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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 under performing 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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Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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