Ultra-low interest rates, very affordable housing, and an effective response to COVID-19 are projected to deliver 5-8 per cent price growth in 2021
The SA housing market has been overall weak with modest growth (except for houses in certain inner-suburban locations), but is showing clear signs of improved buyer confidence, demand for housing, and consequently price growth projections.
Prior to COVID-19, as of February 2020, the unemployment rate in SA was 5.8 per cent and population growth 0.8 per cent. Overall, the labour market was relatively soft with a reduction in actual employment which meant slow growth for dwelling prices until 2019. At the beginning of 2020, however, buyer confidence increased, particularly in Adelaide, and this saw an improvement in auction clearance rates and, consequently, it appeared dwelling prices had reached the bottom.
As expected, COVID-19 has materially increased the unemployment rate, which negatively impacts the residential property market. Also, the recent bushfires have also had a material impact on the demand for residential properties in South Australia's affected areas.
However, in recent months, the market is leveraging on the improved demand prior to COVID-19, combined with ultra-low interest rates that make it cheaper to buy then rent. For owner-occupiers with interest-only loans, ultra-low interest rates make it typically cheaper to buy than to rent from a cashflow perspective in all of Adelaide.
Houses in Adelaide and surrounding areas now enjoy good demand, particularly with all SA4 areas delivering positive capital growth in the past two months. It is projected that detached houses will enjoy a capital growth in the range of 5-8 per cent in 2021.
While price growth is also highly likely in 2022, it should be noted that unless there are structural changes in the SA economy, medium to long-term population growth, and consequently capital growth, are likely to be modest.
It should be noted that the strength of the market is projected to vary greatly across SA. For example, houses in areas close to the Adelaide CBD, such as Adelaide Central and Hills, are likely to show better resilience and moderate price reductions, in comparison to softer markets, such as the Barossa - Yorke - Mid North area.
In particular, while investor activity is highly likely to increase, SA is not a preferred investment destination like NSW, VIC, and south-east QLD.
As previously mentioned, despite good affordability, the demand for units in SA is generally low and units are not considered a popular dwelling option among families. Further, there are a small number of areas with unit oversupply, such as Adelaide Central and Hills which has the highest rate of oversupply in SA with 2,752 units in the pipeline (representing an uplift of 8.2 per cent to the current stock).
In the foreseeable future, rental apartments carry a higher level of risk. There have been large increases in rental listings and also large drops in rent in the Adelaide Central and Hills area, increasing the serviceability risk, particularly for highly leveraged inventors relying on rental income and taxation planning to service their mortgage payments. Mortgage arrears in those high-supply areas should be closely monitored.
Overall, units in SA are likely to experience price reductions in the range of 3 to 8 per cent. Off-the-plan units in high rises, which are unsuitable for families, carry the highest level of risk.