Property Investor’s Guide To Property Economics

Property Investor’s Guide To Property Economics
July 3, 2019 Simon Pressley

Instead of obsessing with population growth numbers and community features-and-benefits such as train stations and schools, much of my day – every day – involves the nitty gritty of property economics.

It constantly amazes me that an overwhelming majority of people fail to understand that the key to understanding property markets lies in understanding the economic make-up of each individual town and city.

Perhaps the most effective way to help people appreciate the economics of property markets is to take a back-of-the-beer-coaster review of the modern history of various Western Australia locations.

Given that the economic profiles of individual locations throughout Western Australia are less complicated than elsewhere, I figured it appropriate to use them as Case Studies for property investors to gain valuable learnings from.

A “Paddock” Perspective

At a simplistic level, consider the state of Western Australia as an enormous paddock with a variety of jewels beneath the surface of different corners of the paddock.

For identification purposes, the paddocks have been given the names Port Hedland (iron ore), Karratha (gas), and Kalgoorlie (gold). Each paddock has a ‘homestead’ for the workers to eat, sleep and purchase goods and services.

Perth is the headquarters for all of these paddocks. It’s where the bigwigs in suits make strategic decisions and provide managerial services for each of these ginormous paddocks.

There’s another paddock that lots of workers go to for some R-and-R and that is Broome. Or Margaret River.

The thing is, what I’ve referred to as “jewels” are indeed valuable commodities which are purchased by customers that are really individual countries all over the world.

These commodities are important ingredients in the creation of electricity and the manufacturing of earth’s structures and gadgets.

The sale price for each of these commodities fluctuates up and down depending upon global volumes required from one year to the next.
That means that when the price is high, those bigwigs in Perth will understandably want to sell more.

In both the managerial offices in Perth and in the paddocks, their workforce will expand, which, in turn, means that demand for another commodity known as “shelter” also increases.

There will always be blocks of several years (aka “cycles”) when the customers who purchase these commodities require higher volumes to support large scale economic development in their homeland.

During the Global Financial Crisis, for example, there was strong demand from China for Australian resources which protected our national economy from the global downturn.

Property prices in Western Australia continued to grow because there was an influx of workers who needed shelter. However, once that demand waned so did commodity prices, work force sizes, and ultimately dwelling prices.

Uneven Market Performance

Most property pundits understand that real estate markets across much of Western Australia have experienced significant price declines over recent years, but it hasn’t always been like that in the past and there certainly will be opportunities again in the future.

Let’s consider some examples to illustrate my point.

1. Port Hedland

There has never been a bigger roller-coaster property market in Australian history than Port Hedland. From $50,000 in 1990 to overtaking Sydney as Australia’s most expensive location in 2007, then peaking at $900,000 in December 2013, before bottoming out at $210,000 in late 2018. Of course, this is because 25 per cent of its work force is employed in the mining sector (specifically iron ore), which spent a few years in the economic doldrums and is now back in vogue.

2. Karratha

Karratha is an industrial hub for one of the world’s largest gas reserves – about a quarter of its work force is in mining. Karratha’s median house price has followed a similar trend to Port Hedland over the last three decades. It was $70,000 in 1990, peaked at $800,000 in late-2010, held there for a couple of years, but commenced a deep dive from 2013 and landed at $290,000 in late-2016.

Karratha is now back in a growth-phase with a 13 per cent median house price increase over the last two calendar years.

3. Kalgoorlie

West of Perth, Kalgoorlie has produced significantly less volatile price movements with its median house price increasing from $68,000 in 1990 to $306,000 in December 2018. Its biggest growth period was from 2003 to 2010, when the gold price increased dramatically and the median price jumped by a whopping 130 per cent. The region’s resource sector is gold and, again, employs about a quarter of the local work force.

4. Broome

Being so reliant on tourism, Broome’s property market is heavily influenced by the discretionary income levels of Western Australians. When the state’s economy (aka ‘mining’) and confidence is high, more people holiday, tourism trade is high, and Broome’s property prices respond accordingly.

Broome’s median house price today is $460,000 but it tipped $680,000 in late 2010. As the state economy improves, so will this region’s property market.

Related article: What are Australia’s 40 most expensive cities?

5. Perth

The Western Australian capital’s property market may have experienced some price declines over recent times, but over the long term, there has been healthy capital growth. In 1990, Perth’s median house price was $90,000 and by December 2018 it was $520,000. In fact, Perth’s property market during the noughties was one of the biggest golden eras in Australian history with its median house price increasing by a whopping 245 per cent.

Perth’s economy is more diverse than many of WA regional locations however, it is still nonetheless very reliant on mining.

6. Albany

A location that has produced healthy capital growth and does have quite a diverse economy is Albany, in the state’s south. For the historians out there, the city of Albany was actually established before Perth.

Arguably the most important industry for Albany’s economy is agriculture (seven per cent of its work force is employed in the sector compared to the national average of 2.5 per cent). Albany’s median house price increased 5.7 times from 1990 to 2018 ($70,000 to $400,000) with its most prosperous era between 2002 to 2007, when it recorded an impressive 200 per cent growth off the back of the strong WA economy generally.

 

Other Western Australia locations which also have diverse economies include Geraldton, Busselton, and Bunbury, while Margaret River is a popular lifestyle location.

Related article: The rise and rise of satellite cities

Economic influence

At the end of the day, regardless of which location in Australia we are referring to, property investors would benefit from identifying the various industry sectors that are most important to the local economy.

That’s because the outlook for key industry sectors will have a significant influence on the demand for housing.

As I’ve illustrated, Port Hedland and Karratha are arguably the best-case studies to illustrate the high volatility of one-industry towns.

The risks are indisputably higher than locations with diverse economies and are therefore not locations which Propertyology would invest in.

Related article: Turning challenges in to OPPORTUNITIES

That said, there would be some DIY investors with a higher appetite for risk who paid circa $100,000 for a standard house in about 1990 and sold prior to 2013, making significantly more money than anyone could have made in any other market in Australia.

In the immortal words of Kenny Rogers, “You’ve got to know when to fold them.”

Unfortunately, most people might be able to sing this song, but they can’t identify when a market is about to turn bad and are left wondering what the hell happened when their holding is worth less than what they paid for it.

Propertyology is Australia’s premier property market analyst and award-winning buyer’s agency. Every capital city, every non-capital city, we analyse fundamentals in every market, every day. We use this valuable research to help everyday Aussies to invest in strategically-chosen locations (literally) all over Australia. Like to know more? Contact us here.

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