SA Excerpt from the 2016 January Market report

On the surface, the SA economy is struggling – but could it be a slow-burn investment performer?
South Australia has always been a state known more for its economic potential than for its progress in realising those assets.
Its mineral resources are regularly referred to as ‘on par’ with those of WA, with precious metals and uranium deposits often earmarked as the key to a new golden age. However, that golden age never quite seems to arrive, with projects such as the Olympic Dam extension languishing in development hell.
As a result, the SA economy retains the dubious position of Australia’s worst-performing mainland economy. The ills of Adelaide’s car manufacturing industry are well documented, with the Elizabeth Holden plant – employer of 6,000 people – set to shut its doors for the final time in 2017.
With the highest unemployment rate in the entire country at 8%, the metrics don’t look great for the state, especially when the vast majority of infrastructure projects are stuck in development hell rather than going ahead.
However, experts are still looking fondly at SA, with Deloitte Access Economics saying its economy is “in better nick than it’s given credit for”. The thinktank cites solid retail sales and housing construction as causes for celebration. It also highlights that the state’s (slow) population growth is holding up amid a national slowdown.
Good news also comes in the form of the Australian Navy and a $39bn shipbuilding contract. Adelaide is also likely to be the construction location of an as-yet-unspecified number of Navy submarines – another boost to the state.
What does that mean for the state capital’s housing market? The outlook is decidedly mixed.
Adelaide’s performance during 2015 can at best be described as ‘going sideways’, with CoreLogic RP Data figures showing a slight fall in house prices and a more substantial drop of 3.9% in unit prices.
What lies ahead for Adelaide? Our panel of experts are divided into two camps: those who think the city will continue to linger in the doldrums, and those who believe Adelaide has a brighter future ahead.
In the former camp are CoreLogic RP Data’s Tim Lawless and BIS Shrapnel’s Angie Zigomanis.
Lawless is concerned about the manufacturing slowdown’s impact on the city as a whole.
“There is some uncertainty around Adelaide,” he says. “Admittedly, it doesn’t suffer from the same peaks and troughs as other markets, but it is being hit by the manufacturing slowdown – especially around northern suburbs like Salisbury and Elizabeth.”
Zigomanis, meanwhile, is concerned about a potential oversupply.
“Adelaide has been soaking up an oversupply that built up as a result of the new-homes scheme,” he says. “It finally got to a point where supply was in balance with demand, but construction has increased again – and it’s now tipping back into oversupply.
“As a result, Adelaide hasn’t really seen the benefit of low interest rates in promoting market activity and capital growth.”
In the other camp are AMP’s Shane Oliver and Domain’s Andrew Wilson. Oliver thinks Adelaide may in fact benefit from the lower dollar and lower interest rates, with price gains picking up over the next 12 months. His rationale comes down to the fact that Adelaide’s market is driven much more by owner-occupiers than investors.
As recent changes to APRA capital requirement measures are making it more challenging for banks to lend to investors, markets with a larger proportion of owner-occupiers are likely to remain more robust than more speculative markets.
This, suggests Oliver, could see the Adelaide market hold up despite its economic challenges, and perhaps even have value gains.
Wilson agrees, highlighting Adelaide’s ‘conservative’ property cycle compared to Eastern capitals like Sydney and Melbourne.
“It’s a secure market, which generally performs in a stable, reliable manner regardless of what’s happening in the wider economy,” says Wilson. “It’s almost as though South Australians are so used to having an underperforming economy that they’re just getting on with business regardless.”
Wilson also highlights Adelaide’s tight rental market and growing rents, with its relative shortage of rental properties due to the affordability of homes. Indeed, Wilson suggests Adelaide could well see capital growth in the region of 5% or more in 2016 – on par with his predictions for Sydney and
“There’s a lot of value in the market, especially around the metro area, the west and the east of the city,” adds Wilson.
For investors on the hunt for cash flow, there could also be investment options in the aforementioned northern suburbs of Elizabeth and Salisbury – although they may require a robust risk appetite.
“There are also huge rental yields available in the northern suburbs, with very low entry points in terms of property prices,” says Wilson.
Adelaide: Northern suburbs
The picture is subdued outside of the capital.
Lawless suggests that port towns and lifestyle markets south and west of Adelaide, as well as tree-change locations like the Barossa Valley and the Adelaide Hills, could be well placed to benefit from retirees and sea changers.
However, given Adelaide has not seen the price gains that the Eastern capitals have – a major driver of sea and tree changes – this is not likely to lead to major upheavals in these markets.
A far bigger elephant in the desert is the long-mooted Olympic Dam expansion. Sadly, it seems like investors waiting for the uranium boom may be waiting for a while.
“It does seem like Olympic Dam is always on a distant horizon,” says Zigomanis. “Because it’s such a long-term project – it’s going to be there for 40–50 years – you build it when it is as cheap as possible to build. Our senior economist is of the view that they may as well start now, but it’s looking more likely that it’s on the backburner at least until the end of the decade.”

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