SQM foreshadows mining downturn: Pete Wargent

SQM foreshadows mining downturn: Pete Wargent
SQM foreshadows mining downturn: Pete Wargent

I recently spent a bit of time charting the death throes of the resources construction boom. 

As you can see below, although the Northern Territory has been offered a temporary reprieve by the massive $34 billion Ichthys LNG project, engineering construction activity has been hit extremely hard almost everywhere else, particularly so in Western Australia (down by 24 per cent over the past year), Queensland (-38 per cent) and South Australia (-25 per cent). 

SQM foreshadows mining downturn: Pete Wargent
Moreover, despite a year-on-year decline of more than 20 per cent the downturn has miles to run yet before construction activity even gets close to its historical norm. The value of work commenced points to an accelerating decline.
SQM foreshadows mining downturn: Pete Wargent
Moreover, with the Commodity Price Index having continued to weaken, we could easily overshoot to the downside, which terms-of-trade booms in Australia have historically tended to do.
SQM foreshadows mining downturn: Pete Wargent
Given that the construction stage tends to be comfortably the most labour-intensive phase of resources projects, this must inevitably result in sharply declining demand around many regional areas of Australia.

Vacancies rising in resources capitals

On a related note SQM Research released its latest July 2015 Vacancy Rates and asking rents data yesterday.
Vacancy rates nationally held steady at 2.4 per cent but the figures revealed a significant divergence between the resources capital cities and the rest.
As you can see in the chart below, moving from left to right vacancy rates remain relatively tight in Hobart (1.2 per cent), Sydney (1.8 per cent) and Adelaide (1.9 per cent).

Hobart's vacancy rates have tightened over the past year from 1.5 per cent to 1.2 per cent despite a near total dearth of population growth - if you think carefully about it, you may come to your own conclusions as to why - while Sydney's vacancy rate of 1.8 per cent is unchanged from one year ago.

Brisbane city-wide vacancy rate is now recorded as being 2.6 per cent, and in fact in a number of apartment construction hubs vacancy rates are already considerably higher than that. 
Shifting across towards the right hand edge of the chart Darwin is now tracking at an elevated 3.5 per cent having spiralled from just 1.4 per cent a year ago.

Meanwhile vacancy rates in Perth have blown all the way out from 2.5 per cent in July 2014 to 3.8 per cent.
SQM foreshadows mining downturn: Pete Wargent
Asking rents follow vacancies

Also reported in the SQM media release was a massive 20.5 per cent fall in asking rents for houses in Darwin, as well as 15.2 per cent decline in asking rents for Darwin units.

Over the past year asking rents have also declined in Perth for both houses (-7.4 per cent) and units (-6.3 per cent), according to SQM's index.

Of course, vacancy rates are expected to rise at this stage in the construction cycle, but it may take Perth and Darwin quite some time to absorb the excess stock.
SQM foreshadows mining downturn: Pete Wargent
Mining towns crushed

This capital city market action is of course small fry compared to what is playing out in resources regions.

Following on in sympathy from an epic property crash in the Pilbara, the Australian Financial Review reported that investors in the Bowen Basin heartland are being sent broke with dwelling prices continuing to collapse dramatically.

Property prices in Moranbah have reportedly crashed by up to 70 per cent over the past three years, while prices in Dysart prices have crashed by closer to 50 per cent over the same period.

Instead of linking back to articles which promised untold riches from investing in mining towns, it is worth considering the two golden rules which nearly all of the most successful investors follow religiously:

Rule 1 - Don't lose money.

Rule 2 - See Rule 1.

When it comes to property investment, there is no easy way back from a 50 per cent drawdown, particularly if leverage is used.

Remember that the promise of higher returns often comes with correspondingly higher risks. 

PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and blogger.

His latest book is Four Green Houses and a Red Hotel.

Pete Wargent

Pete Wargent

Pete Wargent is the co-founder of BuyersBuyers.com.au, offering affordable homebuying assistance to all Australians, and a best-selling author and blogger.

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