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Australia's biggest housing investment myth

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Australian Broker | 03 Jul 2013, 07:00 AM Agree 0
On the surface, mining towns offer great returns on investment - but dig a little deeper and the picture becomes muddied
  • Rosemary | 03 Jul 2013, 10:04 AM Agree 0
    The issue in investing in mining towns is that when circumstances change such as they have in Moranbah, the investor's capital is at risk.

    Moranbah has gone from extremely low vacancy rates of about 0.1% to 3.45%, rental yields have dropped from around 14% to 6% and vendor discounting is also now at 16%. (RP Data April 2013).

    For inexperienced investors what is their strategy to get in, benefit and get out before there is no resales market? This is the space for property investment advice rather being caught out by the property spruikers.
  • Jess1 | 03 Jul 2013, 10:33 AM Agree 0
    The last I heard they were closing smelters in Mount Isa and because Glencore has merged with Xstrata they are trying to reduce the "excessive" workforce there. Not a good sign! Would never let any client buy there!
  • PeterT | 03 Jul 2013, 12:35 PM Agree 0
    As Rosemary points out, the Moranbah info in the article is almost 18 months old now, you'd be mad to buy there.
    There's certainly great reward in mining towns, but it comes at significant risk. The mining industry is currently transitioning from an investment to a production phase. All the mine contruction is reaching its end and for every 3 workers on a mine, 2 of them were building it. Shortly only the 1 guy will remain to actually pull the minerals from the ground. I'd say that if property investors are trying to get in on the mining boom, they're already too late.
  • Bob | 03 Jul 2013, 02:39 PM Agree 0
    The problem with property investment in mining towns such as Moranbah is the difficulty getting the exit timing right. I would argue that it is already too late - optimistic estimates suggest that mining investment is yet to peak but will happen soon. However whilst a number of committed projects will continue over the next few years the fall off may then be dramatic and the labour force required will more than halve.

    The problem for property investors is that the value of the property doesnt steadily increase until the mine is complete and then suddenly drop in value once demand drops - prices will slowly deflate as the projects come on line.

    The impressive yields and capital growth from towns such as moranbah were generated when nobody was considering an end to the boom - now that its in sight you would have a hard time getting a high price for a depreciating asset, especially while yields are under massive pressure and sentiment in the mining industry is so negative.
  • Powerbroker | 03 Jul 2013, 05:33 PM Agree 0
    What Moranbah info are you referring to? I can't work it out... but I think Moranbah is at closer to 5% vacancy rates than 3%. but yes, you'd have to be crazy to buy there. i speak to developers who say they are building unit complexs after unit complexs. they are building them and trying to get rid of them quick. if they are not planning on sticking around neither should anybody else
  • Rebecca | 03 Jul 2013, 11:54 PM Agree 0
    FYI - Broken Hill's population has never been 10,000. I believe this should have been worded that the population dropped by 10,000 not to 10,000.
    Thanks!
  • Rosemary | 04 Jul 2013, 08:54 AM Agree 0
    I think investors fail to understand that mining companies need to manage their costs and have no interest in property investors making money at their expense. When a mining area is in its early stages then they need investors to provide housing, however as the mining matures they have more options.

    In Moranbah companies recently changed their FIFO policies and increased the size of their 'man camp' to accommodate more of these workers. This has reduced the need for housing from investors. Changes in commodity prices and to the exchange rate have exacerbated the impact of these changes.

    Setting up your property investment strategy with an exit is vital. In this instance it would need to consider commodity prices, overseas contracts for product, the Australian dollar exchange rate and other complex economic factors. Not in the realm of qualifications for most investors!
    Getting out with profit still on the table for others is the objective and Bob has identified that this point has probably passed for Moranbah. A number of property 'experts' who have championed this location may well fade away too.
  • Blind Freddy | 09 Jul 2013, 11:10 AM Agree 0
    Mining is cyclical and commodity prices are currently low due to an oversupply of thermal coal, however that wont last and eventually demand will overtake supply. The announcements that the boom is over is just the current situation, there are still hundreds of coal projects that could and will go ahead when the economics improve. For property investors, the trick is in the timing and never to get overcommitted or to have a concentrated reliance, so that you can withstand a downturn in one market and wait for the upturn. Now is probably a good time to buy if you have a longer term view.
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