Despite the controversy of Olympic Dam the real issue for South Australian property is not one of uninitiated resource projects, but of housing supply.
South Australia is currently enduring some difficult challenges – both economic and demographic – and among states, its property market appears to have a tricky 2013 ahead of it.
For now the state is still mulling over what could have been. In August BHP Billiton announced that its planned Olympic Dam expansion, what would have been a US$30bn project, would not get the go-ahead, throwing much of the state’s economy and property markets into uncertainty.
The project had long been slated to rescue the state economy, spur export growth and create much needed demand for housing and new infrastructure.
A Deloitte Access Economics report reminds investors why the project will be sorely missed. “SA has been losing market share within Australia, and hopes for limiting those losses had rested on an early upswing in resources spending on a scale large enough to make a difference. That is code for ‘Olympic Dam’, and it now looks as if that cavalry may not arrive,” it says.
The report adds that without the Olympic Dam project the state economy remains firmly founded on an industrial structure that continues to sit on the wrong side of Australia’s two-speed troubles. The difference between it and Victoria is that the latter has been much more successful in attracting migrants and this has had a profound effect on the differences in population growth. While Victoria and resource-led states continue to grow, the South Australian population has been stagnating.
In fact, Deloitte Access Economics says that the state’s economic challenges may be to the point that even if Olympic Dam had gone through, problems would persist. “There was always the risk of a ‘cargo cult’ mentality: wait for the Olympic Dam ship to come in and everything in South Australia’s economic future would suddenly become sweetness and light. That was never on the cards,” it states.
The report points out that spending continues to fall in important areas of the economy, and consumer caution remains the order of the day. Population growth hasn’t kept pace with the national picture in well over 20 years, and South Australians are older than in other states – and ageing faster. Over 2011, employment figures closely mirrored the national picture, but the same story hasn’t held for 2012 with employment growth moving in the wrong direction.
Within this environment, what is perhaps most surprising is that property values were increasing over 2012. RP Data’s Home Value Index for Adelaide recorded the largest increase of any capital city over the month of September, rising 2.4% and taking the city’s quarterly capital gain to 1.2%.
RP Data’s national research director Tim Lawless says the growth conditions appear to be driven by the more expensive end of Adelaide’s housing market,” he says, adding that over 2012 RP Data-Rismark’s stratifi ed hedonic index showed a 4.5% increase across Adelaide’s most expensive suburbs compared with a 0.5% gain across the most affordable end of the market.
Outside of Adelaide, prices haven’t done as well. RP Data figures showed -2.2% growth for regional houses and -10.3% growth for regional units over the 12 months to September.
Against this backdrop – a stalling economy where property prices have managed a series of mild increases and decreases – it is evident that 2013 will be hard to call for property markets. What remains to be seen is whether investors should be worried.
Supply and demand factors
1. Looming oversupply
According to ANZ’s Australian Property Outlook report, the Adelaide housing market appears to be, in very general terms, balanced in supply and demand, with measures of rental vacancies pinning the city as the second most vacant capital city.
In more precise terms, the city may be mildly oversupplied in the opinion of Angie Zigomanis, BIS Shrapnel senior manager. “It has a slight oversupply, which points to a weaker market,” he says. “You’ve got a demographic where younger people are leaving and the city doesn’t have the same pulling power as other non-resource states as a desirable place to live. If you aspire to get a certain level of employment, there’s not as many of those higher jobs in Adelaide.”
Meanwhile, a QBE LMI Housing Outlook 2012-2015 report indicates that this slowing in population growth corresponded with a rise in dwelling constructions. This followed a peak in prices that occurred midway through 2010. Essentially, too many properties have been built and what was once a housing deficiency has slipped into oversupply, the report claims. As evidence of this, it points to the June quarter vacancy rate of 3.9%, which outscores the balanced market level of 3%. The upside is that future residential construction is likely to remain soft, according to ANZ’s report. It claims building approvals have hit 10-year lows and have been falling for the last two years. Dwelling approvals in the year to July 2012 were also 41% lower than the two years prior.
Still, high vacancy rate data makes for difficult reading for investors who are aware of how supply and demand relates to property price movements. Prices tend to rise in conditions where demand for properties thoroughly outstrips the supply.
If demand across Adelaide is waning slowly, just as supply in recent times was increasing, logic suggests that price growth will be negative. But is this the entire picture for Adelaide?
2. Buyer sentiment
Australian Property Monitors’ senior economist Andrew Wilson says the problem in making forecasts about Adelaide is that its property market is typically subdued. It is not prone to large fluctuations in prices or demand: the lows aren’t that low and the highs aren’t that high.
“Adelaide doesn’t tend to have a volatile price cycle. It tends to have quite a moderate price cycle. It doesn’t have a very low entry point or high peak point and is usually more of an evenly spread and more subdued market in terms of turnover and activity from the change up market,” he says.
Wilson says that even taking forecasts of negative growth into account, Adelaide would be unlikely to see large-scale falls. The same would be truth if the market was to grow and that growth would be marginal.
“I expect next year to be similar to this year, where we saw low sales volumes, but performance will depend on economic circumstances – national economic activity, which will be sentiment based, and local economic activity,” he says.
ANZ’s Paul Braddick agrees. Braddick believes first homebuyer activity, perhaps more so than in some of the other states, will impact property prices and with this segment of the market confidence in the state economy and employment market is always essential.
“With South Australian housing relatively more affordable than the Australian average, underlying first home buyer activity will be the leading market indicator for South Australia, but the uncertain economic outlook following delays and cancellations to a number of large, uncommitted mining and energy projects, is weakening homebuyer confidence,” Braddick says.
Despite fears that Adelaide may be oversupplied and that the state-wide economy is not the most encouraging for first homebuyers, Century 21 chairman Charles Tarbey says that the city’s affordability should not be underestimated as a market driver.
The city’s median prices are the lowest within mainland Australia, close to $100,000 cheaper than in Melbourne and Perth and roughly $200,000 cheaper than in Sydney.
“It’s a slingshot effect. You see the market in Sydney pick up and then the SA market starts looking cheap, so people start to invest there. They start to invest in SA just as the Sydney market starts to slow down and the slingshot effect is on its way again for Adelaide.”
The important thing is that the bigger capital cities like Sydney would need to recover first, says Tarbey, who adds that because other markets would be involved, determining just when any slingshot affect would start to benefit Adelaide is difficult.
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