If you have been keeping an eye on vacancy rates in mining towns across Australia over the past 18 months, you would have probably seen some crazy numbers.
While each town’s rental market has unique dynamics, causing different results, the general trend has been a significant increase in the number of properties available for rent.
Many of the larger towns in Queensland and Western Australia’s Pilbara region have recorded large increases, with Port Hedland’s vacancy rate now sitting at around 8%.
In smaller towns, which often rely heavily on one mining operation, vacancy rates have even climbed as high as 18%.
With more competition for tenants, rental prices have inevitably dropped, sometimes up to 20%. Places like Gladstone and Mackay have seen average weekly rents drop by more than $100 in 12 months.
So, what has happened?
In some areas, demand for accommodation has simply dropped as mining projects transition from a labour-intensive construction phase to an operational phase.
Over-inflated prices have also driven many potential tenants further out of town or to neighbouring towns. These workers prefer to commute some distance rather than pay exorbitant rents.
In some areas, the weak rental market is a result of an over-supply of property. During the last boom, developers responded to the strong demand by building more and more homes, which were sold to eager investors looking to cash in. This has dramatically increased the supply of rental properties.[sam id=41 codes=’true’]
Unfortunately, some areas have experienced both a drop in demand and an increase in supply.
Although it’s true that mining towns can deliver strong rental yields and capital growth, there are considerable risks. Market dynamics can quickly shift (for a variety of reasons) and leave unsuspecting investors in a cycle of falling rents and falling property values.
Proof of the high risks associated with mining towns is the fact that most of our largest lending institutions now carefully limit their exposure to these areas.
Some have introduced a maximum rental yield of 8% when assessing applications for investment properties, believing that anything higher is unsustainable. Other won’t lend more than 80% of the property’s value.
While some mining towns will certainly bounce back in coming years, recent events will hopefully serve as a lesson to investors trying to strike it rich.