Adelaide economy to struggle but major house price falls will be prevented: QBE Housing Outlook

Adelaide economy to struggle but major house price falls will be prevented: QBE Housing Outlook
Adelaide economy to struggle but major house price falls will be prevented: QBE Housing Outlook

The median house price in Adelaide has shown steady growth since 2012/13 as lower interest rates and prices at a relatively low base resulted in a period of improved affordability, according to QBE's latest housing report.

Employment drivers at the time, in the form of public infrastructure projects, also spurred migration inflows propping up underlying demand. The median house prices at June 2016 was $461,000, up 3.2% on a year earlier.

Inner Adelaide median house prices have grown 26.7% on a year earlier. However, the inner region covers a small sample area and is a tightly held market with low transactional activity increasing volatility in the median price measurement. The Middle and Outer ring medians have shown much more moderate growth at 2.7% and 2.1% respectively.

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Adelaide economy to struggle but major house price falls will be prevented: QBE Housing Outlook

The South Australian economy is forecast to face some significant economic headwinds with the manufacturing sector suffering from the relatively high Australian dollar compared to lower cost competitors overseas. Several public engineering construction projects have also been completed such as the Noarlunga Line Electrification, the South Road Superway and the Southern Expressway Duplication.

With the completion of these projects, public investment will decline significantly with few projects to fill the void in employment growth. Additionally, the scheduled closure of the Holden manufacturing plant in Elizabeth in 2017 is expected to further drag on the economy.

Some job creation should come from increased ship and submarine building, but with few other large employment drivers, the state economy is expected to struggle for growth.

Dwelling construction activity has also peaked in 2015/16 as price growth and low borrowing costs has driven commencements. Underlying demand has not kept pace and an excess in dwellings is forecast to have emerged in Adelaide in 2015/16.

This surplus is expected to accelerate over the forecast period as underlying demand remains weak brought on by softening economic conditions. This is expected to put pressure on vacancy rates, already climbing above the balanced rate in June 2016 at 3.3%.

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Adelaide economy to struggle but major house price falls will be prevented: QBE Housing Outlook

As rental yields fall and competition increases for tenants, investor demand is expected to contract leading to limited house price growth.

The low interest rate environment with potential cuts over the next year, is expected to result in affordability improving. The ratio of mortgage repayments on a median priced house is forecast to be around 21%, which is the lower end of its range over the past 20 years.

This will prevent major falls in house prices and median house price growth of 0.9% is expected in 2017/18, before the rising surplus and slowing economic activity result in a 2.2% decline in prices in 2017/18.

A total decline of 1.3% is expected for median house prices over the forecast period, taking the median house price to $455,000 at June 2019.

Compared with the east coast capital cities, Adelaide does not experience the same level of new unit or apartment development activity and the unit market is consequently forecast to move in line with the forecast for house prices. However, much like the other state capitals, investor purchasers are more prevalent in the unit market.

Tighter restrictions on investor lending is seeing a decline in investor demand and as a result median unit prices are forecast to remain relatively flat over the three years to 2019, declining an aggregate 0.6% over this period to $340,000 at June 2019.

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Adelaide Qbe

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