Adelaide has been exceedingly slow to catch up with its bigger counterparts who are lapping up outsized buyers’ interest. Will 2014 turn the tide for South Australia?

South Australia’s lacklustre performance over the past year has inspired little confidence among investors.

The oversupply situation that started in 2010 has left a bitter after taste in investors’ mouths, particularly those who embarked on developments and who realised belatedly that demand had disappeared by the time their properties were put on the market. It was not just the buyers who made themselves scarce; there were also fewer renters, leaving many landlords with untenanted properties.

“I think South Australia is a fairly tough market,” says Angie Zigomanis of BIS Shrapnel. “It had a strong post- GFC response to construction, a bit like Melbourne. Probably did not get over the top as Melbourne, but it’s still digesting that extra stock now. We think the market is still probably oversupplied to some extent.”

There was some growth, albeit very small at 1.3% for the year, which was well below the median value when it hit its peak at $410,500 in June 2010. “The drop in prices in the Adelaide residential market has been the result of a post-GFC surge in construction that left the market in oversupply,” explains Zigomanis.

The vacancy rate peaked at 3.9% in 2012, although it has slowly tightened to 2.9% in June 2013.

BIS Shrapnel notes that all segments of the market remain weak. While first home buyer demand has been picking up over the past 12 months, it remains at low levels overall. Unlike Sydney and Melbourne, upgrader and investor demand in Adelaide remains flat.

What to expect in 2014

After a soft and lacklustre performance over the past couple of years, will 2014 finally be the time for Adelaide to shine?

Reasons to be cautious

Our experts believe the state faces some challenging times ahead, and warns investors to remain cautious.

1. Oversupply will continue to weigh on property prices

While there are signs that the underlying oversupply is starting to get absorbed, it’s still a long way before demand outpaces supply. Price growth will therefore remain subdued over the next 12 months.

2. Population growth is slowing

While the population is still rising, it is growing at a much slower pace, at just 0.9%. The lack of job growth in the state has made it less attractive for interstate migrants.

“South Australia is not getting the same level of population growth as the other four major capitals like Sydney, Melbourne, Brisbane and Perth, so that’s hindering market recovery,” says Cameron Kusher, senior research analyst at RP Data.

Another downer for the economy is the lower employment participation rate, and in Kusher’s opinion the higher typical age of residents in Adelaide is probably hindering the economy as well.

3. Poor sentiment to persist

While the lower Aussie dollar may help kick-start activity in the manufacturing sector, Deloitte Access Economics says it may be too late to stave off further job losses.

“The pain being felt by the state’s

families at the moment is very real: that can be seen in the labour market where job losses are starting to mount – employee headcount has fallen across the state over the past year – with the unemployment rate continuing to rise sharply in recent months,” it says in a report.

There are also other signs, such as the lower occupancy rates at hotels and weakening business confidence. “I think South Australia missed the boat when it missed out on a number of resource opportunities,” says Residex founder John Edwards, who is currently consulting with data provider OnTheHouse.com.au.

Reasons for optimism

If you’re wondering if there’s only bad news to be had in the SA economy, relax. It’s not all bad news. Despite the downbeat view from afar, there are a number of reasons why investors should not give up on the SA market just yet.

1. Drop in construction will reduce oversupply

BIS Shrapnel expects construction to drop in the next 12 months and slowly erode the dwelling surplus from its peak of 2,700 at June 2013.

2. Economic activity set to pick up

Shane Oliver of AMP says that while SA has struggled, the economy is picking up some steam. “It’s a bit like Brisbane,” he says. “It has struggled a bit, but over the last few months it has been stronger. I think we have seen the worst in Adelaide. It’s about a year behind Sydney. But the outlook is definitely starting to improve and should continue to do so. I would say it is looking at about 4–5% growth over the next year. So it will be catching up to the national growth average.”

3. Low interest rate and A$ will stimulate the economy

Deloitte Access Economics says the shift to lower interest rates and a lower Australian dollar has made life easier for many of SA’s businesses. “This will allow some to go on the front foot, moving from ‘defence’ to ‘offence’ for the first time in years,” it says in a report.

It adds that lower exchange rates are great for manufacturers, tourism, lifting numbers of foreign students studying in SA, and for the state’s farmers (who already look set to enjoy a better year, thanks to more favourable weather).

4. Expansion of Olympic Dam expected to finally go ahead

Although the expansion of Olympic Dam hasn’t yet got the go-ahead, it will at some stage. “This is a world class asset, and demand for its potential production will continue to rise over time,” says Deloitte. “Initial exploration completed in the Arckaringa Basin suggests that there may be an enormous shale oil gas opportunity in the area surrounding Cooper Pedy. Hence the state’s longer term prospects are improving.”

5. Affordability

The slow price growth in SA is certainly a positive for investors who are priced out of Sydney and Melbourne. With the gap in prices widening significantly, investors will be forced to look somewhere more affordable.

“I think our strengths in SA lie with the affordable price of property compared with other states,” says local investor and mentor Andy Muirhead. “You can still buy a three-bedroom house in a large regional mining town that has more than two main industries for under $115,000. A house like this could rent for $180 per week – over 8% returns.”