Mining towns at risk of property prices crashing 25%: SQM Research

Property prices in mining towns could fall 25% in 2013 if Australia's terms of trade plummet or the eurozone collapses, according to worst-case scenario forecasts from SQM Research.

Even under a best-case scenario (terms of trade falling but stabilising, 50 basis point rate cuts, Australian dollar at parity), SQM Research forecasts a very mixed outlook for mining towns, with expectations ranging from a 5% fall in property prices to a 7% rise in prices.

“In the case of mining towns, it very much depends upon the individual mining town's base resource,” says SQM Research managing director Louis Christopher

If a mining town has 100% exposure to iron ore and iron ore prices fall, property prices in that town could “take a beating” he says.

“Others mining towns, such as those exposed to precious metals, will do OK.”

Large falls in property prices in mining towns are predicated under two different scenarios, according to SQM’s 2012 Boom and Bust Report.

The first scenario is based on a crash in the terms of trade (the ratio of value of a country’s exports to the value of its imports), with the Australian dollar remaining high and the cash rate cut by just 0.25 percentage points.

“Concerns are being raised about Australia’s resources sector, which at present is witnessing turmoil. All major mining companies are in the process of cancelling mining projects and reducing prices to remain competitive in the global market,” says SQM Research in its report.

“Falling terms of trade along with Australia’s heavy reliance on its resources sector could lead to a considerable dent on the economy’s progress going forward, and this would have a direct impact on housing as well.”

Under such a scenario SQM Research forecasts property prices in mining towns to fall by between 15% and 25%.

The second scenario – property prices in mining towns falling between 5% and 25% – is predicated on an unorganised European default and/or a eurozone break-up.

SQM Research points out that this is would be wild-card scenario “and despite current fears, an unlikely scenario”.

“However, if the event were to occur, it is possible that offshore financing would dry up and the RBA would quickly and aggressively cut rates. While there would be many forces at play, it is probable that the Australian dollar would fall substantially. However, it would only provide muted assistance to most sectors due to a sharp decline in total demand,” says the Boom and Bust report.

To find out what the mining boom will mean for property investors and where the investment hotspots are likely to be, sign up for Property Observer’s free webinar with hotspotting.com.au’s Terry Ryder on Tuesday, October 2 at 12.30pm