Darwin looks strong on all indicators but one issue threatens to be the bogey man under the bed.

For Darwin, 2012 has very much been the tale of growth beyond all expectations. Toward the end of 2011, forecasts were that slowing population growth which had occurred between 2010 and 2011 would be set to continue and that a lull in resource projects meant the property market would merely plod along.

This was until approval for the $34bn Inpex Ichthys LNG Project changed everything. The project will haul gas from a field in the Browse Basin offshore Western Australia to an onshore liquefaction plant in Darwin via an 889km subsea pipeline. While development has begun, gas production is expected to start by the end of 2016, with 8.4 million metric tons of gas expected at its peak.

“If you put a $30bn-plus project into a small economy like the Northern Territory, you’re going to see a major impact and that’s what we’ve seen,” says ANZ’s head of property research, Paul Braddick.

According to ANZ’s Australian Property Outlook report, Darwin’s housing market has been a bright spot in an otherwise sluggish Australian market. House prices have risen and are now close to 5% higher than a year ago, it says.

The report attributes the bounce back to the Territory’s strengthening economic backdrop, where the initial construction phase of the Ichthys Project has driven a sharp 230% increase in NT business investment.

Against this backdrop, Darwin rents have soared. Australian Property Monitors fi gures indicate that over the September quarter the city outperformed every capital city for rental growth, charting in the most expensive rents in the country – both for houses and units.

The question now on investors’ lips is how rents and capital growth will look for 2013.

Supply and demand factors

1. Demand for workers and housing to soar

ANZ claims that over 2013, the Territory housing market will continue to be supported by solid underlying fundamentals in the state’s economy. The Australian Property Outlook report expects the Ichthys Project to continue generating significant demand for labour, which will encourage net overseas and interstate migration – not just over 2013, but over the next couple of years.

“It’s boom, boom, boom in the Northern Territory at the moment,” says Braddick. “The Ichthys LNG Project up there is just so massive relative to the size of the NT economy and the money that it’s pumping into Darwin and the amount of jobs it’s creating is simply enormous.”

2. Housing shortage

As the Northern Territory economy grows, Darwin is currently undergoing a massive housing shortage. BIS Shrapnel senior manager Angie Zigomanis reports that in the 12 months to October vacancy rates tightened considerably, which he says was easily one of the reasons prices shot up so much over 2012.

Zigomanis also forecasts tight vacancies to continue in Darwin for the next 12 months at least. He points to history as working in the city’s favour. Over 2010 and 2011, new dwelling starts (projects to build new houses) fell below the level of underlying demand for them. The flow-on effect is that what was once a modest deficiency in the number of properties needed has now ballooned to chronic levels.

The precise impact of the slow rate of building on property indicators is a pause for thought. At October 2012, Darwin had a vacancy rate hovering below the mark of just 1%. This indicates a city enduring a severe shortage of rental property.

Under this backdrop, Australian Property Monitors’ report of rents having skyrocketed makes perfect sense. Darwin tenants are paying exceptionally high rents because they have no choice. There really is that little rental property coming onto the market.

Before investors get too excited, however, Australian Property Monitors senior economist Andrew Wilson warns that demand for Northern Territory property tends to follow a cyclical pattern that corresponds with the seasons.

“Darwin has this high rate of net state migration in and out and it’s because the workforce moves in over the dry season and moves out in the wet season,” he says, pointing out that even taking these patterns into account, the current shortage of property is below the norm.

3. Affordability

With strong demand for housing coming about from the gas industry and the low supply of properties already creating a climate conducive to capital growth in 2013, analysts say that the only question mark for Darwin is affordability.

On the one hand, ANZ is optimistic. Its Australian Housing Outlook report says the Northern Territory’s levels of housing affordability remain among the best in the country – despite the recent surge in values.

It cites price falls that occurred across 2011, along with recent interest rate cuts, as having spurred a market where affordability is strong. The report points to a key statistic: only around 18% of NT household disposable income is spent on mortgage repayments, compared to 28% nationally.

Head of ANZ property research Paul Braddick remains a little more cautious. “It’s definitely an issue,” he says. “We saw this kind of thing in Perth over 2007, where you’re getting some very highly paid professionals from all the mining activity and they can afford to pay above the market for property. But when something happens to threaten that particular demand you have to go back to where you think a reasonable value is. “It does create the situation where you look a few years ahead and realise that there are certain levels that prices can bid up to in these markets and are the prices really going to be sustainable?”

BIS Shrapnel’s Angie Zigomanis believes affordability will make the difference between single digit and double digit growth for Darwin over 2013. “There’s still enough upward momentum there for growth in 2013,” he says. “It will probably be somewhere between 5-10% growth.”