TAS Excerpt from the 2011 September Market report

Swingeing budget cuts hark at a winter of discontent

The economic winds have not been kind to Tasmania over recent years. Never a state that’s experienced strong economic or population growth, the key forestry and tourism industries have taken a buffeting since the GFC – with a corresponding drag effect on the property industry.

This has very much been the case over the last year. RP Data figures for March show Hobart values are down by 2.9% over the 12 months leading up to the end of March 2011 – the third largest value fall after Perth (-6.2%) and Brisbane (-4.9). Units have seen a staggering 8% fall in values, with houses seeing negative growth of 2.4%. However, RP Data analyst Cameron Kusher says that investors shouldn’t panic at the figure for units.

“It’s a fairly small sample size, so it can be very volatile,” says Kusher. “The other reason why the unit market may not be doing so well is that median unit prices are $285,000 and median house prices are just shy of $325,000 – if you can afford to buy in Hobart, you can probably afford to buy a house rather than a unit.”

That affordability – especially in relation to mainland Australian markets – has been one of the key strengths of the Tasmanian property market. It’s a good thing too, as good news is hard to come by. The recent state budget was one of the most swingeing in recent memory, as Premier Lara Giddings announced $1.4bn in cuts – and the possibility of 1,700 public service workers being made redundant. A further 2,500 private sector workers may also lose their jobs as a result of the cuts, according to The Mercury newspaper.

National valuation firm Herron Todd White highlights that the government is one of the largest employers in the state.

“[Job losses] would have a detrimental effect on associated businesses and also household incomes, a point which is central to a recent union marketing campaign opposing the move,” said HTW’s recent Month in Review report. “This would augur for less demand for property and possible negative impacts on residential values.”

The future of one major industry project touted as a major economic boost to the island, the Gunns pulp mill at Bell Bay, is also up in the air. The company was originally seeking a joint venture partner to fund the mill, but has so far been unable to do so. As a result, it’s currently planning to sell most of its mainland assets, which include about 40,000 hectares of plantation forests as well as mills at Tarpeena and Kalangadoo in the South East. The battle for formal approval may have been won, but the battle to finance the project – with building costs estimated at $2.3bn – is still continuing.

Tasmania’s third industry, tourism, is suffering too. Although tourist numbers have remained relatively steady over recent years, the regular visitor survey conducted by the Tasmanian government has shown a serious decline in visitor numbers.

For the year ending December 2010 there were 904,000 visitors, down from 912,100 for the previous year. The report also noted a decline of 1% in total visitors to Tasmania on scheduled air and sea services, and total nights decreased by 3% to 8.3 million.

It’s all looking pretty gloomy – are there any bright spots for investors? Kusher highlights that rental yields are solid, and that properties are still the most affordable in Australia.

“Yields are quite good at 5.3% for houses and 5.5% for units: it’s very affordable.However, it’s not likely that we’ll see substantial growth in the Hobart market for a while.”

There’s also the possibility of cash flow positive properties in mining towns in the west of the island, such as Rosebery (currently the holder of the lowest median price in Australia at just $58,000) or Zeehan. However, investors seeking cash flow should tread carefully in these areas, as vacancy rates can be as high as 20% in some locations. Queenstown looks to be the safest bet, with a median house price of $70,000 and a vacancy rate consistently around 2%.

What of the longer-term outlook for capital growth? While Herron Todd White is confident that the current correction “can be attributed to cyclical trends” and that “the economy will eventually return to positive growth in the future”, it’s noticeably silent on timing. Indeed, it seems as though Tasmania could be in for a prolonged period of subdued buyer activity.

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