Darwin growth hits the scale

How close to the max is the city’s recent run of price increases?

An old investor adage, straight from the lips of Warren Buffett, is to be greedy when others are being cautious and be cautious when others are greedy. Certainly, with Darwin’s housing market seeing one wave of price increases after another, it is starting to look like the time to be cautious could be fast approaching.

Housing Industry Association figures report thousands of units have been built in the Greater Darwin area over the past five years, with many more in the pipeline. In fact, the Territory government is now actively pushing the construction industry to supply more housing, hoping an increased supply of properties will limit prices from skyrocketing.

Granted, the city is growing rapidly thanks to one of the country’s largest LNG developments – the mammoth Inpex Ichthys project – but investors have to consider if the market is in danger of getting ahead of itself. After all, it’s happened before. When any property market in Australia goes into boom mode it tends to get out of it quite quickly.

The frequent cause of the boom to bust scenario is developers. When market conditions become as ripe as they are in Darwin at the moment, there’s always a tendency to keep building, until eventually supply overpowers demand. Investors have to wonder: how far are developers going to go this time?

The evidence

According to Hotspotting director Terry Ryder, one has to keep in mind what is going on at the epicentre of this growth – the Inpex Ichthys project. Ryder comments in his July Ryder Report, a simple visit to the site reveals just how unprecedented the project is in a market like Darwin.

“There are 50 road trains carrying rocks, rubble and aggregate for civil works on Darwin’s Channel Island Road every day (where the project is based). Even before dawn I counted nine

coaches ferrying workers to and fro, a great many cement mixers and, every 10 minutes or so, a three or four-trailer road train,” Ryder says.

He adds such a large project going into an area as small as Darwin has made the city lead every other capital city property market. “Currently, Darwin is a capital city behaving very much like a boom mining town,” says Ryder.

Following that activity, Darwin remains Australia’s second fastest growing capital city by population, and the number of overseas visitors has increased 50% on levels seen five years ago. While such developments may indeed get builders into a frenzy, there’s always the fact building new houses takes time. For the moment, investors are probably likely to keep seeing growth, according to Ryder, who points to the current rental market: “Darwin’s vacancy rate is the lowest among capital cities and has the highest rental returns… One of the established patterns in real estate is a sustained period of high rent rises will lead to price growth.”

Suburb to watch

Rosebery

Palmerston locale Rosebery has never been short of Your Investment Property coverage – and for good reason. The suburb has been growing consistently since its establishment in the 1990s and as Darwin prices continue their run of growth, Rosebery has enjoyed a fair share of the spoils.

The latest RP Data figures have unit prices growing at 11% between June 2012 and 2013, and although it’s tempting to think this kind of growth cannot last and will inevitably move to another suburb, it’s worth noting Rosebery has something its neighbours don’t. First, it is privately built and owned, with no public housing. Second, there’s a bit of contour in the land: the suburb isn’t flat like the rest of its sister suburbs in Palmerston.

Local sales agent Gary McKell says when the suburb was being developed two decades ago, strict covenants governed colours and styles builders could use. Among the rules in places were strict stipends that houses were not allowed front fences and sheds had to be the same colour as the house. This gave the suburb a tidy upmarket feel that remains popular with buyers.

Rosebery’s 4.9% average rental yields on units remain low – by Darwin standards at least – but there is a fair amount of variation in the rental market and properties tend to score above or below the average for rents based on street view, general condition and location within the suburb.