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1367.5 - Western Australian Statistical Indicators, Dec 2004  
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Feature Article: The impact of rising house prices on the WA economy

(This article was published in the December Quarter 2004 issue of Western Australian Statistical Indicators, ABS Catalogue Number 1367.5)


INTRODUCTION

Access to affordable housing is important to most Western Australians. In 2001, 70.5% of Western Australian households owned their homes outright or were paying them off. For many families, the home is the greatest financial commitment they make in their life times, accounting for 60.0% of household assets. As well as providing shelter, the home is also valued as an investment and, increasingly, as a store of wealth for retirement.

In recent years, the residential property market in Perth, like most capital cities, has been characterised by strong growth in prices of new and established housing. The resulting increase in building activity and the wealth effects of higher property values on domestic demand, have helped to maintain economic growth, during a period of relatively subdued demand in major export markets.

Some commentators have suggested that the recent surge in Perth's house prices has been driven by increased demand for housing, rather than by constraints on housing and land supply. The Productivity Commission (2004), in its recent inquiry into first home ownership, examined the demand and supply factors operating in the national housing market. This article draws on the work of the Commission to examine the factors operating in Perth's housing market. It also explores the impact of rising house prices on the Western Australian economy and how this has differed from the situation in other states and territories.


THE RISE IN HOUSE PRICES

After a decade of modest gains, the price of established homes in Perth began to accelerate in 1999-2000. During the 1990s, the price of established homes in Perth increased at an average annual rate of 2.4%, slightly above the rise in the general level of prices (2.1%). In contrast, the average annual increase between 1999-2000 and 2003-04 was 10.5%, well above the 3.1% increase in the general price level. However, growth in established house prices in the latter period was below the national annual average of 13.5%, which was largely driven by dramatic price increases in Sydney and Melbourne. The price of new (project) homes, which excludes the cost of land, also increased considerably during this period, although at a more modest average of 6.5% per year, equivalent to the national increase.

Graph - House price indexes


MEASURING HOUSE PRICES
The ABS established house price index used in this analysis attempts to measure the 'pure' price change of established houses between different periods. Price change may reflect some variation in the physical quality and geographical location of houses sold. In order to minimise these effects, the ABS stratifies the sales by geographic region and assigns a weight to each region, to reflect the total value of dwellings and land in the base period. The timeliness of the data can be affected by the lag between the agreement of a contract for sale and the price recorded at settlement.


FACTORS AFFECTING RISING HOUSE PRICES


DEMAND FACTORS

The Productivity Commission's (2004) inquiry into first home ownership identified low interest rates, greater access to finance, government initiatives and taxation as the major factors affecting the demand for housing and rising house prices in Australia. Also highlighted as aiding growth in Australia's property market were underlying factors related to population and strong labour market conditions. These factors are discussed below.

Population growth, immigration and household size

Population growth is fundamental to housing demand as it impacts directly on the number of households requiring accommodation. Population growth comprises natural increase (the excess of births over deaths) and net migration (arrivals less departures). For the states, net migration is further broken down into overseas and interstate components. In the five years to March 2004, the estimated resident population of Western Australia rose by 131,573 persons or 7.1%, the second highest rate of increase of any state or territory in Australia. The growth in Western Australia's population over this period was driven by overseas migration, which resulted in a net gain of 78,126 persons, and natural increase of 67,068 persons. Net interstate migration recorded a net loss of 12,012 persons.

According to the Department of Immigration and Multicultural and Indigenous Affairs (2004), in 2001-02, 58.7% of Western Australia's migrants were in the skilled category, much higher than the Australian average of 40.5%. Skilled migrants have less difficulty in finding employment and are more likely to enter the property market as buyers than unskilled migrants.

The continuing decline in the size of households in Western Australia also affected housing demand during this period. Lone person households increased from 24.9% of all households in June 1999 to 26.8% in June 2004. In comparison, in the 1991 Census, 19.6% of Western Australian households consisted of only one person. Between 1999 and 2004, the total number of households in the state increased from 707,574 to 772,062, with declining household size accounting for 15,109 households or 23.4% of the increase.

Rise in full-time employment and real incomes

Also providing a foundation for increasing demand for residential property in Western Australia has been a relatively long period of economic growth. Between 1994-95 and 2003-04, Gross State Product increased by an average annual rate of 4.4% in real terms, generating strong employment growth and higher real incomes (ie. nominal incomes less inflation). Over this period, the number of persons in full-time employment increased steadily by an annual average of 1.7%. Employment growth has accelerated recently, rising by 3.2% or 21,500 persons in 2003-04. In the ten years to 2003-04, real wages grew at an annual average rate of 2.0%. The strength of the state's job market and rising levels of disposable income have fuelled expectations of future prosperity, and helped sustain the capacity and willingness of consumers to purchase a home or invest in property.

Cheaper and more easily available finance

The cost and availability of credit has been a major factor influencing the demand for housing in Western Australia, as most housing purchases are largely debt financed. Since the mid-1990s, Australian interest rates have been in decline, mainly due to low levels of inflation, but also because of increased competition among credit providers. The deregulation of Australia's financial system over the past decade has seen the number of loan providers increase from 92 in 1996 to 136 in 2003 (Australian Bankers Association, 2003). There has also been a doubling of the number of products provided by lenders, leading to greater and cheaper access to credit for prospective home buyers.

Graph - Standard variable bank interest rate for housing loans



The standard bank variable mortgage rate has fallen from a high of 10.5% in the mid-1990s to 7.05% in June 2004. Lower interest rates, particularly over the last three years (2001-02 to 2003-04), have increased the amount that a home buyer can borrow at a given level of income, allowing more buyers to enter the property market or upgrade to better housing. Lower interest rates have also increased the net returns on rental property for investors, enhancing the attractiveness of, and demand for, housing as an investment.

Returns on residential property investment

The relative attractiveness of property as an investment has been another major factor contributing to the strength of housing demand in Western Australia. In recent years, investments in residential property have generally provided higher capital growth than those in the more volatile share market. The transfer of funds from equities into the property market has had a pronounced impact on the price of housing in all major capital cities of Australia, including Perth.

The recent strong performance of Perth's residential property market is highlighted by a broad comparison between returns on investment from property and equity markets (as shown in diagram 3). Between the September Quarter 1999 and June Quarter 2004, shares (as measured by the ASX 200 index) have appreciated by 22.6%, whilst Perth residential property (as measured by the price index of established homes) has appreciated by 65.9%. The increased injection of investment funds into the property market over this period, has contributed to the increase in the price of housing in Perth. For owner occupiers, the potential return on housing, relative to equities, has been further enhanced by the tax exemption on capital gains from the sale of a taxpayer's principal residence.

Graph - Perth established house price index and the S&P/ASX 200 index



Effect of taxation

The Australian taxation system has played a significant part in increasing the demand for housing in Western Australia, by providing favourable conditions for those choosing to invest in housing. Australia's progressive income tax system, and the ability to offset losses incurred in running a rental property against income from other activities (negative gearing), have made this form of investment increasingly popular, particularly among higher income earners.

Investment in housing has also been encouraged by amendments to Capital Gains Tax (CGT) legislation. Since 1999, tax has been calculated on half of the nominal gain from the sale of a property by an individual or trust. For owner occupiers, the CGT exemption on a taxpayer's principal residence may also encourage investment in housing over alternative investments.

Government initiatives

In July 2000, the Goods and Services Tax (GST) was introduced in Australia. The Australian Government responded to concerns about the impact of the GST on the housing market by introducing offsetting measures. Financial assistance was provided to help prospective first home buyers bridge the deposit gap and enter the property market, which helped support the overall demand for housing in Australia.

The First Home Owners Grant was introduced along with the GST in 2000. The grant of $7,000 was paid to eligible persons purchasing their first home as their principal residence, and was not means tested or taxed. An additional grant of $7,000 was introduced in March 2001, for first home buyers building their home or buying a previously unoccupied home. The additional grant was decreased to $3,000 in January 2002 before being withdrawn in June 2002.

The Western Australian Government also provided assistance to prospective home buyers through its Keystart program. Introduced in 1998, this program provided low deposit housing loans to home buyers who found it difficult to meet the deposit requirements of standard commercial loan providers. Keystart proved to be popular among first home buyers, accounting for more than one in every three loans approved for first time buyers in its first year (Government of Western Australia, 2003).


SUPPLY FACTORS

There are a number of supply-side factors which may impact on housing prices. The housing market is highly diverse, with wide variations in the size, quality and location of homes on offer. Shortages in some locations can result in large price increases, which affect the overall movement of prices in a city. In periods of high building activity, shortages of land, labour and materials may cause cost increases which are passed onto the consumer. As potential buyers are priced out of the new homes market, demand can spill over to lower priced established homes and prices rise.

Supply of land for development

House prices can also be affected by restrictions on the availability of land for residential property development. Large surges in demand cannot be met quickly by increasing the land supply, as it takes time to develop land and infrastructure. Government planning regulations and restrictions can further constrain the supply response.

In Western Australia, new land supply takes the form of subdivision approvals and lot creations. Subdivision approvals are planned lots conditionally approved by various government authorities. The approval is valid for three years, during which the developer may (or may not) create housing lots, based on an assessment of market conditions. In 2003-04, for example, 32,000 lots were granted subdivision approval by the Western Australia Planning Commission and 16,800 lots were created (HIFG, 2004). Over the past ten years, lot creations have closely followed the pattern of dwelling approvals and commencements.

Graph - Dwelling approvals, commencements and lot creations



The Productivity Commission (2004) found that, with the possible exception of Sydney, the restricted supply of land at the urban fringe was not a major cause of rising house prices in Australian capital cities. The overall increase in house prices has mainly resulted from a surge in established housing demand, particularly from existing home owners upgrading to a larger or better quality home. In more desirable established suburbs of Perth, and other capitals, the demand for residential property far exceeds supply. Although there has been some increase in housing density, the supply of residential lots cannot be substantially increased in most established suburbs. In the year to June 2004, according to the Real Estate Institute of Australia (2004), the median house price rose by 13.7% in the inner Perth metropolitan area, compared to 12.1% in the middle suburbs and 10.8% in the urban fringe.

Infrastructure costs

Over the last two decades, according to the Productivity Commission (2004), local and state authorities have increasingly charged the cost of infrastructure provision in new housing developments to the developers. The Urban Development Institute of Australia (2003) estimates that these costs account for 42.0% of the total cost of land development in Perth, which is usually passed onto the home buyer. This may, however, also have allowed for more land to be made available for housing than would have been possible under the traditional way of financing infrastructure, through government debt. If so, the larger supply of land would have exerted a moderating influence on new house prices in Perth.

Increased construction and labour costs

The implementation of the GST and recent shortages of building materials and labour have contributed to rising house prices. In the five years to June 2004, prices of materials used in house construction have increased by 11.0% in Western Australia. Labour costs for the state's construction industry have also increased over this period, due to a limited supply of skilled workers. Wages for Tradespersons and related workers rose by 15.5% between 1999-2000 and 2003-04, slightly above the average increase across all occupations in the state (14.4%). Shortages of materials and labour have been exacerbated by growth in the size of new houses over the period, with average floor space increasing by an annual average of 3.3%. Also impacting on construction costs for Western Australian housing has been the difficulty for builders in obtaining building indemnity insurance after the collapse of the major insurance provider HIH Insurance Limited. Not only has this caused delays in the building industry, but it increased the premiums paid by builders, which flowed through into new house prices.


THE IMPACT OF RISING HOUSE PRICES ON THE WA ECONOMY

Rising house prices can affect the level of production and income in the economy. As funds are channelled into the housing market, the production and earnings of related industries such as Finance, Construction and Property services rise. Rising house prices also tend to cause a redistribution of wealth in the economy. Investors in housing benefit from the capital gains in the property market, while potential first home buyers may be priced out of the market and forced into rental accommodation. This section will explore how the recent escalation in Perth's house prices has impacted on the Western Australian economy.


INCREASED DWELLING INVESTMENT

Over recent years, rising house prices have had a direct impact on the level of dwelling investment in the Western Australian economy. Between 1999-2000 and 2003-04, the value of investment in dwellings rose by 20.7% from $4,073 million to $4,916 million. Accounting for more than two thirds of the increase was investment in new and used dwellings (up by 24.7% or $603 million), with the remainder coming from alterations and additions (up by 14.8% or $242 million). The strength of the price component of increases in the property sector is evident when comparing these nominal gains to real growth in dwelling investment. The nominal (monetary) change in the value of an economic aggregate, such as the value of dwelling investment, between two points in time is driven by changes in both prices and quantities. When the effect of price movements is eliminated (e.g. through chain volume measures), the real (quantity) growth can be determined. Investment in dwellings, which had been growing since 1996-97, declined by 20.7% in real terms in 2000-01 following the introduction of the GST. Despite a real increase of 20.0% since 2001-02, dwelling investment in 2003-04 was 4.8% below its 1999-2000 level. In contrast, real national dwelling investment increased by 17.4% between 1999-2000 and 2003-04, due to the higher level of investment activity in Sydney, Melbourne and Brisbane.

Graph - Value of dwelling investment in Western Australia



INCREASED RESIDENTIAL BUILDING AND CONSTRUCTION OF INFRASTRUCTURE

The increased demand for housing in Western Australia has flowed through into the value of construction activity. The value of new residential building commencements in Western Australia rose from $2,719 million in 1999-2000 to $3,443 million in 2003-04, an increase of 26.6%. However, over the same period, the number of dwelling commencements fell by 0.7%. The effect of the introduction of the GST is evident in the peak in commencements in 1999-2000, as builders and their customers sought to complete projects before the tax took effect on 1 July 2000. In that year, the number of commencements increased by 22.9%, only to fall by 40.4% in 2000-01. The recovery, from March 2001, coincided with the introduction of an additional $7,000 grant for first home buyers purchasing, or building, new homes. Between 2000-01 and 2003-04, dwelling unit commencements in Western Australia increased by 66.5% in number and by 95.1% in value, compared to the national increases of 51.7% and 91.6% respectively.

Graph - Value of new residential building commencements



Rising house prices have drawn investors into the property market, including the market for new housing. Prospective owner occupiers have also been drawn to the new house market, as established homes in sought after areas have become increasingly more expensive. First home buyers and low income earners, in particular, have bought in locations of affordable new housing on Perth's urban fringe. In Western Australia, the value of new house commencements rose by 29.8% from $2,208 million in 1999-2000 to $2,867 million in 2003-04, below the national increase of 36.7%. Despite the growth in value of new house construction, the number of commencements in Western Australia declined by 0.5% between 1999-2000 and 2003-04. In the period 2000-01 to 2003-04, however, the number increased by 70.8%.

Increased demand for more affordable housing has also contributed to a rise in higher density housing development. The value of new other residential dwelling commencements (ie. flats, units, apartments and townhouses) in Western Australia increased by 12.7%, from $512 million in 1999-2000 to $577 million in 2003-04. In contrast, the national increase for this type of housing was 57.4%, highlighting the strength of the higher density housing market in Queensland (up 139.2%) and New South Wales (up 52.5%). Between 2000-01 and 2003-04 the number of new other residential dwelling unit commencements in Western Australia increased by 48.3% to 3,835 units, 2.1% below the level recorded in 1999-2000.

The third component of residential building activity, alterations and additions, also increased, by 17.4%, in the period between 1999-2000 and 2003-04. As house prices rise, the costs associated with upgrading to a new home rise accordingly, and renovating or extending the current home becomes more financially attractive. Home renovation has also recently gained popularity as a lifestyle activity. However, the increase in alterations and additions is lower than that of new house construction.

There has also been an added requirement in Western Australia for the construction of infrastructure to facilitate the growing number of new residential developments. The value of work done on roads, highways and subdivisions in the state has increased by 33.5% over the five years to 2003-04, from $752 million to $1,005 million. In real terms the increase was 19.9%. Other notable real increases in infrastructure construction over this period were in: Electricity generation, transmission, etc.; Bridges, railways and harbours; and Recreation and other.


GROWTH IN INDUSTRY INCOME, WAGES AND SALARIES AND EMPLOYMENT

Western Australia's Construction and Property and business services industries have benefited from the recent activity in the property market. Higher levels of residential building activity and the increased number of houses traded on the property market have, to varying degrees, enhanced company profits, wages and salaries and employment in these industries.

A measure of industry earnings is provided in the National Accounts by Total Factor Income, which has two components. The first, Gross operating surplus and mixed income, broadly refers to the net earnings of businesses before depreciation. The second component, Compensation of employees, refers to wages, salaries and other payments made to, or on behalf of, employees. For brevity, the two components are referred to below as profits and wages.

Between 1999-2000 and 2003-04, total earnings in the Western Australian construction industry, as measured by Total Factor Income, increased by 34.8%. Earnings in Construction had increased by the same percentage in the previous five-year period. In both periods the increase in earnings exceeded the national average of 31.8% from 1999-2000 to 2003-04 and 28.6% from 1994-95 to 1998-99.

In the five years to 2003-04, profits in the construction industry increased by 35.8%, slightly more than the average increase of 34.3% across all industries in Western Australia. Wages in Construction rose by 33.4%, compared to the 27.0% increase for all industries.

Total earnings in the Property and business services group of industries in Western Australia increased by 37.0% between 1999-2000 and 2003-04. The national increase over the same period was 29.0%. Western Australia's Property and business services industries also saw profits rise, increasing by 41.5% in the five years to 2003-04, while wages rose by 35.1%.

Between 1999-2000 and 2003-04, full-time employment grew by 7.9% in the state's construction industry, compared to growth of 5.3% across all industries. Full-time employment also increased in Property and business services industries, rising by 9.8% over the period. In particular, full-time employment increased in the industries of Property services (up 11.7%), Property operators and developers (up 8.6%) and Real Estate (up 8.4%). Between 1999-2000 and 2003-04, total employment in Real estate rose by 22.9%, with much of that growth being part-time employment (up 82.9%).


HIGHER HOUSING DEBT

As most purchases of housing are debt financed, higher house prices have meant higher borrowing requirements for Western Australians. In the five years to 2003-04, the average housing loan in Western Australia increased by 26.7%, from $119,500 to $151,500.

Graph - Average loan size for all dwellings financed



The increased level of housing debt is reflected in the level of interest paid on housing loans, which has increased from 4.8% of gross household disposable income in 1999-2000 to 6.5% in 2003-04. Low interest rates during the period may also have led consumers to borrow more for housing, given their increased ability to service larger amounts of debt. Rising interest payments on home loans may, however, partially reflect the increase in new banking products, allowing home owners to borrow against the increased value of their homes to finance other expenditure, resulting in the masking of some consumer debt as housing debt.


INVESTORS VERSUS OWNER OCCUPIERS

The increasing attractiveness of residential property investment in Western Australia over the last five years has seen a change in the proportion of investors and owner occupiers in the housing market. Investment property, as shown by total dwelling finance for rent or resale, accounted for 30.1% of total dwelling finance in Western Australia in 2003-04, up from 21.9% in 1999-2000. However, the proportion of investment finance in the state remained well below those of markets in New South Wales (41.9%) and Victoria (35.3%) in 2003-04, where the RBA has raised concerns about the high level of property investment and exposure to a downturn in the market.

The value of finance for housing investment in Western Australia increased by 128.6%, from $2,400 million in 1999-2000 to $5,486 million in 2003-04. Individual investors purchasing established homes accounted for 91.5% of the increase in total dwelling investment finance in the state, underlining the popularity of this form of investment. The latest available Australian Taxation Office data indicate that 11.3% of individual taxpayers in Western Australia operated rental properties in 2001-02, returning a total net rental loss of almost $125 million. The tax deductibility of these losses means investors can potentially afford to borrow more for housing than owner occupiers, making housing relatively less expensive for investors.


DECREASED SAVINGS

The upturn in housing debt has had a negative effect on household savings across Australia. Nationally, the net savings of households have declined from a peak of 5.6% of disposable income in 1995-96 to -2.5% in 2003-04, suggesting that Australians are now spending more than they are earning. Higher house prices and increased competition in the lending industry appear to have led consumers to increasingly finance household consumption through debt and equity withdrawals. Net savings estimates are not available at state level but, in Western Australia, the ratio of gross household savings to gross disposable income declined to 13.9% in 2003-04, from a peak of 15.3% in 1999-2000.


INCREASED SPENDING ON RENTS AND HOUSEHOLD GOODS

As house prices have risen, investors have been drawn to the property market by the prospect of capital appreciation, resulting in an increase in the stock of rental accommodation. With rents rising less than the price of houses, the demand for rental accommodation has increased. In Western Australia, this is evident in household consumption expenditure on rents and other dwelling services, which rose by 27.0% (or $1,565 million) between 1999-2000 and 2003-04.

With more Western Australians moving between homes, the demand for household goods also increases, as people furnish their new home to reflect their individual requirements and style. The general increase in consumption spending funded by housing equity withdrawals has also helped fuel household goods demand. Over the five years to 2003-04, household consumption expenditure on furnishings and household equipment increased by 21.3%, from $2,428 million to $2,945 million. From a business perspective, the turnover of the state's household goods retailers rose by 21.7% ($542 million) to $3,037 million over the same period.


EFFECT ON INFLATION

In recent years, the cost of housing has been a major contributor to inflation in Perth. Consumer Price Index (CPI) data showed that housing costs, which include rents, utilities, and other housing costs such as house purchase, property rates and charges and repairs and maintenance, have risen by 18.6% between 1999-2000 and 2003-04. This increase, however, was lower than the national increase of 20.3% over the same period. In Perth, the most notable rises over the last five years have been the cost of House purchase, up 24.4%, and Property rates and charges, which increased by 27.7%.

Over the last three years the contribution of housing costs to the overall increase in Perth's CPI has risen rapidly. In 2001-02, the cost of housing accounted for 14.4% of the rise in the level of Perth's prices. This share increased to 19.9% in 2002-03. In 2003-04, more than half (54.0%) of the prices growth in Perth was attributable to the cost of housing, 16.4 percentage points higher than the contribution housing costs made to national inflation (37.6%).


DECLINE IN HOUSING AFFORDABILITY

Rising property prices have an impact on housing affordability, particularly for first home buyers, by increasing both the initial cost of housing (loan deposit) and the ongoing cost of servicing the debt incurred in financing the purchase (mortgage repayments). These costs are reflected in the two tests that banks apply when approving housing loans. The first is an equity test, in which the prospective borrower must satisfy the bank that he or she has a sufficient deposit, traditionally 20.0% of the purchase price (although, a lesser deposit has often been accepted in recent years). The second is an income test, in which the bank assesses a prospective borrower's ability to repay the loan from his or her income. The general rule is that loan repayments should not exceed 30.0% of the borrower's gross income.

Based on these criteria, and assuming a 20-year loan, the annual income required to purchase a median-priced house in Western Australia rose by 43.8%, from $41,680 in June 2000 to $59,920 in June 2004. Over the same period, average annual earnings for an adult full-time employee increased by 18.9%, from $41,756 to $49,660. In other words, a shortfall of $10,260, or 20.7% of average annual earnings, had emerged by June 2004, as growth in earnings did not keep pace with growth in median house prices. In comparison, in June 2004, the shortfalls in other capital cities ranged from $13,862 (27.9% of earnings) in Darwin to $77,936 (151.1%) in Sydney.

Higher density housing, on the other hand, has remained relatively more affordable over the last five years. Flats, units and townhouses have become more attractive, particularly for first home buyers, as the annual income required to purchase a median-priced flat, unit or townhouse remains below average earnings ($49,660), rising from $29,830 in June 2000 to $48,400 in June 2004.

Graph - Qualifying income to secure a typical home loan in Perth



An alternative measure of housing affordability is the debt servicing ratio, which shows the proportion of household income required to pay the interest on housing loans. In Western Australia, dwelling interest, an estimate of the interest paid on the total value of housing loan balances, increased from 4.8% of household gross disposable income in 1999-2000 to 6.5% in 2003-04. Dwelling interest itself rose by 71.9% over this period, reflecting the increased size of housing loans in the state rather than higher rates of interest. Between 1999-2000 and 2003-04, the debt servicing ratio for Australia rose from 4.7% to 6.3%, and only New South Wales recorded higher ratios than Western Australia over this period. This reflects the high proportion of the state's residents who have a mortgage. In the 2001 Census, among the states, Western Australia had the highest percentage of residents purchasing their homes (27.7%), and the lowest percentage (32.2%) who fully owned their homes.

Graph - Debt servicing ratio for Western Australia



FIRST HOME BUYERS

In the last five years, among owner occupiers, first home buyers in Western Australia's property market declined from 21.4% of buyers in 1999-2000 to 14.6% in 2003-04. The number of first home buyers in Western Australia decreased by 19.1%, from 15,323 in 1999-2000 to 12,402 in 2003-04, whilst the number of non-first home buyers increased by 28.7%, from 56,318 to 72,479.

The decline in the number of first home buyers, over this period, may partly reflect the pull forward effect of the First Home Owners Grant. Dwellings financed for first home buyers peaked at 17,704 in 2001-02, the year in which an additional grant was available. However, rising house prices have since made it more difficult for first home buyers to enter the housing market. At the same time, changeover buyers, have seen the equity in their existing home increase, and therefore, have had to borrow relatively less. This is reflected in the change in average home loans approved for each type of buyer between 1999-2000 and 2003-04. The average loan size for non-first home buyers increased by 25.7%, from $121,000 in 1999-2000 to $152,000 in 2003-04, while loans for first home buyers increased
by 29.6%, from $114,300 to $148,100.


EFFECT ON RENTAL MARKET

Growth in property investment in Western Australia has also flowed through to the rental market, where the increased supply of rental properties has exerted a moderating influence on rental earnings. Rents, as measured by the rental component of the Consumer Price Index, rose by 7.8% in Perth from 1999-2000 to 2003-04, but the price of established houses increased by a far greater rate (54.9%) over the same period. As a result, rental yields for three bedroom houses have declined from 5.4% in June 2000 to 4.1% in June 2004, but still remain higher than most major Australian capital cities. Falling rental yields are, however, often tolerated by property investors whilst increasing property prices provide the opportunity for capital gain.

Graph - Rental yields for three bedroom houses in Perth



Another indicator of supply conditions in the rental market is the change in vacancy rates of rental accommodation. Between June 2000 and August 2003, vacancy rates increased from 3.2% to 4.7%. Since then, there has been a decrease in the vacancy rate to 3.3% in June 2004, due mainly to an increase in net migration to Western Australia. This indicates that recent demand has been adequate in the property market to meet the increased supply of rental accommodation from investors. This is consistent with declining rental yields, in that, rental accommodation has become more affordable relative to owner occupation.

Graph - Vacancy rate for all rented dwellings in Perth



INCREASED INCOME FROM DWELLING OWNERSHIP

Income from the ownership of dwellings in Western Australia increased by 20.5% ($872 million) between 1999-00 and 2003-04. Income from the ownership of dwellings includes the gross rent (less operating expenses) earned by operators of rental accommodation, plus the estimated rental value of owner occupied dwellings.


RECENT DEVELOPMENTS AND LOOKING FORWARD

In November and December 2003, the Reserve Bank of Australia increased interest rates, citing the high level of activity in the housing market as an area of concern. As a result, the standard bank variable interest rate on housing loans increased from 6.55% in October 2003 to 7.05% in December 2003. There have been signs of a subsequent slowdown in the larger eastern states markets, with established house prices decreasing by 2.1% in Sydney and 0.3% in Melbourne in the first half of 2004. Nationally, prices increased by 2.9% in the same period compared to 8.4% in the six months to June 2003. In Perth, established house prices rose by 3.3% in the first six months of 2004 compared to 10.9% in the second half of 2003 and 10.2% in the six months to June 2003.

The increases in interest rates appear to have reined in the demand for housing credit. In trend terms, between October 2003 and June 2004, the number of housing finance commitments declined by 13.8% in Western Australia and 22.7% nationally. However, in the first two months of 2004-05, Western Australia recorded increases in housing finance commitments (1.7% and 8.3% respectively) as stamp duty relief measures drew first home buyers back into the market. In July 2004, 1,151 dwellings were financed for first home buyers, the highest number since October 2003 (1,183). In the following month, 1,481 first home buyers received finance approval for their homes. Among owner occupiers, first home buyers accounted for 18.4% of home loans in July and August 2004, compared to an average of 14.6% in the previous twelve months.

The short-term outlook for the residential construction industry remains positive. The number of building approvals in July 2004 (2,227 dwelling units), was the highest since October 2003 (2,396 units). In the previous six months, approvals had continued at a monthly average of 1,928 units, slightly less than the 2003 monthly average (1,935). In June 2004 trend data for dwelling unit commencements rose for the eighth successive quarter, increasing by 11.3% in the 2003-04 financial year compared to the national increase of 0.6%. The Housing Industry Forecasting Group (2004) projections for 2004-05 show dwelling commencements easing to 21,000 units from 22,393 recorded in 2003-04.

Dwelling unit completions have been declining in trend terms since the March Quarter 2003, suggesting that labour and materials shortages may be causing delays in the industry. At the end of the June Quarter 2004, the estimated value of outstanding work on residential building projects that had already commenced was $1,436 million, an increase of 44.7% since June 2003. Including work approved but not yet commenced, the state's residential building industry had an estimated $1,893 million of work in the pipeline at the end of June 2004.

Some other factors indicate a slight strengthening of the underlying demand for housing in 2004-05. The annual rate of population increase has risen to 1.7%, second only to Queensland's rate of 2.1%. Net interstate migration has turned positive and continued to grow in response to increased employment opportunities in Western Australia. By September 2004 the number of full-time jobs had increased by 1.8% on September 2003, and the unemployment rate had fallen to 4.9%, compared to 5.5% nationally.


CONCLUSION

Between 1999-2000 and 2003-04 the housing market in Perth experienced rapid increases in the prices of new and established homes. This has largely been the result of an increase in demand, driven by low interest rates and the attractiveness of housing as an investment, and of inherent constraints in the supply side of the housing market. The rise in house prices has had a number of impacts on the Western Australian economy. Investment in dwellings and associated infrastructure has increased incomes in property and construction industries and contributed to economic growth in the state. Household debt has increased and savings declined as consumers have borrowed to purchase homes or drawn on increased equity in their homes to fund household consumption. As housing affordability has declined, first home buyers have found it increasingly difficult to enter the housing market and governments have responded with incentives. The high level of investment activity in the market has seen decreasing rental yields and increased vacancy rates for most of the period. Both the rise in prices and its impacts on the Western Australian economy have been more moderate than those in the major eastern states property markets. It is therefore likely that the Western Australian property market and construction industries will experience a relatively softer landing as demand moderates in response to recent and anticipated increases in interest rates.


REFERENCES

Australian Bankers Association, 2003, Submission no. 164 to the Productivity Commission Inquiry into First Home Ownership.

Australian Stock Exchange, 2004, Historical Market Statistics, viewed 8 September 2004,
<http://www.asx.com.au/research/market_info/historical_equity_data.htm>

Australian Taxation Office, 2003, Taxation Statistics 2000-01.

Australian Taxation Office, 2004, Taxation Statistics 2001-02.

Department of Immigration and Multicultural and Indigenous Affairs, 2004, Population Flows: Immigration Aspects.

Government of Western Australia, 2003, Submission no. 190 to the Productivity Commission Inquiry into First Home Ownership.

Productivity Commission, 2004, First Home Ownership, Report No. 28, Melbourne.

Real Estate Institute of Australia, 2003, Australian Property Market Indicators July 2002-June 2003.

Real Estate Institute of Australia, 2004, Market Facts (June Quarter 2004).

Real Estate Institute of Western Australia, 2004, Property Market Indicators.

Reserve Bank of Australia, 2004, RBA Bulletin Statistical Tables.

Urban Development Institute of Australia ,Western Australian Division, 2003, Submission no. 162 to the Productivity Commission Inquiry into First Home Ownership.

Western Australian Housing Industry Forecasting Group (HIFG), 2004, Housing Industry Projections 2004/05 & 2005/06.

Western Australian Planning Commission, 2004, State Lot Activity (December Quarter 2003).


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