Mining town markets going from bad to worse: Terry Ryder

Stark reminders keep occurring of just how bad markets have become in mining towns and regional centres with a big reliance on the resources sector.

During our daily research routine, the Hotspotting team came across a local newspaper article which recorded homes for sale as low as $49,000 in Blackwater, a coal-impacted town west of Rockhampton, with an average sale price around $150,000.

Early in 2012 Blackwater had a median house price of $360,000, following a 17% rise in the previous 12 months. The median weekly rent was $675 and typical yields around 10%.

Fast forward three years: the median house price has dropped 28% in the past 12 months and the median weekly rent is now $300, less than half those peak levels, with typical yields about 4.5%. Vacancies have been as high as 8% and are currently 5%.

A few hundred kilometres to the north is Moranbah, the quintessential boom-bust coalmining town. I’ve written about Moranbah’s demise in considerable detail over the past couple of years. Suffice to say that the median house price, once $750,000, is now $285,000 – and the median rental yield, once above 10%, is now 3.65. Ouch.

Towns like this will recover in time, but the current state of the coal industry means a lot of pain for investors who bought in at the peak.

Experienced property analyst Louis Christopher wrote recently about similar agonies for markets in Western Australia. He noted that a house in the resources regional centre of Port Hedland had passed in at auction for $360,000, having been bought four years ago for a reported $1.3 million.

“It's a very sobering result and it could be a sign of worse to come in the Pilbara region if the iron ore price keeps dropping given burgeoning global supply,” he said.

“The modest 1960s fibro home on a 600 sqaure metres block failed to attract buyers, with the Port Hedland market especially vulnerable to the commodities downturn as it is one of the world’s biggest iron ore loading ports. The plunge in the iron ore price and slowing Chinese economy have stifled mining activity and stymied demand for property in Port Headland and other mining towns around the nation.”

Christopher said prices for three-bedroom houses in Port Hedland shot up in 2012 to $1.3 million, but the median is now just over $800,000. That’s a value reduction of half a million dollars for the average Hedland house.

Given that recent auction result, house prices could fall a lot further before they stabilise, Christopher said. This is a warning I have made in this column and elsewhere several times in the past year or so – not just in Port Hedland but also in Karratha and Newman.

It’s important these warnings are heard because spruikers who make their living peddling over-priced dwellings in places like Port Hedland would have us believe that these are growth markets, with double-digit yields available.

The reality is that these markets are still falling and, as Christopher warns, are likely to get worse before they get better.

“The drop in house prices (in Port Hedland) follows plunging demand for rental properties as fly-in workers fly out and stay out,” he said.

He said that asking rents in Port Headland had recorded a “staggering drop”, from a peak of $3,000 per week in early 2012 to $1,250 in February 2015. He predicts they will fall further, as do I.

Christopher says it’s a similar story in Karratha. “While house prices never soared to the extent that they did in Port Headland, three-bedroom houses have plunged 40% over the past three years, down to around $457,000,” he said. “Asking rents for houses have fallen from a peak of $2,000 per week in 2011 to around $900 now. 

“For the property investors who got caught up in the mining boom, the sting will be very painful. It’s a reminder that if you are buying property, the risks of falling prices are very real if the economic cycle turns - especially in boom and bust mining towns where what goes up, invariably comes down.”

The decline in these markets is not just about hard times in the iron ore and coal sectors. It’s also about over-building by developers and a failure to appreciate the full impact of the growing use of FIFO workforces accommodated in temporary workers villages.

Towns in Queensland’s Surat Basin are stark examples. Hotspotting research shows that about a quarter of the population of this region last year comprised FIFO workers – close to 15,000 extra people in the area.

But 94% of them have been accommodated in workers accommodation villages, usually located outside the established towns like Dalby, Chinchilla, Roma and Miles.

Developers built a lot of new dwellings in these towns expecting big demand from the coal seam gas boom. But few of the workers on the gas projects have rented houses in the region’s towns.

The outcome has been vacancies as high as 21% in Chinchilla and 30% in Miles, with rents inevitably heading south. Values are starting to follow.

This phenomenon means that even when commodity prices improve and industries like coal and iron ore start to expand again, it may not fill up all those empty dwellings in Port Hedland and Moranbah.

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

If you missed our free webinar with Terry Ryder, 'The Best and Worst for 2015: Top 5 Hotspots and 5 Places to Avoid', you can watch the video or download the slides here.