The worst is yet to come for Gladstone

I’m seeing a rising tide of media talk that the Gladstone market has bottomed and now might be a wonderful time to buy there in readiness for the next up cycle.

This is very bad advice from people who will earn money if investors act on it and buy Gladstone real estate.

The worst is yet to come for Gladstone. The bottom won’t be reached until the three big gas projects finish construction and around 8,000 workers leave town. Only then will we see the how deep the Gladstone downturn can go.

The current situation is a vacancy rate of 6%, according to SQM Research. This is a lot better than the 10% vacancies at the start of the year and this, together with some mildly encouraging price statistics in a June Quarter report from the Real Estate Institute of Queensland, is seen by some as a sign that the market has turned the corner.

“Market stabilises in Gladstone,” said one newspaper headline, with market professionals quoted in the article claiming that Gladstone was “on track to bounce back amid growing confidence”.

Somewhat more realistic is the assessment from the Australian Manufacturing Workers Union, which has forecast a “jobs crisis” in Gladstone. It says there is already a “massive contraction in jobs in Gladstone industry” and it will get worse because of the “soon-to-happen mass exodus of 8,000 workers on the Curtis Island projects”.

The Curtis Island projects are the three processing plants which will convert coal seam gas to Liquefied natural gas. They represent investment totalling about $60 billion and are all well advanced in their construction phases.

You’d think the Gladstone property market would be pumping with all that economic stimulus, wouldn’t you? I had an email recently from someone who had bought there a couple of years ago and was “not happy” because the porperty had lost $50,000 off its market value. “What happened to Gladstone?” was the plaintive cry.

I’ll tell you what happened to Gladstone. Idiot developers happened to Gladstone. The visited a construction blitzkrieg on the central Queensland city, without too much regard to what their competition was doing.

They build far too much new dwelling stock, even for the current construction phase of the major projects, without considering what would happen to market demand when the construction ended and all those thousands of building workers left town in search of the next boom.

So those who own Gladstone investment properties, and are feeling uncomfortable right now, have more pain to come.

But you don’t buy real estate in resources towns unless you have the temperament and financial resources to ride the peaks and troughs. Gladstone has had previous booms, and those booms were followed by busts. Such is life in mining towns and regional centres reliant on the resources sector. If you’re not willing to tolerate that volatility, you shouldn’t buy in these places.

Even with the decline in values in resources locations in the past 12-18 months, the fact remains that the highest capital growth rates in Australia – by far – are in mining towns and resources regional centres. The capital growth rates (average annual rise in median house prices over the past 10 years) in places like Port Hedland and Newman in Western Australia have dropped markedly in the past couple of years - but they remain the highest capital growth rates in the nation.

If you buy in these places (and I personally would not) you have to be patience, resilient and able to accept the volatility of markets in high-risk locations.

Gladstone has a huge future. I see it as Australia’s leading industrial city. Those who own property there will get growth in coming years. But before we get to that point, there will be more pain.

So, no, now is not the time to buy there. The market will fall further. Nor is it a good time to buy in places like Port Hedland or Karratha, because those markets are declining also and have not yet touched bottom.

You can contact Terry via email or on Twitter. 

Picture courtesy of Wikimedia Commons.