Warning to investors: Stay away from the coalface

As we look to what's ahead for 2012, Property Observer is republishing some of our most noteworthy stories of 2011.

All the talk of a resources boom which may last for decades has encouraged investors to look at buying property in mining towns chasing the next hot spot.

Only last week Chris, a builder from Tasmania, asked my opinion on investing in a mining town, saying he was chasing capital growth but was worried about the effect the new carbon tax may have on Australia's resource sector and the towns that rely on this booming industry for economic prosperity.

I advise him to steer clear of mining towns, and it has nothing to do with the controversial tax. There are a whole plethora of reasons why buying at the coalface should be avoided.

The first thing I asked Chris was “are you an investor or a speculator?” I explained that seeking out the next big boom location is not really investing.

To me, investing in property is all about generating strong long-term capital growth. To achieve this, investors must have a clearly defined investment plan that outlines their goals and how they intend to achieve them. Then they must do their due diligence and research locations that have a proven history of outperforming the averages and buy the type of property that will help them reach their goals.

Hot-spotting is almost the complete opposite to this sensible, not-so-sexy, tried and tested method of successfully building a property portfolio. It’s more about short-term speculation than long-term wealth creation.

When I asked Chris what type of people were buying properties in our mining towns he correctly said “investors” rather than owner-occupiers.

This helped me explain the reason for the underlying volatility in mining town property markets. I’d rather have a market underpinned by strong demand from a wide demographic of owner-occupiers and supported by a range of industries than a speculatively led investor market.

Just look what happened to property values in our mining towns during the aftermath the global financial crisis. Investors fled these more unpredictable property markets and prices crashed. In fact in many cases there there were no buyers for their properties. Some are still trying to sell their properties today!

If a local real estate market is predominantly driven by speculative investors who jump in feet first during a boom when prices are soaring, but just as quickly move on when the dust settles and sentiment changes, you’re in for a volatile ride.

Basically, when things are good they're very, very good, but when they are bad, they're rotten.

Without strong owner-occupier demand underpinning house prices and creating a pattern of steady, long-term capital growth, there really is limited true potential for a sound, secure long term investment.

And let's face it, owner-occupiers are not scrambling to snap up a home in Australia's remote outback where the majority of mining operations are located.

Then there's always the prospect of the town simply disappearing if the mining company decides to call it a day and move on to greener pastures. Given that the local economy in these resource driven locations is predominantly reliant on mining employees to sustain it, this would prove financially fatal for local businesses and most residents would be forced to pack up and relocate in order to survive. Of course no residents means no tenants and no income from what you may have once deemed a veritable goldmine! Pardon the pun.

If this isn't enough to convince die-hard speculators to stay away, perhaps the growing threat to the economic viability of mining towns – a breed of employees known as “fly-in-fly-out” workers – will set you straight. These highly paid workers set up residence in nearby urban centres or coastal regions, fly in on a weekly basis to perform their duties and reside in temporary accommodation camps, then fly home to spend their hefty paycheques in a more civilised setting.

Of course our mining boom and the resulting billions of dollars spent on resources infrastructure is boon to our economy. And I can understand the temptation to invest in towns that may appear to profit on the back of this boom. But I’ve seen these booms turn into speculative bubbles. Today’s hotspot could be tomorrow’s over-heated market!

Just look back a few years ago when the resources boom hit WA, and thousands of investors jumped on the bandwagon and bought into those mining towns that sprung up literally overnight. Of course, when the resources sector cooled off, many of these towns went from boom to bust as the main industry supporting the local economy slowed down.

Today many investors are still having issues trying to offload their underperforming properties in these towns.

For my money, real estate should be about long term growth and secure returns and these are easy to find in and around Australia's major capital cities – where our diverse economies have been evolving for hundreds of years. These areas are true property investment goldmines!

Michael Yardney is the director of Metropole Property Investment Strategists , a best-selling author and one of Australia's leading experts in wealth creation through property. He also writes the Property Investment Update blog.