The month in review: Darwin
By Herron Todd White
May, 2010
The greater Darwin area has experienced significant
capital growth during the past six years on the back of
strong economic conditions, low interest rates, favourable
yields and population growth. The inner Darwin suburbs
of Larrakeyah, Fannie Bay, Parap, Stuart Park and Bayview
are typically the more expensive suburbs in the Darwin
metropolitan area. Entry-level homes in these areas
generally range from $650,000 to $750,000, depending
on the suburb, and this will only buy an average home.
Six years ago, the entry-level price range in these suburbs
was in the order of $400,000 to $500,000. By contrast, the
older suburbs of Palmerston, such as Gray, Woodroffe,
Moulden and Driver are typically the more affordable
suburbs with current entry-level housing priced between
$400,000 and $ 450,000. Six years ago, these same homes
were selling in the $130,000 to $180,000 price range.
It is amazing to see the entry level price range for a home
in the more affordable suburbs rise to a level equivalent to
the entry level price range of the more expensive suburbs
being achieved six years ago. If only we all bought a house
six years ago! But what will the next six years bring?
It is hard to predict the next 12 months, let alone the next
six years. But one thing is certain - there will be many
hurdles to growth in values to the levels that we have
seen in Darwin during the past six years.
The major hurdles to significant capital growth over the
coming years that we have identified are rising interest
rates, low household income growth, inflation eating into
household incomes, increased future supply of units in
the CBD and increased supply of vacant land. The most
significant of these hurdles will be rising interest rates as
higher valued properties will require more money from
the bank to finance the property to purchase and in turn
will require higher monthly mortgage repayments.
In 2007 and 2008, interest rates were on the rise, to levels
not seen since before the property boom began in Darwin.
In response, demand for residential property dropped
and the market in Darwin softened considerably, and in
some areas, it went slightly backwards.
Interest rates have started to rise again and most economic
analysts are now predicting a 0.75% rise in interest rates
by the end of the year. This will see the average household
mortgage rate increase to around 8%. These are the same
levels we saw in 2007/08. Some analysts are now saying
that interest rates could rise by another 2% by the end
of 2012.
These interest rate levels will increase household
mortgage repayments significantly. An increase of 2.75%
pa on a $350,000 home loan will see monthly mortgage
repayments increase by about $800 per month; $1030 per
month on a $450,000 home loan; and $1375 per month
on a $600,000 home loan.
For the Darwin residential property market to maintain
growth levels seen over the past six years, household
incomes and rents will have to increase in the face of
rising interest rates. This is problematic in itself as incomes
generally do not rise quickly, particularly over and above
the underlying rate of inflation, while rents are generally
a function of the amount of money people can afford to
pay.
It is likely that capital growth in the Darwin residential
property market will slow over the next 12 months as
demand for housing softens due to rising unaffordability
on the back of rising interest rates. If higher interest rates
are maintained for an extended period, then it is likely
that the residential property will be subdued for an
extended period also.
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