June 8, 2016 by Dymphna 6 Comments

Market Review: The real story in Perth


The Perth market has just deployed its stabilising fins. Some interesting lessons here on how property markets actually work.

There’s something interesting happening in the Perth rental market right now, and it a good lesson on how the property market works, especially in a softer patch.

One of the things I like about property (oh, I’ve got a list!) is that there are some built in stabilisers – things that help keep the market on an even keel. There are a few factors that temper things on the way up, and cushion things on the way down.

One of these factors is “household formation” and it’s playing a central role in Perth’s market right now.

Now, if you’ve been paying attention, you’ll know that one of the key drivers of house prices is population.

That’s not too hard to understand. It’s people who buy houses, so if there are more people, there’s more demand for houses, and that pushes prices up.

But population flows don’t translate one for one into housing demand.

There’s a few factors that affect how population growth translates into housing demand. The first is average household size. Back in the 50s the average household had more than four people in it. Now I think we’re less than 2.

So that means the same number of people demand more houses.

(This trend decline in average household size in Australia is one of the keys to understanding why there’s such a persistent housing shortage in Australia.)

The other swing factor is household formation.

Households are formed when a young person moves out of home, or people leave a share house and set up on their own – when they form a household of their own.

But this isn’t a mechanical process. Young people don’t go and form a house as soon as they turn 18 (as much as we might wish!)

In fact the timing of household formation has a lot to do with what’s going on in the economy at the time.

For example, in the US after the GFC, when a lot of university graduates were finding it tough to find a job, household formation tanked, as young people moved back in with their parents to save a few dollars.

It also depends on what’s going on in the property market. If rents and prices are surging ahead of wages growth, then young people may feel priced out of the market, and decide to stay home a little longer.

Or, if they see rents coming down and falling within reach, then they may decide to seize the moment and strike out on their own.

This seems to be what’s happening in Perth right now.

Thanks to a softer rental market, there’s been a surge in new leases. From WA Today:

“Figures from the Real Estate Institute of WA show one-bedroom leased properties increased by 50 per cent in the March quarter, compared with the previous 2015 December quarter.

Two and three bedroom properties were up 18 per cent.

The total volume of leased properties in Perth increased by 17 per cent..

The vacancy rate had come down to 5.6 per cent in the March quarter from six per cent…

“Affordability in Perth’s rental market has improved over the last 18 months, tenants who may have been living in shared accommodation are now finding that they can afford to move out on their own, which is why were seeing this shift to smaller households,” said REIWA president Hayden Groves.

“While rental listings in Perth remain above the long term average, the number of properties leased in the March quarter has soared well above the growth of listings which is a real positive for the market.”

I’m not sure I’d go so far as to say that this is a big positive for the Perth property market, given it’s a fall in rents that has been driving the surge in leases, but we can clearly see here the positive role household formation is having on the market.

These new households are increasing demand exactly as the market needs it. Perth rents have fallen as population growth slows now the mining boom is unwinding, and a large number of new properties are coming on to the market.

However, it could have been a lot worse. If these new households hadn’t come on to the market, demand would have fallen further, and rents would have fallen further as well.

So to a degree, household formation is helping to protect rents and protect prices over in Perth. It’s acting as a stabiliser.

That’s our lesson for today.

However, it’s worth noting that household formation doesn’t always play this role, and in fact it can act as an accelerant. When there’s an income shock – such as there was in the US following the GFC – then income-shocked kiddies can leave the market altogether. They give up their rentals and move back home. Or they huddle together in bigger sharehouses.

In this case demand falls even further and faster, and there will tend to be an over-correction to the downside.

Which is just what we saw in the US.

Anyway, it’s an interesting case-study in how property markets actually work. Thought you might find it interesting too.

Got any other questions about how the property market works? I’d love to hear them.