The Australian Financial Review recently ran an interesting article arguing that the Darwin economy is becoming more diversified and less prone to boom/bust cycles, which should help support housing values and reduce the risk of a significant housing correction down the track:
Darwin’s emerging status as a gas hub signals the start of a longer-term period of prosperity and will end its boom-and-bust reputation, experts say.
The change in fortunes for the city is largely credited to Inpex’s $US34 billion ($36.5 billion) Ichthys liquefied natural gas project, which is attracting everyone from small business contractors to property speculators to Australia’s smallest capital city…
Gavin Hegney, founding director of property valuers Hegney Property Group in Perth, said property speculators who liked to invest in fast-moving mining precincts would be attracted to Darwin.
“With Darwin you have a lot better hope of it standing the test of time,” he said. “It’s the upside of a construction town, and the safety of a capital city”…
Terry Ryder, the founder of property research site Hotspotting.com.au, said Darwin’s long-term potential was linked to whether it became a bona fide centre of gas production.
“The big kicker for Darwin’s future is Darwin becoming a gas hub,” he said…
Mr Ryder said unlike mining towns reliant on one source of revenue, Darwin has a more diversified economy that includes revenue generated from spending linked to a US Marines base.
Undoubtedly, Darwin has been a property investor’s wet dream for the past decade, with house values rising by a whopping 123% since June 2004 when averaged across the four main data providers, which is well above the national capital city average of 45% growth over the same timeframe (see next chart).
Darwin rents have also skyrocketed over the past few years, according to APM, driven by booming demand and an acute shortage of rental accomodation (see next chart).
Indeed, Darwin housing’s recent outperformance has been driven by two fundamental factors: 1) the massive $36 billion Ichthys liquefied natural gas (LNG) project; and 2) the recent location of 2,500 United States marines in the region, both of which are stimulating economic activity, jobs, and demand for housing.
However, while the near term fundamentals appear sound, it would be a grave mistake to assume that Darwin has shed its boom/bust tag and that its housing market is unlikely to experience the kinds of volatility common in many regions with narrow industry bases.
Specifically, the surge in capital expenditure (capex) related to the Ichthys LNG project has been massive, with capex literally exploding over the past two years, rising to nearly 30% of Darwin’s state final demand as at June 2013 (see next chart).
While this mining investment has supported a wide range of jobs across Darwin, the construction sector has probably benefited the most, as illustrated by the next chart:
The problem going forward is that the Ichthys LNG project is scheduled to finish early in 2016, with the peak in mining investment likely to take place a year or more earlier. Once this project finishes, so do the jobs associated with its construction, leaving behind a huge economic hole and a probable sharp contraction in housing demand.
Darwin’s boom is big enough to trick some into thinking it’s enduring but don’t mistake that for sustainable.
