Are mining towns really property investment goldmines?: Margaret Lomas
You’ve probably met someone who bought property in a mining town and made a bucket load.
Years ago when everyone else was turning up their noses at those giant red holes in the ground that were mining towns, some crazy risk-takers bit the bullet and took the gamble. It wasn’t much of a gamble, really – you could buy property that probably fit within your credit card limit, but at that time everyone figured nothing much could come of it.
Stories abounded of untold success. It was the first we’d ever heard of a "donga", but apparently these tin sheds skyrocketed and fetched astronomical prices and rental yields. Everyone wanted a piece of that action, and you had to jump out of the way to avoid the stampede of investors racing to these one-horse towns for their piece of investing gold.
There’s no question that a great return can potentially be made buying property in a mining town, but people make money investing in pork bellies and trading foreign currency, too. Why don’t we all jump on that bandwagon? Quite simply, because we know they are high risk, and we are mostly pretty acquainted with our own personal appetite for risk.
So what madness is this that causes property investors, many of them without money to lose and gambling the equity in their own family homes, to completely ignore the risk factor attached to buying in mining towns?
I have a few theories around this. Firstly, property investors rarely educate themselves before taking the plunge. Somehow they feel that just because they own a home of their own they are suddenly experts at picking the right property. It’s a bit like believing that just because you bought Telstra shares you vicariously received a crash course in share investing and are now an expert at it.
Secondly, it seems that when you use someone else’s money (the bank’s) it’s OK to be less careful. There’s a misplaced confidence that comes when a bank gets a valuation and then agrees to advance you the money – as if it somehow provides its tick of approval for your decision and, well, banks know what they’re doing, right?
Lastly, it’s public enemy number one – the undying belief that property, as long as it’s held long enough, will always go up. It provides a false sense of security around property buying and removes any common sense many investors might otherwise use when choosing an appropriate investment that sits nicely within their risk profile.
Investing in a town based solely on only one industry carries a risk that is greater than buying property in an area where the industry is diversified. An event that may initially have little to do with that one industry, such as another GFC, a slowdown in China’s demand for our resources, to name a couple, could eventually develop to create an impact great enough to negatively affect the fortunes of the true risks involved.
Where an entire area extracts its income and employment from that one industry and its related industries (such as retail and hospitality), a closure of that industry can have swift and devastating effects upon those who own property. An investor may go quickly from having a property with a high value and exceptional rental returns to one with no tenant and no buyers.
I’ll never argue that significant gains cannot be made by those who invest in towns such as these, typically mining towns. However, all investing must be undertaken with a sound grasp of the true risks involved. If you are prepared to accept those risks, and you have considered what your position would be if you owned a property that suffered a significant loss, then a mining town may be an excellent investment for you.
Contrarily, if you need a little more surety in your investing, stick with areas of more diversity, which can manage industry closures because there are many other employers to take up the slack.
Margaret Lomas is a best-selling author and writes and hosts the popular Property Success With Margaret Lomas and heads up the panel on Your Money, Your Call, both on Sky News.