Darwin’s property market – a case study in muddled public policy

My post on the Territory’s recent mini-budget has resulted in an interesting comment box discussion about Darwin property prices.  At first blush general Troppo readers might not find it all that absorbing, but in fact the dynamics of Darwin’s property market provide an instructive example of the interplay between government policies and actions, market forces, demographics and a range of other factors.

Are Darwin real estate prices anomalously high?  How about rents, which haven’t really figured at all in the comment box discussion? This article examines those questions in some depth, and then explores possible public policy solutions.

Troppo web host Jacques Chester kicked off the discussion with this comment:

As for the housing market, that to me is the key “cost of living” problem for Darwin in particular and the NT in general. Power, petrol and food have always been very high and I expect that consumer inflation in the NT is tracking inflation elsewhere.((In fact NT inflation as measure by CPI is slightly lower than the national average, and has been for most of the last decade. ~KP))

But rents and mortgage payments are squeezing out other payments and creating enormous, disconnected inflationary pressure. Demand isn’t going away, so supply has to ease. That means faster land release and higher density.

I agree generally with most of Jacques’ points, although:

1. NT electricity prices are currently in fact lower than the national average and the 30% increase recently announced is on a par with increases in south-eastern Australia; and
2. I doubt that serviced land unavailability is a major factor contributing to high property prices (certainly not in rents).

The question of whether inadequate supplies of vacant serviced land are contributing to high Darwin property prices arose during the recent NT election campaign.  A Housing Industry Association spokesperson at the time said that there were at least 2,000 serviced blocks currently available and that this was more than enough to cater for demand. I’m not sure about the exact figure, but certainly the large new-ish subdivisions of Farrar and Bellamack at Palmerston and Lyons and Muirhead on the Lee Point peninsula appear to have lots of available blocks.((Although that could be a misleading impression caused by developers buying up vacant land and then sitting on it passively, a phenomenon know as “land banking” which is dealt with in the COAG affordable housing report discussed at the end of this post. ~KP))  Moreover, with the population of greater Darwin having only increased by about 400 people last year, it seems unlikely that land availability is a huge issue.  On the other hand, I’m sure Darwin’s population has begun expanding again at a significantly faster pace with the influx of workers for the Inpex gas project.

Some Real Estate Institute members appear to disagree with the HIA:

In the main we have seen the volume of land sales fall and median prices rise. This is indicative of what we have been stating for the past 3 years and that is, we are now in a critical time regarding land availability.

Land availability is probably a factor in Darwin property prices, but I doubt it’s the central one.   The picture is much more complex.

Just how high are Darwin’s property prices?

On most recent rankings I’ve seen, Sydney’s median property prices are the highest of the capital cities, closely followed by Canberra, with Darwin ranking third closely followed by Melbourne.

That doesn’t suggest a radically overpriced property market by national standards, although some people seem to think that Darwin prices should be much lower than Sydney or Melbourne.  Such opinions appear to flow from their own personal perspective that the latter cities are much more desirable places to live than Darwin.  However, on more rational economic analysis it’s obvious why Darwin prices are on a par with Sydney and Melbourne.  Darwin’s population has grown faster than all capital cities other than Brisbane and Perth over the last 10 years.  Combine that with the fact that Darwin’s cyclone-resistant Building Code adds $20,000 or more to the construction cost of an average home, and that the tiny local manufacturing base means that nearly all building materials and components must be shipped up from “down south”, leads to a conclusion that we’re actually fortunate that housing prices are not significantly higher.

The perception that Darwin property prices are out of control mostly flows from the record of price rises since just before 2000.  Up until around then Darwin prices had been fairly subdued for over a decade, and had fallen behind southern capitals.  However, demand fuelled first by the move of defence forces to the north, then the large Conoco-Phillips gas project at Wickham Point, then the artificial stimulus of the Rudd government post-GFC and time-limited First Home Owners Boost, and now the early stages of the even larger Inpex gas project, have resulted in Darwin prices outstripping most other capitals.  As Troppo commenter and seasonal Darwin resident Marks observes:

One of the problems in the NT is that it is a very small economy. Thus, when a project like Inpex (and before that the Conoco Philips) happen, you get a boost that is a very high percentage of state final product. No matter how fast local building firms build, there is going to be a shortage. This happens not only in the NT, but in other areas where the start up of an industry creates an employment boom – it is not a violation of the laws of supply and demand, rather an example of their applicability.

Darwin house prices have increased by 32 percent in the last five years compared with the weighted eight capital cities average of 19 percent, while apartment prices have increased by a massive 47 percent compared with the the weighted eight capital cities average of 24 percent.  However, prices fell by a little over 4 percent last year and rose by significantly less than the national average in 2010.

Moreover there are some suggestions that the extent of the current Inpex-driven price hike is overstated.  One estate agent recently suggested to me that recent price rises are mostly being driven by an artificial supply shortage as existing vendors hold back on listing properties for sale in expectation of even greater Inpex-driven windfalls in the near future.  Has the market been overhyped by frenzied real estate agents and election-obsessed politicians? Certainly most of the Inpex contractors are being housed in a large workers’ camp in the Darwin rural area, so it’s possible that we won’t see a prolonged property boom like the Conoco Phillips one between 2002 and 2006.  That possibility is reinforced by the REINT’s Quentin Killian:

The volume of house sales fell by 15.4%((In the September quarter ~KP)) and the median price moved down very slightly by 0.3% to a median for Greater Darwin of $568,250. You might note this is a fair bit different from some of the reports in the media recently; however the REINT data is drawn directly from NT Lands Titles Office and is collated and verified by the Australian Valuers Office, so we stand behind the veracity of our data.

When the estate agents begin talking the market down you know there’s something strange going on. Nevertheless, even if we accept the accuracy of figures showing the market rising more than 8 percent this year alone, that doesn’t make Darwin prices radically unaffordable.  First there’s the fact that the impressive price rises through the noughties came on top of a decade of subdued growth.  In addition NT average weekly earnings (see Table 13G spreadsheets) rose by some 37 percent in the last 5 years and 65 percent in the last decade, and of course interest rates now are lower than they were 5 years ago.  Thus, and perhaps counter-intuitively, Darwin housing is actually MORE affordable now than it was five years ago rather than less.

However, this is only true if you have a reasonable job and also have enough savings for a home deposit or the capacity to save a deposit.  For most renters, especially young people, that simply isn’t the case.  In fact their position is much worse than it was five-ten years ago.

The real problem is high rents

As recent Australian Property Monitors figures show:

Rent prices for houses in Sydney and Perth have risen to record highs but Darwin remains the most expensive rental market in Australia. …

Sydney is now the second most expensive city in the nation to rent a house, behind Darwin.

Rent rises in the Northern Territory capital eclipsed all other jurisdictions, with median house rents for the quarter jumping 7.7 per cent and unit rents up 10 per cent.

Median weekly rents in Darwin rose to $700 a week for houses and $530 for units.

Dr Wilson said the Darwin market reflected the transient nature of the workforce.

“Nonetheless, the Darwin rental market continues to struggle with an underlying shortage of available housing,” he said.

Wilson’s observations about the transient (and young) makeup of Darwin’s population are borne out by ABS figures:

¹ifferences in tenure patterns between geographic regions are partly a reflection of differences in the age and family structures of regional populations. For example, in 2009–10, the states with the oldest age structures had the four highest rates of outright home ownership. The Northern Territory had the lowest home-ownership rate (57%) and the lowest proportion of outright owners (18%) (graph 10.7). The Northern Territory also had the highest proportion of renters overall (40%), and the highest proportion of public renters (8%). This pattern of housing tenure reflects the Territory’s young age structure, highly mobile work force, and relatively large Aboriginal and Torres Strait Islander population.

The high proportion of renters is the largest single cause of sky-high rents in Darwin, not so-called “greedy” landlords (an explanation frequently advanced by rabid correspondents to the NT News).  This has been compounded by supply constraints, arising from two main factors:

1. Until 3 or 4 years ago, both ALP and CLP governments had for more than a decade pursued a policy of selling off old Housing Commission rental stock and not replacing it to any significant extent.  The waiting list for public housing in Darwin is currently more than 5 years.
2. Since the GFC, finance institutions have adopted a much more conservative approach to lending for residential apartment projects.  Pre-sales of close to one hundred percent are commonly demanded as a condition of development finance approval.  The result is that the construction cranes that were previously a feature of the Darwin skyline have largely disappeared.

One commentator unhelpfully observes:

The Northern Territory presents the most compelling case for renters to consider buying with the improvement in housing affordability contrasting with the territory recorded the steepest decline in rental affordability with the proportion of income required to meet median rents increased 1.3 percentage points to 24.9%.

But how do you save for a home deposit when you’re paying such high rents?  Moreover, renters who aspire to home ownership are also victims of post-GFC lender conservatism. Before the GFC first homebuyers could relatively easily borrow up to 90 percent of valuation of the property they wanted to buy.  Nowadays you need at least a 20 percent deposit unless you have collateral security or a courageous parent prepared to guarantee the loan.  That means saving a deposit of at least $80-110,000, which is just about impossible if you’re paying high Darwin rents.

Is there a viable public policy solution?

Successive NT governments have long offered stamp duty exemption for first homebuyers (most recently up to a cap of $26,000 S/D), as well as a modest first homebuyer grant (most recently $7000).  It was certainly a help, but does not really address the perfect storm of high rents, the deposit gap and tighter finance conditions facing contemporary first homebuyers.

During the election lead-up the Henderson government proposed a scheme which some saw as a much better answer. The government-owned Territory Insurance Office would lend qualified first homebuyers their entire purchase deposit interest-free! As CDU’s Rolf Gerritsen observed, the scheme bore distinct echoes of the US sub-prime mortgage fiasco.  My daughter was very keen to jump on board despite fairly clearly not being able to afford repayments in the near future.  I must confess I was relieved at least on that score when the ALP lost and temporarily torpedoed Bec’s homebuying ambitions.

By contrast, the new Mills CLP government has abolished the former stamp duty exemption completely, but increased the first homebuyers cash grant to $25,000 (though only for purchasing/buildng a brand new home).  This will almost certainly be a windfall to developers and real estate agents, but whether it actually makes things any easier for first homebuyers is questionable at the very least.  The Council of Australian Governments has concluded that such schemes, although they help to a limited extent, tend to push up housing prices to a significant extent, especially in situations  “when supply is constrained” (i.e. exactly the situation Darwin presently faces, with construction workers engaged for the Inpex project).

The full COAG report contains a range of policy proposals aimed at improving affordability both the renters and homebuyers. Recommendations include policies aimed at freeing land supply, reducing  land banking, reducing development costs and increasing market responsiveness. The Mills government would be well advised to study it carefully rather than repeat the mistakes of the past by implementing an expensive but dubiously effective first homebuyer grant scheme.

My own view is that the highest priority should be a radical increase in the provision of new affordable public rental housing.  We should aim at reducing public housing waiting times from 5 years to no more than 12 months, andsmultaneously loosen public housing elegibility criteria so that young couples on modest wage incomes (say up to $70K per couple) would qualify.  That would have a dual benefit, reducing pressure on the lower end of the private rental market and therefore reducing market rents, and also making it easier for renters to save for a deposit on their first home.  Sadly, I suspect that it’s a policy the CLP would be likely to reject without a moment’s consideration for ideological reasons.

1. D[↩]