Darwin’s strong performance over the past few years has been the envy of many states. But is the long-predicted slowdown finally taking hold?

Darwin’s story has captivated a lot of investors for a very long time. It’s been running hot for a couple of years and just about everyone was expecting the state capital to have run out of steam by now.

The latest numbers seem to agree with the prognosticators, though. During the past 12 months, the median house price rose by 7%. This is a strong showing if you compare it with the bigger states, yet if you look at Darwin’s performance over 2011/12 when the median surged by 11%, by comparison the housing market is now markedly slower.

“Darwin has been the best-performing market in most of the last 10 years,” says Cameron Kusher, RP Data senior research analyst.

“If we look at property values this year, they’re only up 2.2%. During the last two years, Darwin has been outperforming the rest of the country. But sales volumes are down this year, so demand is not as strong. They’ve been starting to trend a little lower over recent months. Maybe the peak in activity has passed.”

The latest report by CommSec also confirms that the Northern Territory has started to lose ground during the last quarter. Craig James, chief economist at CommSec, says that while Darwin finished first in terms of economic growth and construction work, it also finished seventh in business investment, unemployment and housing finance, signalling a loss of momentum.

So what’s ahead for the Top End? Is this the end of the boom and the start of a slump? Or could this just be a temporary setback?

Outlook for 2014

Our experts believe Darwin’s fundamentals remain solid, yet there are a number of reasons why investors should be cautious about investing in the NT.

Reasons to be cautious

1. Mining investment slowing

Shane Oliver, chief economist at AMP, expects a weaker performance from the Top End as mining investment slows down.

“The NT market has certainly had a great run for a while. But as the mining boom slows, the heat will come off the market,” he says. “Mining is fading, and that’s one of the major positive drivers of Darwin’s property market and general economic growth. So this could have a significant effect over the next year. It all depends on how quickly it all slows down as the major projects finish up.”

2. Rental vacancy rates are rising

Vacancy rates in Darwin have risen from 0.8% in June 2012 to 3.4% in June 2013, in response to an estimated increase in new homes of 2,100 dwellings, according to BIS Shrapnel.

“Given that there is an estimated underlying deficiency of 500 dwellings in the Northern Territory at June 2013, it suggests that the spike in vacancy rates is partly due to the small size of the Darwin market and that the surge in supply should be digested,” the economic forecaster says.

3. Affordability constraints

With prices rising higher than Melbourne and Perth, Darwin is hitting an affordability ceiling where the impact of the lower interest rate hardly makes a dent on mortgage serviceability.

By the end of 2013, Darwin’s median is expected to reach $612,000, just behind Sydney’s $690,000.

“While the current low interest rates have taken affordability in most capital cities to their best level since the early 2000s, this recent price growth means that affordability in Darwin is only at its best level since 2006,” says a report by BIS Shrapnel.

“While investor activity has continued to strengthen in 2012/13, first home buyer activity has started to slow (from a relatively high base), suggesting that some affordability issues may have emerged. Upgrader demand is also showing only modest rises.”

4. Slower price growth ahead

With resource-related investment expected to begin to trend downwards from 2014/15, and the rising levels of new construction preventing the dwelling deficiency from blowing out, the growth in prices is forecast to weaken through to 2015/16, taking the median house price to $660,000 by June 2016 and reflecting total growth of 8% for the 2013/16 period, according to BIS Shrapnel.

Reasons for optimism

Despite the negatives, there are plenty of reasons to be optimistic about the Top End’s prospects.

1. Strong local economy

Despite the slowdown in price growth, investors in Darwin are still on track to reap capital gains of 7.4% by the end of 2013 and another 4.6% over 2014, thanks to the strong local economy.

“Darwin’s capacity is driven, clearly, by the mining sector,” says Andrew Wilson, chief economist at Australian Property Monitors. “There are certainly a lot of positive aspects to the mining and export sector in the NT, so even though unemployment is rising there at the moment, I still think that we have the potential for Darwin to continue to grow.”

2. Potential for more LNG-related activity to come

The $34bn Ichthys LNG development remains the biggest show in town, says Deloitte Access Economics, warning of the risk of having the overwhelming majority of the Territory’s engineering construction activity accounted for by a single project.

However, the economic forecaster points out that “there is potential in the pipeline for more LNG-related activity to come”. This is led by the:

  • $13bn Greater Sunrise Gas development and floating LNG platform in the Timor Sea
  • $4.6bn Bonaparte floating LNG project
“With the commencement of a number of other resource projects, construction on the Ichthys project is expected to hold the NT in good stead until its completion in 2016,” says the Deloitte report.

3. Demand for housing remains strong

Continuing strong demand for infrastructure development promises to make the current upswing more sustainable than some others the Top End has seen, according to Deloitte. It says the key to longer-term building demand is population growth, which is now looking rather more positive than it did a couple of years ago.