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Fact or fiction: the state of the South Australian property market

Opinion

Since the emergence of the global coronavirus pandemic, we’ve seen some economists and many media commentators pile on to the doomsday narrative of a looming Australian property market collapse. This isn’t unusual. For many years we’ve seen countless prophecies about the pending property implosion.  The only problem is they’ve all gone unfulfilled. And the ‘end of days’ predictions for property post-COVID-19 are also set to miss the mark, writes Bushy Martin.

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In April and May, the world was turned on its head and economists were rushing out their forecasts of property Armageddon.

For any property owner or investor following mainstream media, it would’ve made you sick to the stomach.

The truth has been much less dramatic or newsworthy.

According to Corelogic data, while many capital cities have experienced short periods of incremental price declines in house values in the last quarter (-3.5 per cent in Melbourne, -2.1 per cent in Sydney, -1.6 per cent in Perth, Brisbane -0.9 per cent, Adelaide -0.1 per cent, Canberra +1.3 per cent with a national average of -1.7 per cent), year to date figures reveal that Sydney is up 2 per cent, Adelaide by 1.4 per cent, Brisbane up 0.9 per cent, Perth down -1.3 per cent and Melbourne dropping by -0.9 per cent.

These subdued results are a far cry from the wholesale price slaughter that was being bandied around at the beginning of the pandemic.

Unfortunately, the misinformation doesn’t end here.

For example, you may have heard that “rising unemployment will kill property values.” This is fiction. There is simply no direct correlation between unemployment and property values.

When unemployment spiked rapidly from 6 per cent to 11 pr cent in the early 1990s recession, median house values continued to rise in all of the mainland capitals during and after the days of Paul Keating’s ‘banana republic,’ according to ABS stats.

And you may have read that the pause on migration would be damaging to property values. Wrong again. About4000 expats are flowing back into Australia each week, replacing the 220,000 new immigrants that were expected to come into the country this year.

Further, we’re also seeing the forces of internal migration provide a boost to Adelaide property as more people move out of Sydney and Melbourne to smaller cities and regions. There are anecdotal reports of more than 80,000 ‘interstate Adelaideans’ seeking a move home, while other secondary cities will also benefit from the big shift towards remote work as well as significant workplace and behavioural change.

As has consistently been the case historically, property values have again proven to be resistant to economic shocks.

Why have many of the property forecasts failed to eventuate?

COVID triggered a recession we decided to have in contrast to our recession in the early 1990s that Keating said we had to have.

Because we decided to have it, the government has controlled the economic slowdown with a massive fiscal stimulus across a raft of integrated programs that have created a financial and psychological safety net to support property owners.

This has meant that if you don’t need to sell, you don’t sell. Then the basic economics of supply and demand come in to full effect. Despite the circumstances, when there are limited properties for sale with consistent ongoing demand, which is the current state of play in Australia, property prices are maintained or grow for good quality homes.

Further, what most crystal ball gazers don’t recognise is that the property market is all about finance, not economics.

During both the recession in the early 1990s and the dot com bubble in the early 2000s, property values either remained stable or increased.

The only time property values fall is when access to credit and borrowing is tightened, through tough lending restrictions. We saw this happen after the GFC in 2008 and most recently before and after the Banking Royal Commission, from 2017 through to 2020.

Finance has never been cheaper, yet never harder to get. Record low interest rates don’t mean much if you can’t get access to credit!

The Federal Government realised that the flow of credit has been log-jammed, and has moved to relax lending laws from March 2021 – this has already caused banks to drop the benchmark servicing rate from 5.35 per cent to 5.05 per cent, increasing borrowing capacity by $100,000 for the average potential homeowner.

But this doesn’t mean the coast is clear for all property owners.

Property performance is a two-speed race – suburban housing performs very differently to inner-city units and apartments.

COVID has been a volume switch and amplifier of underlying conditions. While good, high demand properties continue to perform well, poor quality and oversupplied properties with low demand have suffered more – COVID has simply hit the accelerator, quickening growth for good properties and bringing forward the pain for poor properties.

The city apartment market is in for a tough time. While South Australia doesn’t have the big high-rise apartments of the eastern states, there are still plenty of Adelaide apartment owners in this area who are feeling the pain with a surplus of new apartments suffering the sudden absence of international students and foreign investors. According to SQM research, vacancy rates in Adelaide City have jumped alarmingly from 2.8 per cent in January to 7.2 per cent in September.

Commercial property is different again. A lot of work has been done to ‘pause’ the market through deferred bank repayments and a code of conduct for landlords and tenants to get through the pandemic. While lockdowns and work from home have clearly hurt office tenancies in the big cities, with Sydney office vacancies rising sharply from 3.9 per cent to 5.6 per cent and Melbourne 3.2 per cent to 5.8 per cent from January to August according to the Property Council of Australia, Adelaide has emerged relatively unscathed – office vacancies only rose by 1 per cent from 14 per cent to 14.2 per cent in July.

In the same way that top residential properties are still in high demand, premium commercial properties are still rare and hot. In August, Adelaide had its biggest office property sale in more than two years, a staggering $174.65 million deal.

While much has been made of the office market, there is huge growth in other sectors including non-discretionary retail, storage and other warehousing. It is certainly far from doom and gloom for commercial property investors.

What does the future look like?

If you own property in Adelaide, the future is bright. So often South Australia has been maligned, but now is our time to shine. We’ve avoided much of the carnage experienced by the rest of the world, and our diverse economy and fast response to COVID has set the springboard for a sharp rebound.

And this is backed up by independent, trusted property data. According to Property Predictions, who have a been accurate with over 90 per cent of their price movement forecasts nationally since 2011, Adelaide is heading for more than 8 per cent growth in property values in the next 12 months, while the average across Australian capital cities is expected to be an uplift of 4.5 per cent.

If we look even further out to three years, according to the latest BIS Oxford Economics latest forecast, Adelaide is looking at 5.3 per cent growth and 3.8 per cent for South Australia more broadly. It will be interesting for the eastern states – inner Melbourne and Sydney will take a hit, -1.9 per cent and -1.2 per cent respectively, but growth will come further out in surrounding regions – Victoria is expected to see an 11.1 per cent rise and New South Wales 7.3 per cent.

So while there’s always plenty of hype and headlines, the reality is much more predictable – if we learn from history and follow the money, we’ll see that property will continue to be a stable and reliable market as Australia rebuilds post-pandemic.

Bushy Martin is the founder of South Australian firm KnowHow Property Finance, an author and host of the Get Invested Podcast.

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