By Herron Todd White
The current state of residential land supply within Darwin and Palmerston is akin to being amidst a federal election campaign – oversaturation, modest interest and government policy aimed at the lowest common denominator.
The Inpex effect is well reported and likely to be far too familiar to readers, so for the sake of brevity, we won’t go down that rabbit hole this time around. However, it is worth noting that it was no surprise that following the spike in population drivers during this time (2011 to 2015), demand for housing, including vacant residential land, was insatiable and inevitable. Naturally a time lag occurred in the release of land to the market during this period and we are now faced with a situation of a large oversupply of residential land given the current contraction in population growth.
In August 2018, Herron Todd White (Darwin) was commissioned by the Property Council of Australia to undertake a research paper to accurately assess the total supply of land and buildings across the greater Darwin market. Part of this research was to specifically include residential land estates. It must be stressed that these are not completed lots on the market at present, but a supply pipeline which is now available to meet demand as it is warranted.
The full report can be found on the Herron Todd White website (www.htw.com.au), however the upshot was that as at August 2018, the total supply line for residential lots in the Darwin and Palmerston regions was in excess of 6,000, representing a minimum supply of around 17.72 years to a maximum of 24.81 years dependent on the rate of sale (consistent with previous historical data).
The current situation sees basic economic principles at play, with downward pressure on price being a natural consequence of oversupply. Competition for buyers in the different estates has also seen some developers offer incentives in the form of paid building works to sweeten the deal, ranging from fencing to cash grants directly to the chosen builder
The competition within the market coupled with a slowdown of the Northern Territory economy generally has rippled through the construction sector, traditionally the backbone and measuring stick of the Darwin economy. Competition for builders to secure work is a result of a smaller pool of available jobs which has seen an adjustment to pricing – a downward contraction in favour of the client.
During the healthy construction periods of 2011 to 2015, it was common for the average four-bedroom, two-bathroom rendered block home of say 150 square metres to have a cost of between $2,000 and $2,300 per square metre of living area (excluding verandah, garages etc) and very rare to see pricing below $1,900 per square metre.
These days, the pencil is a lot sharper and costs are more consistently around $1,700 to $2,000 per square metre of living area. This can obviously have a large degree of variance depending on the size of the dwelling, quality of fixtures and fittings and any variations to standard layouts. We note that this still far exceeds rates applied for dwellings in southern states, which is largely due to the cyclone coding requirements for dwellings in the Northern Territory.
The Northern Territory government is attempting to arrest the slide in population (see Boundless Possible) and downturn in the construction industry by releasing the latest round of building stimulus packages. Territorians would now be familiar or at least aware of the packages available to not only first home buyers but also newcomers to the local market. On 8 February this year, the Gunner government released these new measures with the aim to “create local construction jobs, build our population and support first home owners by increasing eligibility”.
It is too early to tell whether or not this stimulus package has had the desired effect. Our discussions with local developers and builders have seen that they are reporting an immediate uplift in enquiries from locals, however this is yet to translate to a significant increase in land sales or housing starts. Whilst we are hoping that it can stimulate this sector of the market, there is some apprehension out there that this significant promotion and support of the new homes sector with financial incentives may stifle any possible recovery in the established housing market. Despite the fact that they comprise typically older dwellings, areas such as Roseberry, Gunn and Bellamack are examples of suburbs with relatively modern dwellings (circa 2000 to 2012 construction) on good size blocks of land (600 square metres plus) which seem to show great bang for your buck compared to newer areas such as Zuccoli and Johnston being within the same price bracket ($450,000 to $650,000) yet having land areas 30 to 50 per cent smaller and dwellings of typically inferior layouts. The market appears to be keener on a new dwelling on small blocks of land with limited maintenance although it is very price sensitive – an issue the build bonus package is attempting to address.
The question regarding land plus build contracts comes up frequently, with the expectation in the market that the sum of the two must equal the capital value of the property. Whilst generally this does have some relationship, we are seeing more situations where land and construction contracts are not stacking up. For example, a land contract of say $210,000 and a build contract of $360,000 on completion effectively owes $570,000. In this case it appears to be higher than the property would achieve when sold as a completed dwelling based on resales of other modern (recently constructed) dwellings in the area. Here, the market is demonstrating that the relationship between cost and value are not directly related. There are some concerns of over capitalisation creeping into the equation in certain circumstances, however as mentioned previously, it is largely dependent on size, quality and finish of the construction.
The other obvious piece is that the second purchaser doesn’t have access to as many build bonus grants as the original building client which can limit the deposit of the buyer. The added cost of stamp duty to the overall sale price also increases over the stamp duty which would have only been paid on the land.
The current oversupply of vacant residential land can only be addressed and equalised by population growth or a complete shift in market demand from established dwellings to new homes. This would largely be driven by government policy and incentives the likes of which are available and accessible now. We sit and wait for more thorough results to show what impact the latest building stimulus package has had on the market and cautiously watch any shifts in building contract pricing as a result so that we can identify particular market characteristics and movements. We don’t expect that the current situation is likely to change in the short to medium term.
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