bigger part of that is the size of the purchase, and what of that is debt. Affordability in this climate will mean people want smaller mortgages. From a median price and affordability index, WA is streets ahead of other states, albeit supply is still an issue (that’s your job!). You’d be really worried as a first home buyer in Sydney with a million-dollar mortgage you got with a 5% deposit and government guaranteed loan scheme as the interest heads from 2.8 to 4.8% and then further north. Because there is 950k in debt there. The sweet spot is going to be inner city medium density living, where people’s deposits go further, and the interest payments are manageable. Smaller 3×2 or 2×2 product under the 700k mark. Increases in living cost and rates means peoples plans for larger families and households will probably go on the backburner for a while, so get with the program.
Interstate migration (and overseas) will start to lift now that the borders are open and the strength of economic opportunity here becomes known. BHP, Chevron, Rio, and Fortescue all have huge expansions and new projects in the pipeline and global resource and energy security markets present unprecedented new opportunities in the wake of frosty western relations with Russia and China. Coupled with employment opportunities galore and great affordability, I have an inkling there will be a large influx of distressed eastern states households selling up over the coming years and heading west, meaning more demand for product here, and upward pressure on housing prices and overall demand.
Housing undersupply is still very real, and not getting fixed in any great hurry. As we can see below, whilst overheated eastern states markets are starting to slide, we are still on the up. And with such undersupply and rental vacancy floating under 1%, that isn’t changing soon. Its simple economics- more demand than supply mean prices will only go up (and can only go up).
We are so affordable in WA it isn’t funny- median house price is only 580k, with mortgages consuming around 25% of income in the average WA family household income. There is room to breathe- in NSW its 45% of income currently, and nearly 40% in Victoria. We have plenty of room for growth without sending households broke.
New medium density planning regulations are getting rolled our in WA in the second half of this year, and there are lots of new product types and constraints being lifted around special purpose and small dwellings with lot size reduction concessions and less restrictions. We are being actively encouraged to supply the 1×1, 2×1 and 2×2 product diversity that the market wants in the new planning framework. Never in history has the market and planning policy direction aligned so well. Coupled with land tax reduction incentives for eligible build to rent schemes, there will be real incentive to develop to rent, with yield in WA already a respectable 4.4% and climbing. I have modelled medium density terrace home outcomes showing gross rental yields between 7 and 11 %. It works, it’s what the market wants, and what it can afford. As rates rise in toe with living expenses and meeting lending criteria gets harder and harder, build to rent will become a staple in the developer’s arsenal.

In summary, there is no need to panic. To the contrary, it’s time to start looking at the same sites out there with different eyes. Buying a block and putting 3 townhouses on it is over. They cost too much to build, they take too long to build, and soon no one will be able to afford them, or the children that usually fill the bedrooms.

The new win for WA property development is affordable, compact inner city living that is transport, lifestyle and amenity conscious, and not apartments. People still want the semblance of ground beneath their feet and a few square meters for their designer dog to do its business that is not the carpet inside. Look to product types that are easy and fast to construct, and appeal to a larger buyer base of downsizers, young families, FIFO workers and couples. Building to rent looks great too.

Get in touch with us to learn more about how to better take advantage of the opportunities that are coming west Australia’s way, or grab a copy of our E-book to start your property development journey.