BHP’s temporary closing of a coal mine in Bowen Basin has served as a reminder that investing in mining towns can be risky.
A few months back, Dysart property data read like a dream. Just mentioning some of the stats for the area would be enough to reduce investors into bouts of slow, hard breathing, shaky legs and rapid blinking.
The Queensland coal mining town had high average annual growth and showed no signs of slowing down. The rental market was favourable – vacancies were low, yields were high – and there was a ready crowd of high-paid tenants waiting to find a place to live.
But more lately property investors in the area may be stumbling on to a cold reality – that, sometimes, even the best dreams can turn into nightmares.
With a recent announcement by BHP Billiton to reduce operations in Dysart, questions have been raised about whether property indicators might head into negative terrain as a result. Fifty per cent of the Dysart population are employed by the mines and 46% are renters. If they were to leave the area because employment opportunities became scarce, property prices would almost certainly crash.
As it stands, the announcement is that operations have been reduced on a temporary basis. It’s a scary prospect for investors with property there, regardless. As the coal sector struggles with new taxes, potential royalty rises and other cost pressures, the long-term future of the 1,400 coal workers that live in Dysart is still a hot topic of debate.
For commentators such as Forrester Cohen CEO John Moore, that debate is already over. Moore believes that resource towns have always been risky investments and that investors in Dysart should have seen it coming.
“From an investment perspective there is just not the diversification required to count on a sustainable investment in the area,” he says. “Mining towns can offer some spectacular results for seasoned property investors, [but] the risks are high.”
Moore points to how, a few years back, a North Queensland town served as a perfect model for how mining
towns fail. That town was Weipa, which had a rental market that relied heavily on the workers employed in aluminium mines nearby. When 700 contract staff were retrenched there because of a decline in the demand for aluminium, the entire property market went up in smoke.
The contract staff quickly moved out of town, resulting in widespread vacancies. Demand for aluminium eventually bounced back about eight months later, but by then it was too late. Most investors couldn’t afford such a long vacancy period and were forced to sell. Not only that, they had to sell at significantly reduced prices. They had bought in a boom period and sold midway through a crash.
Moore adds that there are plenty of other factors for the unwary to consider about mining towns. “The sustainability of investment in mining towns depends on how much commodity prices fluctuate, the employment policy of the mining companies in the area and the [mine’s] life.”
Other regions improving
Meanwhile, new figures from the Real Estate Institute of Queensland reveal that after trailing resource centres for some time, areas outside of mining towns have shown solid property performance recently.
Vacancy rates in Brisbane dropped from 2.5% to 2.2% over the first quarter of the year, while the average vacancy rate for inner Brisbane suburbs went from 2.3% to just 1.7%. The REIQ says that agencies in the state capital are reporting a limited supply of rental accommodation as owner-occupiers snap up investment properties.
“Until very recently, we had many potential first homebuyers and investors sitting on the sidelines while our market and economy recovered from natural disasters last year, which has put pressure on our rental market,” says REIQ chief executive Anton Kardash.
“However, this pent up demand is now starting to dissipate, with the latest ABS data showing increasing numbers of investors and first-time buyers coming back into the market… this more robust level of investor demand is good news for our rental market, given more investors means more investment stock for renters to choose from.”
With interest rates at their lowest for more than 50 years, there are some great rates available. The best thing to do is to compare rates from all the lenders. Let us help take the leg work out of doing this - Compare Home Loans now