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Beware of the boomtown blues

On the back of every resources boom, there’s invariably a mini property boom in mining towns as speculators (I don’t consider them investors as they’re out to make a quick buck) try to cash in on the influx of industry personnel seeking rental accommodation for the term of their contract.

But are these apparent investment “hotspots” all they’re cracked up to be?

Remote mining communities are part of a collective geographical classification known as “muscle towns”; generally remote locations recognised for their reliance on one industry, very little in the way of attractions and a notorious lack of public buildings and private accommodation.

Speaking with The Australian, demographer Bernard Salt lists some of the most prominent present day muscle towns as Gladstone, Mackay and Townsville in Queensland, South Australia’s Whyalla and Karratha and Port Headland to the west.

Because these regions go through periods of high demand from a tenant pool fed by local mining operators, the resulting housing shortage sees values and rents suddenly soar to nonsensical highs and almost overnight property can become incredibly expensive.

And the more remote the region, the more expensive it is to buy or rent, as illustrated by the insanely over inflated property markets of Karratha and Port Headland in the Pilbara.

Principal of Ray White in Karratha, Richard Naulls reports, “In 2005, a basic four-bedroom, two-bathroom house in Karratha cost $500,000. That jumped $300,000 in one year, and would now be valued at $1.1 million. It would rent for $2100 a week, and a nice modern version for $2500.”

The amount of speculators keen to get a slice of the action in these one industry wonder towns becomes apparent when Naulls reveals that at least 70 per cent of purchasers in Karratha are investors, most likely enticed into such a high risk area by the promise of a minimum 10 per cent yield.

In Port Hedland, First National principal Morag Lowe says median rents are $1900 a week, with prestige homes fetching up to $3000 and investment properties delivering a yield of 10 per cent plus, which she expects will rise even further in the next few years.

“Investors are always interested. They account for at least 65 per cent of all sales,” she says.

According to RP Data figures, median house prices in the Roebourne district, which includes Dampier (the port) and Karratha, are a staggering $960,000 and median rents are $1500 per week. In Port Hedland, it’s $747,500 to buy and $1775 to rent with an average yield of 12.3 per cent.

So why do these towns, situated in the middle of nowhere with very little in the way of amenities, command such hefty price tags?

Essentially, it all comes down to supply and demand. Residential real estate is scarce in these areas and building new homes is virtually impossible due to a lack of essential services such as water, power and sewage.

“We’re constantly in catch-up from the last boom,” Lowe says. “We have plenty of land, but we need to put in the services – water, power, sewage – before we can build houses and there’s a critical skills shortage. Tradesmen get paid more to work in the mines and, even if we got them to build these houses, where would they live while they were building them?”

But the very thing that makes these towns so tempting for those looking to make a quick buck, is the thing that makes them high risk investment prospects.

All it takes is the for local resources to dry up, leading the mining operator to pack up and move on to the next big thing and the entire town’s economic backbone collapses. And let’s face it, who wants to buy or rent a property in what will surely become a veritable ghost town?

As such, although these smaller, remote towns may offer extraordinary growth, analysts warn it takes only one mine closure or change of plan to destroy values. While all of these exorbitant figures might be too much of a temptation for some investors to ignore, it pays to remember that with any investment the rule remains the same; the bigger the potential return, the greater the associated risk.

Sure the mining sector is strong at present and from all reports, is set to continue booming for some years to come, but that doesn’t mean properties in mining towns make good investments.

You see, most of the buyers in these towns are investors and I’d rather invest in a market underpinned by strong demand from a wide demographic of owner-occupiers and supported by a range of industries than a speculatively led investor market.

Just look what happened to property values in our mining towns during the aftermath the global financial crisis. Investors fled these more unpredictable property markets and prices crashed. In fact in many cases there there were no buyers for their properties. Some are still trying to sell their properties today!

If a local real estate market is predominantly driven by speculative investors who jump in feet first during a boom when prices are soaring, but just as quickly move on when the dust settles and sentiment changes, you’re in for a volatile ride.

Basically, when things are good they’re very, very good, but when they are bad, they’re rotten.

Without strong owner-occupier demand underpinning house prices and creating a pattern of steady, long-term capital growth, there really is limited true potential for a sound, secure long term investment.

And let’s face it, owner-occupiers are not scrambling to snap up a home in Australia’s remote outback where the majority of mining operations are located.

Just look back a few years ago when the resources boom hit WA, and thousands of investors jumped on the bandwagon and bought into those mining towns that sprung up literally overnight. Of course, when the resources sector cooled off, many of these towns went from boom to bust as the main industry supporting the local economy slowed down.

Today many investors are still having issues trying to offload their underperforming properties in these towns.

For my money, real estate should be about long term growth and secure returns and these are easy to find in and around Australia’s major capital cities – where our diverse economies have been evolving for hundreds of years. These areas are true property investment goldmines!

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About

George is a Director of Metropole Property Strategists in Sydney. He shares his 27 years of experience in the property industry as a licensed estate agent and active property investor to help create wealth for his clients.
Visit www.SydneyBuyersAgent.com.au


'Beware of the boomtown blues' have 17 comments

  1. Avatar for Property Update

    April 12, 2012 @ 11:48 pm Riezel

    Well said, George. Such boomtowns are the goldmines for getting rich quick!

    Reply

  2. Avatar for Property Update

    April 13, 2012 @ 9:46 am Greg

    We have invested in Port Hedland and South Hedland since 2008. I mean “invested”, not “speculated”. My view is that anyone putting their money anywhere but the right mining towns is wasting their time. Buying in the Hedland area virtually immediately put us years ahead compared to where we would have got by buying in Sydney, where we live.
    Never ever have we had a property vacant for longer than 1 week. Right now, we have people bidding $100 to $200 more than the rent we advertise.
    With 8 properties in Hedland, we no longer have to work. We bought the first property there in 2008, in 2010 both of us stopped working at 30 and 28 respectively.
    To me this is living the dream, there is no better place to invest than a properly selected mining town. Port Hedland does not rely on one mine – there are dozens of mines in operation, with many more under construction now, there is salt, and other industry. A $12bn port expansion is just getting underway. Do not be misinformed by those who are steering towards buying in “safe” areas. If you want to retire in 20 years, you might as well not invest at all. If you want financial freedom in 1-2 years, consider mining towns.

    Reply

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      January 31, 2013 @ 1:53 pm Clifford

      Hi Greg
      We purchased our first investment property in Port Hedland 2006
      Bought our second on a year later in South Hedland
      Sold one just short of 4 years later for a hefty profit, would have had to wait 20 + years to achieve same elsewhere.
      Used an offset account with profits to reduce repayments on our second property
      We currently recieve $2050 per week for our South Hedland property and the money keeps rolling in.
      Neither property has ever been unoccupied
      Poor old George the investment guru has missed the point entirely, but then again he may well be pushing his own agenda.
      We are now semi retired thanks to our Hedland investment choices, 6 Months on 6 Months off and plan to sell our last property in 12 Months before ritiring self funded.
      Guess where we spend our time off? Love the Pilbara
      It is a caculated risk as with any investment, do the home work and minimise that risk
      Best investment we have ever made.
      Good luck
      “Cheers to those who have a go”

      Reply

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      September 5, 2015 @ 10:46 pm Mark V

      Hi Greg, after growing up in Hedland i watching the house prices go up & up, I then took the jump & brought my first house in south Hedland in 2011 & was getting a good return so digged deep into my pockets & bought another in 2012 , after sending a lot of money doing them up to make them stand out, I borrowed against them to buy my dream home in cook point Port Hedland at top dollar which I put a lot of money into as well but now with the down turn I am shitting my self as my 3x houses have all drop $200,000.00 each. Lucky for me I put the good money I was making back into the houses as they are all still rented now but at a much lower rate as I am going backwards can you or anybody tell me how long it will be until this town picks up again.
      Thanks Mark that’s going grey

      Reply

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      October 3, 2016 @ 1:00 pm Hindsight

      Would love to know how Greg is doing now with Port Hedland house prices falling from $1million to $200k.

      Reply

  3. Avatar for Property Update

    April 13, 2012 @ 11:32 am eric

    on ya greg

    Reply

  4. Avatar for Property Update

    April 13, 2012 @ 12:18 pm George

    We have done careful research and have invested in a few properties in northern Queensland 6 years ago. Today, I have a choice to retire if I want to with the cashflow I’m getting from those investments.

    Reply

  5. Avatar for Property Update

    April 13, 2012 @ 3:19 pm Megan R

    Thanks George.
    I see some disagree with you, but a few of my friends bought in mining towns and m=seemed to make a profit, but they’ve been trying to sell their properties and noone is buying. Can’t move them in over a year.
    teh local agents say invetsors aren’t buying there any more and no owner occupiers are buying.
    I;ll stick to the big smoke

    Reply

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      April 13, 2012 @ 3:26 pm Michael Yardney

      Megan I agree.
      Sure some better performing mining towns have outperformed some under performing city suburbs, but in general there is so much more demand in the capital cities, from owner occupiers who psh up prices.
      On the other hand many mining towns are driven by speculation and are very dependent on 1 or 2 industries

      Reply

  6. Avatar for Property Update

    April 14, 2012 @ 5:37 pm Robin Abraham

    Your article mentions Townsville, Gladstone and Mackay as muscle towns and lumps them in with remote locations like Karratha and Port Headland. I believe the real estate experts have totally underestimated these Qld cities and should maybe pay a visit to see what is really happening, before talking boom and bust, doom and gloom. All three cities have a lot going for them and they are not reliant on one industry alone to keep them alive and thriving. For example, Gladstone has existing 2 x Alumina Plants, an Aluminum Smelter, Power Station and Coal Export Facilities providing thousands of full time jobs, before you take into account the billions of dollars of investment in further coal export facilities, 3 x major gas plants and many other slated projects. The Gladstone population is expected to double in size by 2020 and whilst there are a lot of investors looking at Gladstone there is also a very strong local market for real estate and this should continue for many years before there is sufficient housing to accommodate the expected increase in owner/occupier demand for housing. If I have a choice to invest in Brisbane or Gladstone, it will be Gladstone hands down every time.

    Reply

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      April 14, 2012 @ 6:21 pm Michael Yardney

      Robin
      Thanks for your comment.
      Unfortunately I disagree.
      If I was to invest in a mining town, I’d invest in a BIG mining town. Brisbane or Perth – maybe not as speculative, definitely more stable and secure

      Reply

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        February 16, 2016 @ 6:03 am Wendyn

        Great foresight Michael. Would appreciate any current views you have on the markets you mentioned in the above article. I’m a countercyclical buyer and are considering some quality, bank repo properties in these locations

        Reply

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          February 16, 2016 @ 6:55 am Michael Yardney

          Wendyn – steer clear of this latest new fad. In my mind a recipe for disaster.
          How has countercyclical investing worked for you up to now?

          Reply

  7. Avatar for Property Update

    April 14, 2012 @ 6:06 pm Jawed

    As in all investments there should be a diversed portfolio. Both positive geared properties like in mining towns and negative geared in capital cities are all important for a balanced and healthy cashflow and capital growth.

    George’s message appears to discourage investors to consider mining towns. Despite this, he admitted he has a few properties in regional areas in N. Qld and is quite happy with returns on these properties.

    Let’s face it, every investor has his/her appetite for risks and over time they change because of circumstances and experiences. As such, one should not rule them out entirely.

    Reply

  8. Avatar for Property Update

    April 14, 2012 @ 6:22 pm Jawed

    As in all investments, one should strife for a diversed portfolio. Both positive geared, like in mining town, and negative geared (growth) properties (capital cities) are important for a balanced and healthy cash flow and capital growth.

    Geroge’s message apppears to discourage investors from considering these properties. Despite this, he admits that he has a few regional properties in N Qld which he is quite happy with their return!

    Every investor has his/her appetite for risks and over time they may change, as such, one should not disgard these properties as part of their investments.

    Reply

  9. Avatar for Property Update

    May 14, 2013 @ 10:32 am MarkJ

    Anyone got any idea where Port Headland is going now?

    Construction has slowed with nothing new on the horizon and rents are dropping

    Reply

  10. Avatar for Property Update

    June 14, 2013 @ 6:28 am mel

    anyone who invested pre 2005 will do alright anyone after sit back and watch the fall George is a 100 percent correct the market is getting flooded with rentals and getting cheaper but remain positive as you wont have to worry about capital gains tax I wish I sold my remaining 3 properties last year when I could of but now I understand the word greed

    Reply


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