A macro overview of the Perth housing market

Posted by Gavin Chau

Of all the capital cities Perth is probably the most interesting market from an analyst’s perspective. The population is only 2.2m yet Western Australia has an enormous land mass. In fact, the largest cattle station in Western Australia is bigger than 39 countries. While huge it’s mostly uninhabitable and Perth is one of the most isolated cities in the world – located 2,014km from the next closest city Adelaide.

Western Australia also happens to be the largest iron ore supplier in the world with 37% of the global iron ore supply. The iron ore deposits are one of the cheapest to extract and highest-grade deposits in the world. And its proximity to Asia put it in a perfect position to capitalise on the global commodities super cycle between 2000 and 2014. This was largely driven by China’s industrialisation – a process that is enormously energy and resource-intensive. To put this in perspective a city the size of Brisbane was being built every month over a 14-year period.

The combination of a smaller housing market and outsized exposure to the global commodities cycle was enough to throw Perth out of its normal property cycle. Instead of pausing for a breather it continued to boom for 14 years. Of course, there is no asset market on earth that increases monotonically, and what followed was six years of continuous falling prices. The good news is that June 2020 seemed to be a turning point and the market started to show signs of life again.

Over the past 35 years, houses in Perth have enjoyed good returns averaging 7.3% per annum – this is comparable to Sydney, Melbourne, and Brisbane. Like the east coast capitals, the property market in Perth looks like it’s in a good position from a cyclical perspective.

However, while there are plenty of positives about the potential for growth in Perth housing values, the global economy is running into headwinds. In particular, America is likely in recession, the European economy is weak, and China’s growth has slowed so much that they are already trying to stimulate the economy. All this places pressure on the commodities market with the prices of iron ore sinking over the pessimistic outlook for demand from China. Steel prices have dropped to 16-month lows and an index of Chinese steel profits has dropped by nearly 90% this month. Mining stocks are also down – as asset markets are forward-looking this is a canary in the coal mine of sorts and an indication that there is further pain to come for the real economy.

A bet on the Perth housing market is effectively a bet on the continued industrialisation in China. No doubt we’ll be back in the Perth market at some point. In the long term, this seems like as solid a play as any. But for the time being the current uncertainty about the global macro-outlook makes us think there are better places to allocate our capital.

Posted by Gavin Chau, on 28th Jun 2022