Perth’s property developers failed to respond to Western Australia’s declining population growth, creating an oversupply of homes, which in turn, negatively impacted house prices, states Christopher Kent, assistant governor at the Reserve Bank of Australia.

Western Australia’s population has declined considerably since the peak of mining investment in 2012. However, building approvals did not decline but actually increased, peaking only in 2014. “This meant that the housing supply was still ramping up at the same time that population growth was declining,” said Kent.

Using a ratio of new dwellings and average people per household, Kent said that more dwellings were being completed than were needed by the declining population. “That is consistent with the sharp rise in vacancy rates in Perth and the adjustment to rents and housing prices," he said.

“It also suggests that dwelling construction and construction employment are likely to remain subdued for some time. That is having a knock-on effect to other industries linked to the property market. These linkages are one way in which the decline in the resource sector has been extended and amplified through to other parts of the economy.”

The downturn in Perth’s property prices is in sharp contrast to the robust property markets of Sydney and Melbourne. And while conditions in the established housing markets have eased relative to a year ago, that did not diminish the risks associated with higher property prices and housing debt. “It does mean that those risks are not building to the same extent as last year,” Kent said.

There are signs that housing price growth in Sydney and Melbourne has picked up in recent months. Loan approvals to investors have increased as well.