The Australian property market has dramatically transformed in recent years, with property prices in major cities like Sydney and Melbourne skyrocketing – catching many off guards.

In response, some are turning their attention westward, eyeing Perth as a potentially lucrative destination for their next property investment. Overall, Perth appears to offer a compelling mix of affordability, high rental yield, low vacancy rates, and solid interstate migration, making it an attractive option on the surface.

However, before you rush to invest, it's essential to scrutinize whether the perceived merits of pursuing property investment in Perth are genuinely worth it.

Perth's Allure

Perth's property market has garnered some positive attention recently for several reasons:

Affordability: The most obvious draw for investors is Perth's relatively low property prices compared to major eastern cities like Sydney and Melbourne. The average home in Perth costs half the price of the average Sydney home.

Rental Yield: Perth offers a relatively robust rental yield, which is seen positively given the recent onslaught of interest rate rises eating into investors' cash flow. Investors see Perth as an opportunity to achieve neutral to positive cash flow.

Low Vacancy Rates: With a vacancy rate of 0.7% (the lowest in 42 years!) Perth boasts a strong demand for rental properties. Low vacancy rates generally indicate a lower vacancy risk and support the potential for future rent increases. While vacancy rates are extremely low across all the capitals, Perth seems to be leading the pack – indicating a strong supply bottleneck.

Interstate Migration: International migration is putting pressure on rental demand across all the capitals; however, Perth is also experiencing a surge in interstate migration. Individuals and families are flocking to the city for employment opportunities and a more affordable quality of life.

Population Growth: Predictions suggest that Perth may surpass Brisbane to become Australia's third-largest capital city in the next eight years, with an expected addition of approximately 900,000 residents by 2031. Perth is betting on its education, tourism, primary industry, and proximity to Asian capital cities to drive this growth.

With all these things going for it, it's little wonder some of the most well-known pundits, such as CoreLogic's Tim Lawless, are touting it as the best opportunity available now, believing it undervalued by as much as 30%. But is it as good as it seems?

The Long-Term Play

While these factors may make Perth an enticing short-term investment option, evaluating its long-term prospects is crucial. Investing in property within Australia comes with high transaction costs, such as stamp duty and capital gains tax. These costs drive many investors to adopt a buy-and-hold strategy in the lead-up to retirement. Therefore, it's essential to question whether rushing to buy property in Perth is the wisest long-term play.

The critical question is whether Perth's undervalued position will translate into sustained value growth. There is not much point saving 30 cents on the dollar today if you can't double your money later.

However, that is the exact picture painted when we look at historical data. Over the last 30 years, Perth has lagged significantly behind Melbourne and Sydney for capital growth. It came almost last, second only to Darwin.

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Source: Corelogic Property Pulse August 2022

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A Cautionary Tale of Betting on Size

Furthermore, it's essential to note that even if Perth does become Australia's third-largest city, this alone does not guarantee it will be a financially lucrative investment option in the long term.

There is much more that drives price growth beyond the size of the population alone. For example, how likely is the population to plant roots and settle down (i.e. buy houses). What life stage and financial standing are they likely to do this at? What significant infrastructure and high-value industry is in place to support employment and income growth? What town planning policies and infrastructure projects are in place?

We can see this playing out in the Brisbane market. Although Australia's third largest city performed worse than Melbourne, Sydney, Canberra, and Hobart in price growth.

To put that into monetary terms, an average house purchased 30 years ago for $265,000 would be worth $1.3M in Sydney. The average home purchased for $226,00 in Brisbane would be worth only $884,000 in Brisbane. That is a difference of $461,000!

Let's repeat the exercise again, this time projecting into the future.

Assuming previous growth trends apply, an average house purchased for $1.3M in Sydney today would be worth $6.7M in 30 years. A home purchased in Brisbane for $884,336 will be worth $3.4m.

That's a difference of $3.3m!

Now, let's not forget we are using the performance of Brisbane, which fared better than Perth historically. The calculations for Perth are in the table below.

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Bad Press

While some investors are beginning to set their sights on Perth, data shows only a minority are willing to take the plunge. Perth has gained a bad reputation through the mining boom years, where prices initially surged only to fall by 20% later - leaving many investors stuck.

Prices are finally on the mend after laying flat from 2014 to 2021. Many local investors are cashing out and taking their money to other more predictable markets (for the reasons outlined above).

Meanwhile, interstate investors consider Perth 'an unknown market' and prefer not to take the risk. While they see Perth as affordable, they are not convinced it is enough to secure their investment in the long term. Perth carries the brand of a 'boom and bust' town. Without interstate and international investors returning in force, local demand will be the only upward price driver, making it unlikely to achieve the growth potential of blue-chip cities like Melbourne and Sydney.

Conclusion

In the quest for the ideal property investment, weighing the short-term allure of affordability and rental yield against the long-term growth prospects is crucial. While Perth presents some compelling immediate advantages for property investors, including its affordability and low vacancy rates, historical data suggests that it has not kept pace with its eastern counterparts regarding property price growth.

Unless your investment strategy revolves around making a quick profit through property flipping, it may be wiser to consider Sydney or Melbourne for their historically more robust long-term growth prospects.

Investing in real estate requires a strategic and informed approach, and any decision to head west to invest in Perth should be grounded in a thorough analysis of your financial goals and risk tolerance.

Recent events have shown us that monetary policy and property markets can be unpredictable. Balancing risk, preparing for the worst-case scenario, and having multiple exit strategies are never a bad in property investment.

Deals of The Month

Take a look at some recent 'Deals of The Month' to see how you can still make big equity walk-in gains of 20% or more in Blue-chip markets like Sydney without taking a chance out west.

Rouse Hill Commercial Industrial Unit

A client was seeking a wholesale retail outlet for their Indian grocery business. We located and negotiated a 177m2 commercial unit for them at $1.03M with a market value of $1.15M, saving them $120,000.

Riverstone Duplex Site

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A client was seeking a duplex site for his next investment opportunity. We located a rare 522m2 block in Riverstone suitable for a strata subdivision and duplex construction. We secured it for $995,000 when the market value was $1.1m. Upon completion, the buyer is targeting $400,000 in gross profit (after expenses) within the next two years.

Riverstone Family Home Site

Our client was looking to build a dual-purpose family home and investment. We located a spacious 400m2 block in Riverstone at a great price of $760,000 when similar blocks sell for $850,000 or more.

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