The month in review: Adelaide
By Herron Todd White
It is interesting that for much of last year while the interest rate remained on hold it was speculated that the first movement would indeed be upwards and it wasn’t really until the end of the year or even early this year that the pressure began to mount on the RBA for in fact a rate cut, and so on the first Tuesday of February, 0.25% was wiped off the cash rate with most banks and lending institutions passing on the full quarter of a percent reduction.
With Adelaide’s residential property market remaining somewhat cautious in the wake of the 2010 to 2012 market downturn, a rate rise would possibly have had a fairly noticeable impact on
the local market and the feeling was that all of the positive improvements over the past two or so years, such as increasing sales transactions, reducing number of days on the market, decreasing vendor discounting and auction clearance rates being consistently above 50% could come to a grinding halt, but the really good news is that for the time being, we don’t have to worry about this occurring, phew….. So where to from here?
Overall we don’t believe that this rate cut will make much of a difference to our property market as it currently stands, although we will be happy to be proven wrong. Let us explain… Firstly mortgage rates have been at all time lows for years now, so even though a 0.25% reduction is going to be welcomed by anyone with a mortgage, if the currently very low interest rates were driving our market one would suspect that our market should be performing better than the approximately 3% per annum improvement in capital value that occurred over 2014. As we have mentioned numerous times before Adelaideans are traditionally very conservative and local economic factors, cost of living expenses and job security at this time is playing a significant role in holding back our market.
It is fairly obvious that in the current financial climate many are choosing to consolidate and pay
down debt and are not willing to commit to major financial decisions such as buying or selling a house until confidence improves. Home renovations, improvements and extensions are very popular. Investors on the other hand may possibly see the drop in interest rates as a sign that it is time to act.
With the hint of a further 0.25% reduction it appears that rates may be set to remain around fairly similar low levels into the foreseeable future and all of the other fundamentals for solid medium to long term investment returns remain in place. Adelaide offers very affordable entry level prices (cheapest on the mainland), yields continue to remain above 4% gross and vacancy rates have been very stable (often below 2% over the past few years), and capital growth appears to be slowly improving. In fact the feeling was that increasing investor activity during
2014 has played a significant hand in the steady ongoing recovery of our housing market.
Generally Adelaide investors are most active in the sub $500,000 segment and we believe that sales activity in this price bracket may improve during 2015 and as a direct result there may be a slight improvement above what is expected in capital growth. However at this stage we don’t believe that it will be significant. Unfortunately, increased investor activity may come at the expense of first home buyers also looking to buy in this lower price bracket.
Investors are probably going to out compete first home buyers for sub $500,000 established dwellings located closer to the city, yet again pushing first home buyers into the far outer suburbs.
We believe that overall during 2015 our market will continue on its path of steady recovery and translate to between 3% and 5% in capital gain for the calendar year.
At this time of the year affectionately known as Mad March, many Adelaideans might see the slight easing of petrol prices and mortgage rates as an opportunity to get out and about and immerse themselves in any one of the diverse range of events on offer as part of either the Adelaide Fringe, including its venues the Garden of Unearthly Delights, The Royal Croquet Club or Glutton, or take in a production of dance, theatre or visual arts at the Adelaide Festival, which also hosts an amazing writers’ week. Alternatively there is the international music festival of WOMADelaide, One Day Cricket World Cup matches at Adelaide Oval, the Clipsal 500 four day motor racing event or The Adelaide Cup Racing Carnival at Morphettville.
At this time of the year it’s easy to understand why the New York Times believes that Adelaide is one of the places to visit in 2015 (and you know that we had to mention this honour at least once this year being the only Australian city on the list!).
So while an interest rate cut may play a positive role in improving discretionary spending and morale in this state, at this point we don’t see it translating directly into any noticeable improvement in the performance of our residential property market above what we have previously predicted for the year ahead.
The recent interest rate cut is not expected to stimulate the market to a significant extent however there will be lower repayments which increases the affordability of borrowing money so we may see a slight increase in sales transactions. Interest rates have been historically low which has played a part in an increase in sales numbers in the region so we expect a continued stable flow of sales activity with optimism of a slight increase.
We do not expect the recent interest rate cut to affect one particular property type in the area. We do see investment properties and first home buyer properties the most likely to see the biggest benefit. Investors may have some extra free cash to reinvest and first home buyers will now see an opportunity to enter the market with lower repayments.
Overall in the area it will require not just interest rate cuts but additional factors to impact the
market. Additional factors such as the new James Morrison Academy and University of South Australia expansion and timber industry funding will have a larger impact on the market than interest rates. The new academy will see additional people requiring rental properties and the timber industry funding may give people job security and therefore the confidence to purchase a property.