The suburb of Watermans Bay was originally known as Waterman Bay and named after Alfred Waterman, a fisherman who built the first house in the area (called 'Zephyr') in 1908. The bay was a well-known fishing spot. The Postal District of Watermans Bay was approved in 1954 and in 1962 the name "Watermans Bay" was shortened to "Waterman".
Local residents requested that the named be changed back to Watermans Bay in 1964 however the request was rejected because it did not comply with the State Government policy at that time. In 2003 the Trigg, North Beach and Waterman Community Association conducted a survey of residents to determine the level of community support for a change of name. Of the 564 households surveyed, 502 responses were received with 491 in support and only 11 households objecting to the proposal. In November 2003 the State Government's Geographic Names Committee finally agreed to a City of Stirling proposal to change the name of the suburb from Waterman back to Watermans Bay.
Watermans Bay was originally part of the estate that the Hamersley family acquired in 1837. The area was subdivided as the Mt Flora Estates in 1918; however initial development was largely limited to holiday shacks. The pace of growth in Watermans Bay increased after World War II, and by the late 1960s the area had reached its development potential. In recognition of this growth, the townsite was gazetted in 1964. Some redevelopment began in the 1970s, with new homes replacing holiday shacks. Many of the street names in Watermans Bay honour members of the Hamersley family including Ethel, Margaret, Mary and Ada.