Investing in a mining town requires a long-term view

A long-term view is a standard requirement for property investors. Easy to say, not so easy to do.

When you own in an area that’s currently going backwards, it’s hard to practice the long-term doctrine.

A second necessity for property investors is to understand well the market you choose for purchase. A third is to know yourself and your financial objectives.

All three of these criteria seem to be missing for many people who buy in towns and regional cities impacted by the resources sector.

It’s a common item in my inbox – an email from an investor who bought in Muswellbrook in New South Wales or Mackay in Queensland and is distressed because vacancies are up and rentals are down.

Other locations likewise afflicted include Emerald, Gladstone, Bowen, Moranbah and Chinchilla in Queensland; towns of the Hunter Valley as well as Mudgee in New South Wales; and Newman, Port Hedland and Karratha in Western Australia.

Most of these places are impacted by the same double whammy: resources-related demand went south as developer ambitions went north. In one or two cases, like Gladstone, resources-related demand is as strong as ever, but developers simply went ballistic with new supply.

The result, in all these locations, is high vacancies, declining rents and, inevitably, decreasing property values.

If you own an investment property – or two or three, in the case of some who have contacted me – in these locations, it’s natural to be getting a bit twitchy.

But what about those three criteria I mentioned earlier? I get the feeling many people bought in places like Gladstone or Singleton without a clear appreciation of the nature of these markets.

Locations where the resources sector is a big part of the local economy always have volatile property markets. Unlike your average city suburb or well-rounded regional centre, they are prone to big peaks and troughs. Long-term the price growth averages can be impressive and you can make high capital gains, but there will be stressful periods along the way.

This refers to another of those criteria: a good understanding of your own temperament. Many people aren’t built to own real estate in volatile markets. They border on meltdown when the market dips below the red line. If they understood those markets and their own inner selves well, they wouldn’t – shouldn’t - have bought there.

I’ve never bought real estate in mining centres because I know I wouldn’t sleep so well.

And that brings us to the most important criteria of the three, the long-term perspective. Someone who bought in a Moranbah or a Bowen without understanding that volatility was likely, and is now freaking out because they weren’t suited to that kind of situation, is prone to blowing their money with a panic cut-my-losses-and-sell response.

Many of the locations mentioned earlier will do well in the future. The resources sector is highly cyclical and the good times will return. Headline-grabbing one-liners like “the mining boom is over” are both silly and short-sighted. Australia has a very big future as a provider of key resources to growth economies, especially in Asia.

Comments coming from credible sources in the resources industry are turning increasingly positive, in terms of better prices for commodities and a return to investment expansion.

Property investors who panic and sell now will lose money. Those who hang in there for the long haul are likely to benefit from future growth.

Here’s a final thought to ponder: the Hotspotting team recently researched long-term capital growth averages across the Australia. The locations with the highest growth rates – average annual rise in prices over the past decade – were all mining towns or regional centres impacted by the resources sector, even with the sharp decline in fortunes in the past year or two.

TERRY RYDER is the founder of hotspotting.com.au. You can email him or contact him on Twitter.