From hotspot to bloodbath: Property investment in Australia's mining towns

From hotspot to bloodbath: Property investment in Australia's mining towns
Jennifer DukeDecember 7, 2020

There are few words in the property investing lexicon that evoke as much emotion as the term “mining town”.

Known for their fast-moving property markets that are at the mercy of resources industries, it’s not surprising that many cautious investors steer clear. However, that’s not to say that numerous investors do not buy in, with promises of double digit yields and capital growth that tops hotspot lists an obvious lure.

In fact, they often come in droves.

SQM Research’s managing director Louis Christopher recently undertook an update on the resources towns.

His predictions in the company's 2013 Housing Boom and Bust report were that the hard commodity towns – those usually solely underpinned by resources – were truly in a downturn, while ‘soft’ commodity towns with other drivers, such as resources, have had more positive results.

Christopher's update revealed price drops of up to 40% in some areas and vacancy rates spanning up to 14% in others; a situation he referred to as "bloodshed".

Port Hedland fared the worst, with a 40% price drop, from $1,500,000 to $900,000. In 2002 the median price for Port Hedland was sub $200,000, showing just how far this market has come.

In 2012, Property Observer reported on an upcoming downturn, or at least a sense of caution, for several risky mining hotspots. This was based on a Westpac report, which had flagged a number of Queensland and Western Australian localities as ‘high risk’ due to their single industry basis. Port Hedland was on this list.

The suburbs they had placed on the list were:

• Blackwater (4714)

• Moranbah (4744)

• Dysart (4745)

• Middlemount and May Downs in the Isaac region (4746)

And in Western Australia:

• Roebourne (including Karratha, Baynton, Bulgarra and Pegs Creek, 6714)

• Port Hedland (including South Hedland, 6721)

• East Pilbara (6753)

More recently, NAB dropped their maximum loan to value ratio (LVR) for home buyers and investors in Mackay and Emerald, according to The Rockhampton Morning Bulletin. Investors have seen their potential LVR dive to 80% from 95%, while home buyers will face 90% instead of 95% LVRs.

Looking back towards Port Hedland, it’s not all bad news, writes Christopher.

While rents also took a dive – from a brief $3,200 peak to $1,550 at present – the vacancy rates are stabilising at 6% and listings dropping, according to SQM Research.

“So, there has been bloodshed in Port Hedland, but perhaps some signals from our leading indicators that the worst of it might be over,” said Christopher.

Source: Residex

All in a few year’s work for a mining town hotspot. This sort of rapid-cycle behaviour is not just limited to Port Hedland– single-driver mining town risks do not discriminate based on location.

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Western Australia’s Muswellbrook is also on Christopher’s radar.

With cancelled expansion projects – no doubt painful for speculators – listings seem to be “taking a beating”, he said. Vacancies are improving, however, now back to 9% from 14%.

“That still is a very, very high number but it is the relative movement that is just as important as the absolute number,” Christopher said.

“Rents of course, have been pulverised but there is a hint at the very end of the chart of a possible bottoming out.”

In South Australia things are looking a little more positive.

The much-discussed Olympic Dam is now at 3% vacancies, down from 10% previously, and rents are showing signs of recovery.

But rental yields are a paltry 4%, something that Christopher says is not justifiable given the risks of investing in a mining town.

At the height of its boom, according to the “home of positive cashflow property”, Realestateinfo.com.au, Port Hedland was offering yields of 9.5% as of September 2013, during a time when a downturn was in the offing. The Pilbara, meanwhile, topped the list – offering 14% yields (albeit only from 18 rental observations).

It is common sense that people buy in high risk locations for high returns – otherwise they’d purchase elsewhere with much more peace of mind.

The soft commodity markets Christopher looks at includes Orange, which was suffering in September 2013, but now the rental market is tightening.

When considering all the data, he’s not so sure about whether he’d invest in these areas.

“While our charts might be pointing to a possible bottoming in the market for some of these townships I believe it is very early days indeed and it could be just as likely there is another leg down before the real bottom finally arrives. I don’t know about you but I find the thought of renting a standard house in Karratha at $900 a week (as a tenant), very unappealing even while the same house was once renting at $2,100 a week,” he wrote.

When government planning documents, like this one from Port Hedland in April 2011, suggest that by the time many yield-hungry investors were buying in, it was already well established that the area had an issue with housing supply and rents.

The government was already looking at what needed to be done to take control, as well as possible land releases, across the Pilbara.

The distress that recent rising vacancies and rental yield drops are causing property investors is something that observer Terry Ryder hears about regularly.

He specifically mentions a number of suburbs afflicted with these two softening indicators: New South Wales’ Muswellbrook, Mudgee and the Hunter Valley, Queensland’s Mackay, Emerald, Bowen, Gladstone, Moranbah and Chinchilla, and Western Australia’s Newman, Singleton, Port Hedland and Karratha.

Faced by what Ryder calls the ‘double-whammy’ of resources related demand dropping as developer interest increases, he urges that a long-term outlook is critical for any investor considering a mining town.

“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,” he wrote.

Ryder says that he hasn’t bought in mining centres as he knows he wouldn’t sleep too well.

Of course, those that bought into the Port Hedlands of Australia and sold out at the height of the boom could have made significant profits, while achieving strong yields. If no one ever made money in those areas then no one would buy in. On the flipside, those that didn’t time it so well may have faced bankruptcy.

Sometimes the higher you climb, the harder you may fall.

Photo of Port Hedland courtesy of Robyn Jay/C.C. BY 2.0

Jennifer Duke

Jennifer Duke was a property writer at Property Observer

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