Rate cuts could boost Adelaide’s housing sector

While the November interest rate cut had helped the economy, a further cut in February would probably be needed to boost confidence and kick-start spending, said Bank SA, Managing Director, Jane Kittel at the 2011 Housing and Property Review hosted by the CEDA Adelaide.

Home owners can expect another 0.25 per cent cut in interest rates in February, said Bank SA Managing Director Jane Kittel.

While the November interest rate cut had helped the economy, a further cut in February would probably be needed to boost confidence and kick-start spending, said Ms Kittel at the 2011 Housing and Property Review hosted by the CEDA Adelaide.

"We are forecasting that the Reserve Bank of Australia (RBA) will move again in February - probably by another 25 basis points," Ms Kittel said.

"We all agree that both Australia and South Australia are in a strong position compared to the rest of the world but we are not immune to the flow on effects of instability in the international economy... it has had a significant impact on the local property market.

The audience heard that:

  • State Final Demand (seasonally adjusted) bounced in South Australia (SA) in June 2011, up two per cent on the previous quarter, and business investment had shown the fastest annual growth in six and a half years in the year to June, up 13.2 per cent.
  • But the SA housing market was unlikely to rebound until the second half of the 2012 financial year and the retail sector remained very flat, growing only one per cent in August, compared to two per cent in other states, she said. The Jobs growth was also soft; and
  • Having peaked in March 2010, SA house prices had fallen 4.9 per cent on an annual basis to the end of August compared to a 3.2 per cent fall nationally.

Ms Kittel said dwelling starts were the weakest they had been for 10 years and this weakness would continue over the next few months. Non-residential construction was also lack lustre and the commercial sector was expected to remain flat.

"Only two per cent of Australians aged between 20 and 24 have home loans, which suggests that things are tougher for first home buyers since the withdrawal of government funding (the first home buyers' grant)," she said.

At the other end of the demographic spectrum, the number of Australians aged 55 to 59 with a home loan increased by 10 per cent, she said.

"The thing to watch will be the impact of the baby boomers as they start to retire," Ms Kittel said. "Given the significant decreases in the stock market, more people are likely to eat into their equity to fund their retirement.

"Residential property is going through a tougher time but the outlook is positive in the medium term. The fundamentals of the South Australian economy are sound, and if you add an interest rate cut as we have just had in November and another in February, we should see confidence start to return."

Yet the Managing Director of the Hickinbotham Group, Michael Hickinbotham said despite recent weakness in the SA housing market, median house prices in Adelaide were relatively more expensive for its residents than those in London or New York.

He said Adelaide's median house price had increased from $130,000 in 2001 to $400,000 in 2010 and now represented a median multiple of 7.4 times the median annual household income, up from a multiple of 3.6. This was primarily due to a lack of available land on which to build.

"Ninety five per cent of the increase in house prices is due to the cost of land - the price of houses has actually gone down over the past 20 years. It's a very competitive market," Mr Hickinbotham said. The average lot price had risen by 300 per cent in 10 years.

Adelaideans had the smallest allotments in Australia and the highest price per square metre, he said.

"Over the past 30-40 years, domestic dwellings in Australia have kept pace with the population... but by 2029, we will be 3.2 million houses short."

Mr Hickinbotham said the State Government was moving to address South Australia's land shortage through its 30-year plan which would see new land opened for development but it needed to move quickly to ensure the State could capitalise on business investment.

"We are facing a housing affordability crisis," he said. "Housing affordability underpins the whole system.

"You need to have people living and working here... with money to spend here.  That gives you the tax base that you can use for environmental and social programs - affordable housing underpins social equity," he said.

Mr Hickinbotham said the Government was also looking to address the affordability issues by examining world's best practice in infrastructure finance to underpin development and it was moving to streamline planning processes.

"Planning approvals that used to take a number of weeks 10 or 15 years ago, now take 4-5 months," he said. These delays are costing homebuyers many millions a year in additional interest on mortgages.

On council amalgamations, Mr Hickinbotham made the comment that "it may surprise some members of this audience to hear that I don't believe bigger is always better".

"There are some small councils that are very efficient and some large councils that are inefficient," he said.

"Councils are doing too much. We need to take the rats and mice out of the system and allow councils to use their resources to focus on the core job."

While the government was moving to introduce a league table, ranking council planning approval times, an option worth considering was to tie some funding to this table to give councils an added financial incentive. "At the moment there is little you can do (to overcome slow planning approval) There needs to be some recourse," Mr Hickinbotham said.

Development Manager for Community and Education at Delfin Lend Lease, Mr Kelvin Trimper said there was a case for merging smaller councils to create more efficient entities that were better able to respond to big picture questions such planning and development strategies.

"Smaller local councils are more likely to have to buy in that kind of expertise through consultancies," he said.

Mr Trimper said the South Australian government and the population had plenty to do to prepare to capitalise on growth in future years.

"The rapidly rising cost of electricity, of water, has received a lot of press coverage. These increases have been amazing. You have people calling into the radio stations saying 'we are sitting in the dark because we can't afford the electricity'... We are now all sitting around talking about the cost of electricity - we never used to talk about the high cost of things like electricity in South Australia," Mr Trimper said.

He urged the South Australian government to work more closely with the private sector to fund the infrastructure to support the 30-year plan.

"We haven't really engaged with the idea about who pays (for the new development in the 30 year plan)," he said.

"We have a strong history of public-private partnerships in award winning developments such as West Lakes, Mawson Lakes, Glenelg... Each sector has to recognise the value it creates and its strengths, and the advantage of collaboration."

This kind of collaboration could "tick all the KPI boxes" of environmental sustainability, place theory and community relations, he said.

Mr Trimper said South Australia needed a major boost to encourage spending to overcome the drop in international confidence. He expected that the new homes market would remain flat until 2015.

"We certainly need Roxby to start and other smaller mines to start operating. We need the defence sector to keep moving - we can't rest on our laurels. And the rural sector needs another good year or two to really recover from the drought," Mr Trimper said.

"The locals need to be ready to win local jobs. Do we have the local skills to fill jobs in the mining and defence sectors? Probably not at the moment.

"We need to be upskilling and training the population today. There's no real benefit to the state to having fly-in, fly-out workers - they take their spending to Melbourne or Sydney or wherever they live... We need to ensure that the benefits flow to the residents," he said.