February 22, 2022

Investing in Far North Queensland – it's past, it's present and what may be ahead.

Sales and rental market data have both shown that North Queensland is becoming a sought-after investment and relocating destination for people from the south, especially in the last 2 years due to the rise of domestic tourism and lifestyle movements.

Taking Townsville and Cairns as examples, below charts show the 10-year sales price and rental trends of the two cities.

Townsville’s rental price has been growing strongly since 2018, followed by its sales price, which started to bounce from a six-year fall since 2019. Cairns’ sales price, on the other hand, has been subdued for years before starting to rise steeply in 2020. The rental prices here also started growing more rapidly at the same time.

The robust growth is due to multiple reasons, including lifestyle, affordability, and the heavy investment in infrastructure.

Lifestyle

The relaxing tropical vacation lifestyle used to be sought after by retirees. However, the work-from-home rules and remote working technologies have made it possible for younger professionals to bring their lifestyle change forward.

Affordability

Compared to the southeast part of Queensland, not to mention the expensive New South Wales or Victoria, North Queensland houses still enjoy a much affordable price level. At the end Sep2021, the SA3 of Cairns – North (the most expensive SA3 in Cairns) has a median house price of around $533k. This is compared by Greater Brisbane $603k, Greater Sydney $1,110k, and Greater Melbourne $818k. In the meanwhile, Townsville has a median house price of just $360k.

Infrastructure

The North Queensland is undergoing a massive wave of infrastructure renewal, among which is a $1.5 billion Local Road and Community Infrastructure Program in support of local jobs, businesses, and economy in North QLD. Some of the projects are;

Townsville:

            

$1b – Hydrogen& Battery Facility Lansdown Eco-Industrial Precinct (Stage: DevelopmentApproval)

$247m – Haughton Pipeline Duplication Stage 2 (Stage: Sketch Plans)

$200m – MajorsCreek Solar Farm (Stage: Development Approval)

$100m – Bluewater Solar Farm (Stage: Development Approval)

$81m – Townsville University Hospital (Stage: Contract Let)

$80m – Reef HQ(Stage: Contract Let)

$63m – Townsville Northern Access Intersections Upgrade (Stage: Construction)

$50m – Edify Green Hydrogen & Solar Energy Facility (Stage: Development Approval)

Cairns:

$359m – Cairns Ring Road Cairns CBD to Smithfield (Stage: Early Planning)

$300m – Cairns Western Arterial Road Duplication Further Stages (Stage: Sketch Plans)

$225m – Bruce Highway - Cairns Southern Access - Stage 5 (Stage: Sketch Plans)

$165m – Cairns University Hospital - Cairns Health Innovation Centre (Stage: Early Planning)

$155m – HMAS Cairns upgrade (Stage: Contract Let)

$127m – Barlow Park Stadium Redevelopment (Stage: Early Planning)

$53m – Cairns Hospital Mental Health Unit (Stage: Site Preparation in Progress)

$55m Port of Cairns Common User Barge Facility - Stage 1 (Stage: Sketch Plans)

These infrastructure projects will not only be improving life quality of Northern Queensland, but also creating job opportunities and subsequently increasing local housing demands.

While market data and macro policies both suggests that North Queensland is a great place to invest in, many investors, especially those outside the region, are concerned about the tropical climate, where cyclones and floods are norm. Will the natural disasters affect price growth in North Queensland?

As a responsible buyer’s agency, InvestorKit team decided to dive into data and find answers to the below questions.

Does cyclones and floods suppress the long-term growth of house price?

Townsville experienced a catastrophic flood in late Jan to early Feb 2019, which was claimed to be one of the worst in the city’s history, causing 5 deaths and $1.24 billions of property loss. However, property market data shows that the natural disaster didn’t slow down the growth pace of the city’s rent level, nor stop the sale price from recovering since2019.

Cairns didn’t experience major floods like the 2019 Townsville one in the past 10 years but have experienced several less severe cyclones and floods. However, when we overlap these events with the sale and rental price growth curve, it’s hard to see any of their influence on the price growth.

One of the reasons why cyclones, storms or floods don’t impact house value that much is that the risks have always been there, and almost all the aspect of the housing market, from building codes to buyer’s expectation, is adapted to it.

Now that the long-term growth is not influenced much by the tropical climate, here comes another question:

Is it the same to buy anywhere in the city?

Not really. You would want to avoid flood-affected areas. Admittedly, data shows that the house price and rent level growth of these areas is only affected by major natural disasters, otherwise they are just similar to the non-flood-affected areas. However, there are risks of longer selling time and higher discount rate during the wet season, when cyclones, storms and floods tend to happen. Let’s look at some more charts below to better understand this.

Townsville

The 2019 flood has shown us which suburbs in Townsville are lower and easily affected by floods. Four suburbs – RailwayEstate, Hermit Park, Rosslea, Idalia – are among the most badly flooded areas, and we will compare their market indicators with Townsville average.

Source:https://www.townsville.qld.gov.au/__data/assets/pdf_file/0018/62451/Map_2000cmsHeightv3.pdf

Cairns

For Cairns we have selected three SA2s that fall in the flood zone categorised by the city council: Cairns City, Manunda, and Westcourt – Bungalow, and we will compare their market indicators withCairns average. Suburbs in this area include:

     ·     Cairns North

     ·     Cairns City

     ·     Parramatta Park

     ·     Manunda

     ·     Westcourt

     ·     Bungalow

     ·     Portsmith

(Source: Cairns Regional Council, available at https://www.cairns.qld.gov.au/_designs/cairns-regional-council-new-design/paint-layouts-client-made/emergency-map-images/emergency-map-images-listing

Short-term PriceTrend

For Townsville, both sale prices and rent levels are not significantly affected by the wet season. In 2021 the sale price growth of the flood-affected area even started accelerating during the wet season, and have achieved a better annual growth rate over the year.


Further north, Cairns’ prices are more sensitive to the weather. During the wet season, the growth of both sale price and rent level of the flood-affected area were both subdued compared to the Cairns average. However, at the end of the year, they have caught up with the Cairns average over the dry season, and even achieved a better annual growth rate.  

Long-term PriceTrend

Now if we take a step back and look at the10-year growth of the two cities’ price growth…

Townsville’s sale price growth in the flood-affected area was much more severely hit by the 2019 flood, but the growth pace has soon picked up, leading to the area’s last-2-year outperformance compared to Townsville average. On the rental market, rent level growth of the flood-affected areas is close to the City’s average in the long run.

In the north, the long-term sale price and rent level growth of Cairns’ flood-affected areas are both close to the city’s average.

Listings & Sales Volumes

Surprisingly, our analysis shows that the wet weather does not have much influence on the number of listings (for-sales and for-lease) and sale volumes. In the below charts, we don’t see significant different difference between the flood-affected areas and the cities around the year, indicating that demands and supplies stay stable even in the cyclone & flood season.

Days on Market& Vendor Discount Rate

Data shows that the wet weather does make your purchasing/selling journey in the flood-affected area bumpier by prolonging the selling time (number of days on market) and increasing vendor discount rate. This is especially evidenced by Cairns, the city in the Far North.

In the past 15 months, sale days on market of the flood-affected area started rising in December 2020, lasting till June2021. In the meantime, the Cairns average sale days on market have been dropping steadily. Up till Sep 2021, Cairns’ average sale days on market have dropped by 24% in a year, showing increasing pressure, but the figure for the flood-affected area, although dropped dramatically before the wet season, has now climbed back to close to last year’s level.

Similarly, the flood-affected area’s vendor discount rate was rising during the wet season, while Cairns average was dropping. In the 12 months up to Sep 2021, Cairns’ average vendor discount rate has declined by 19%, showing increasing seller confidence, but the figure for the flood-affected area is even slightly higher than the same time last year.

Back in Townsville, the effect of the wet weather, although can be seen, is not as significant as in Cairns. Sale days on market stayed stable during the wet season instead of dropping as other parts of the city; And the steep drop of vendor discount stopped in the middle of the wet season, staying around 7.5% since then, whilst the rest of the city’s vendor discount rates keep declining.

Other Factors to Consider

Besides days on market and vendor discount rate, there are some factors you would like to be aware of when making a decision to invest in tropical cities.

a. Higher maintenance cost

Properties in tropical areas are more prone to damage from humidity, wildlife (eg. termites), cyclones, flood etc., thus the regular maintenance costs would be higher than houses in the south.

Also, labour force could be limited after major natural disasters such as cyclones due to the high volume of maintenance requests. Labour costs might be raised to match the market pressure.

b. Longer than average tenancy vacancy period

Usually, investors would allow 2-3 weeks of vacancy period each year in case of change of tenants or renovation. However, if a house is damaged by a natural disaster, it would take extra time to fix the house before having new tenant move in. According to some local investors, this vacancy period could be further extended after major disasters due to the lack of handymen.

c. Higher insurance cost

As devastating floods and cyclone events seem to be occurring more often in recent years, the prices for home insurance premiums have been increasing. Below chart shows the trend for Townsville floods area.

The below table is a Canstar calculation of average annual home and contents insurance premiums across Australia in 2021, based on the sum insured values of $300k-$1.2m for home and building cover, and$50k for contents. North Queensland’s premium more than doubles the Queensland average and approximately triples the other states (except NT).

What’s more, flood zones have higher premiums than non-flood zones. The North Queensland Home Insurance website (https://nqhomeinsurance.gov.au/) provides home insurance comparison among numerous insurance providers. The below table shows 3 insurance providers’ medium premium level for a $450k house in Cairns City (in flood zone) and Mount Sheridan (outside of flood zone).

Luckily, the higher holding costs are compensated by the higher yields. By the end of September 2021, Cairns – South SA3 enjoys a 5.5% gross yield and Cairns – North 4.9%, much higher than the generally held healthy yield threshold of 4%.

Many of you must be asking, if the tropical climate or natural disasters do not significantly affect property growth in North Queensland, then why didn’t the region grow in the previous years? We have asked ourselves the same question. Below is some of our findings trying to understand it.

“The Lost Decade”

Core logic data shows that houses in Townsville LGA achieved a 20-year compound annual growth rate (CAGR) of 5.1%(i.e. 170% in total) up to the end of August 2021, while having dropped by -5%in the latest 10 years (-0.5% CAGR). A simple calculation would tell you that during 2001-2011, Townsville houses had grown by a huge 184% in 10 years, or a 11.0%compound annual growth.

Similarly, Cairns houses grew by 215% in total in 20 years (5.9% CAGR), and 26% in the last 10 (2.3% CAGR), meaning that the city grew by 151% from 2001 to 2011, or a 9.6% compound annual growth.

These growth rates are compared with Brisbane’s 11.1% compound annual growth from 2001 to 2011. Pretty close, right?

So what happened to North Queensland in the latest 10 years? Why did the house price stopped growing and even declined? We believe this is because of the slow-down of the local economy and the property market oversupply.

Local Economy Slowdown

Below charts show the regional product growth rate of Townsville and Cairns during the past 20 years.

The annual growth rates reached the lowest level in early-mid 2010s, making the latest 10 years economic growth much lower than the 2000s. This trend can also be seen in the almost-stopped growth of job opportunities and high unemployment rate up to 2016/17.

Looking at the main employment industries during that high employment period (early-mid 2010s), we’ll see that Construction has experienced the heaviest job reduction for both cities, while for Cairns, Accommodation & Food Services and Retail Trade didn’t perform well either.

For this economic recession period, these are what we think have caused it.

a. The end of the Mining Boom

The Mining Boom started in early 2000s as the international commodity price surged, peaked about 2011/2012, and started winding down from 2013 following the decline of commodity price.

As the Boom commenced, North Queensland regional centers like Townsville and Cairns became perfect hubs forfly-in-fly-out workers because of a combination of proximity to mines, excellent lifestyle and abundance of airlines. This is evidenced by the fast-growing population of the two cities during that decade and the increasing domestic airline passenger movements of Townsville Airport.

However, as the Mining Boom passed its peak, the economy growth of the two cities, especially Townsville, started to slowdown and unemployment rate started rising. The end of the Mining Boom hit Townsville the hardest among all Queensland cities. According to a 2016 AFR article, Queensland lost around 22,000 jobs during the last few years of the mining boom, while Townsville, just in the 12 months to April 2016, lost 9500 jobs.

Good news is that the mining industry has been recovering in the recent years while the cities are gaining diversity in their industry composition therefore becoming more resilient. Below are the lists of the value added of each industry of Townsville and Cairns. We can see that more resilient industries such as HealthCare & Social Assistance, Education and Training, and Financial & Insurance Services have grown in their contribution to the local economy during the last 10 years. The declining unemployment rate is also signing their economic recovery.

b. Reduction in government’s infrastructure investment

The 2017 Cairns Council report of Transitioning Regional Economies find that historically, government’s infrastructure investment to the region has played an extremely important role in boosting the local economy. However, in the first half of the last decade (2012-2016), both Cairns region (now known as Far North Qld) and Townsville region have experienced heavy cut-back on the state government’s budgeted capital expenditure. This has had a negative impact on the North Queensland economy.


Luckily, the state government’s investment in the region in the following half of the decade (2016-2021) has been increasing. As mentioned previously, North Queensland is receiving a huge amount of infrastructure investment from the government in recent years, especially in transportation, energy, and defence. The state’s budgets for Townsville and Far North Queensland have increased by 56% and 89% respectively over the last five years (see below chart). The infrastructure projects would be a great booster for the recovery of North Queensland’s economy.

c. High Australian dollar impacting Cairn's tourism industry

As main gates to the Great Barrier Reef, tourism has always been one of the primary industries of Cairns. One of the factors resulting in its slowed down economy before 2016 is the high Australian dollar.

Tourism is sensitive to exchange rate fluctuation, which is evidenced by Cairns Airport international airline passenger movements (chart below). When Australian dollar is at a lower level(approx. 0.75 or lower), international visitors are more active; and when Australian dollar climbs, the number of international visitors has stayed low.

After the GFC, strong recovering mineral commodity prices were putting upward pressure on the dollar, and the RBA raised cash rate to a much higher level than the major world economies, resulting in a heavy rise of Australian dollar in the early 2010s, which led to a subdued tourism industry in Tropical North Queensland Region. In 2012, Tourism income dropped by about 25% compared to 2006. According to Cairns Council and Advance Cairns, Tropical North Queensland’s total economic loss before the recovery in 2015 is estimated to be around $3b in 2005 dollars.


 

The currently declining Australian dollar and reopening of Australia international border will be boosting the North Queensland’s tourism industry and consequently the local economy.

And what’s better, Cairns’ economy is becoming less dependent on tourism. The below chart shows the annual value added of Cairns’ tourism industry and its contribution to the city’s total. Although the value added of tourism industry has had ups and downs during the last two decades, one constant trend is that tourism’s contribution to the economy is shrinking. As we have mentioned before, industries such as Health Care & Social Assistance and Financial & Insurance Services are contributing more and more to the economy. Diversity will bring Cairns more stability.


Property Market Oversupply

Besides the economic reasons, property market cycle also plays a role in North Queensland housing price depression. Population growth and heavy rise in housing price have led to an increasing number of new developments in Townsville and Cairns, which inevitably led to oversupply.

The below charts show that in the first few years of the last decade, new dwellings (measured by number of building approvals) were taking an increasingly high proportion of the total number of sales in both cities. The impact of oversupply occurred in Townsville in early 2010s and then Cairns in mid 2010s. It took years for the market to absorb the excessive supplies before demands surpass supplies and push the price up again.

Conclusion

The economic recovery of North Queensland and the heavy infrastructure investments indicate that this tropical property market has the potential to achieve significant growth in the coming years.Recent market data has indicated its strong growth momentum as well. Although holding costs are generally higher, the affordable price paired with high rental return (yield) makes it possible for investors to still enjoy a positive cashflow.

Market data shows that natural disasters such as cyclones and floods do not have significant influence on property price growth at the city level, but would impact selling/leasing time, tenancy vacancy period, and holding costs in the flood-affected suburbs.

As a smart investor, you would always want to minimise the risk. So, if you’d like to take the advantage of North Queensland’s new growth opportunities, due diligence is essential.

First things first, avoid major flood zones. As we have discussed above, houses in the flood zones of these areas are prone to higher maintenance costs, longer vacancy period, higher insurance premium, etc. In many cases beachfront houses that fall into flood zones look attractive, but you may have to choose between the appealing look and peace of mind.

Financial feasibility model is equally important. Factor in all extra costs, including the extra spending and extra losses, and calculate the return rate (yield) you need in order to balance your incomes and outgoings.

Professional inspections are especially important. The tropical climate causes specific building problems and thus leads to specific building codes. A knowledgeable local building inspector would be able to tell if the structure of the house is strong enough to deal with strong winds/cyclones, storms, or floods, and what can be improved when you own it to reduce risks. Pest inspectors will help you make sure that the house is not damaged by termites, borers, fungi, etc.

InvestorKit is a buyer’s agency who focus on identifying new growing opportunities and minimise your risk in purchasing and holding the property. If you are not sure about how to pick your next investment, don’t worry, as we have the team resources of market researchers, acquisition professionals, and local networks to spot, inspect and nail the right investment! Sounds good? Give us a shout and see if we are a fit to work together over a FREE no-obligation 45min consultation today!

DISCLAIMER: Contents of this document are of general nature only and should not be relied upon solely when making an investment decision. InvestorKit nor any of its directors, associates, staff, or associated companies bear any liability from any action derived from the contents of this email. One should always seek third-party investment information from relevant parties such as legal, finance, and accountancy enquiries.

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