Life after the gas boom
Darwin’s property market is flying as prices continue to rise at a rapid rate. But what happens when construction of the city’s major gas project ends in 2016?
Darwin house prices grew by 11% over the year to May – that’s the good news if you’re an investor who already owns property in the city. The bad news for anyone wanting to get into the market is that this run of price increases isn’t likely to last.
With construction of processing facilities for the $34bn Inpex Ichthys LNG project almost entirely responsible for recent price pressures on Darwin’s housing market, the big issue for investors is going to be what happens in 2016 when building of the facility is completed.
According to Deloitte Access Economics’ latest Business Outlook report, the sheer scale of the project means a major shift in the Darwin economy is going to be inevitable when project construction comes to an end.
“Data suggests that this project accounts for over 90% of the spend on major engineering construction underway in the NT. That’s a very big egg in a fairly small basket,” the report says.
It adds that there are already tentative signs that the gas industry is going to face steep challenges, compounded by a weakening employment market. The construction phase of any major project tends to have the highest labour obligation, and this natural decline in jobs that will occur as the project shifts into its operational phase will be exacerbated by weaker demand for Australian gas.
“Gas projects are dominating the investment landscape in Australia at present… However, a transition is approaching with the bulk of those investment projects being currently underway, with far less in the pipeline to potentially replace them,” Business Outlook claims.
The gas investment pipeline is being set back, the report says, because coal seam gas producers face mounting extraction costs, community opposition and regulations. These have combined to erode the profitability of Australia’s gas exports.
“[Gas] projects are generally underpinned by gas contract prices which have been agreed in recent years. But prices have been changing of late … And with US gas production steaming along thanks to the leaps-and-bounds improvement in shale gas technology, there may be some destabilising price movements to come.”
The property market
Changes in the international gas arena should be significant for the Darwin employment market, which has been boosted and supported by big gas projects of late. Without a stream of major projects bringing in new workers to the city and, by association, increasing property prices, the potential returns and capital growth that investors get on Darwin purchases will be significantly affected.
Suburb to Watch
A big fat 9%. That’s what RP Data figures show houses in Palmerston suburb Farrar are currently scoring, and that alone should be reason to investigate the market further.
The suburb is at the heart of Palmerston, a satellite city of Darwin, approximately 15 minutes’ drive from the Darwin CBD. It houses a major health precinct but is also within walking distance of Charles Darwin University, giving the area great appeal for a diverse range of tenants.
The high rental returns an investor could obtain on a Farrar property are made all the more remarkable given the steep appreciation in property prices that has occurred recently across the Darwin region.
Most city properties have been climbing in value, diminishing the potential returns an investor would get if they were in the market to purchase.
In contrast, Farrar properties have fallen considerably in median value over the last year, and, given that rents have stayed the same, it is this price movement that has brought about the excellent returns.
With the Greater Darwin region expected to continue to see fairly strong property price growth over the next two years at least, it is unlikely that Farrar property prices will continue to decrease as dramatically over the next year. This suggests that current property prices represent a likely trough in the market that will probably last for the next year.
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