Australia's biggest housing investment myth

by Aidan Devine03 Jul 2013
Property in mining towns

Mining towns are not so risky if you know how to play the game, says Next Hot Spot director Andrew Peterson, but he adds this is part of the problem.

“When we’re talking towns that don’t have anything going for them besides mining activity, they are usually markets that you need to get into while they are going good and then get out of quickly, before they start to decline. Considering how long it takes to find a property, settle on it, develop it – if that’s what you’re planning – and then tenant it, not to mention one day sell it, that’s really hard to do,” he says.

Peterson believes understanding the reality of mining towns is to understand the reality of property investing itself. “There’s a clear difference between investing and speculating,” he says. “A speculator is looking for money to make now. Speculators take risks. Investors are in it for the long haul. If you think about it that way, there really is no way to ‘invest’ in a mining town. You can make money if you’re a professional developer, but, if you’re just a mum and dad investor looking for something to support your retirement, a mining town probably won’t work.”

Another problem with mining towns, according to Peterson, is they are usually far from ideal places to live. People are reluctant to settle in them permanently and the local property market suffers as a result.

“Most property markets in mining towns never fully mature. There might be high salaries in the area and that might grab a lot of investors’ attention, but there’s more to the picture,” claims Peterson.

“Most mining workers are very reluctant to spend their money in the mining town they work in. They’d much rather sit on their money and spend it somewhere else. That actually means that it is not the mining towns that benefit, it’s the areas like Perth or Gladstone where the workers fly back to.”

Peterson believes it’s worth making a distinction between ‘source’ areas and ‘catchment’ areas. The source areas are right next to the mines – the one trick pony towns that only exist because of mining. The catchment areas are the places that already have good infrastructure and offer a good lifestyle component, but have the added benefit of receiving a boost from the resources sector in some way – either being close to a major mining area or being a transport hub for one.

The catchment areas are the places that cashed-up mining workers will want to live in permanently, according to Peterson. They are unlikely to have the same incredible rate of rental and capital growth over the short term, but looking ahead to the next 20 years, they will be the areas that end up with the strongest property markets.

Global resource markets

If Peterson is right and it’s the catchment areas that will benefit the most from the resources boom over the long term – Perth, Toowoomba, Gladstone, Rockhampton, Brisbane – the next, and obvious, question is whether the resources boom is something sane investors would want to hedge their bets on in the first place.

According to leading economist, Shane Oliver from APM, there is still no definitive answer. Owing to the unpredictable nature of the international market and its effect on the demand for resources, Oliver says that there will always be an element of uncertainty in the resources market. However, he sees the key being Asia.

“A truly nightmare scenario you tend to see on blogs written in the US and Europe is that China would stop growing. I don’t see that happening and expect China to continue to see good economic growth, so I think the real worst case scenario would come about if there was no pick up in global growth this year. In reality, I think a lot of the worries about Europe will probably start to recede and I see growth in the US economy picking up a notch. Amongst this, China growth will probably stablise at around 7% this year.”

China’s influence on Australia may seem obvious, but Oliver says the Asian giant’s importance cannot be underestimated. “China is our biggest export market. It accounts for 5% of our exports, and that’s up from about 1% a few years ago,” he says.

The soon to arrive ‘mining peak’

While it is difficult to predict when the resources boom might start to falter, a far easier event to forecast is when Australia’s mining project pipeline will peak. According to the QBE LMI Housing Outlook 2012-2015 report, this is likely to occur by late 2014. In between then, the report forecasts mining-related investment to continue to grow, despite some recent falls in commodity prices.

In fact, the report says that commodity prices should have little impact on mining activity over the next two years. This is largely due to many projects being past the stage to “turn back” – mining companies have pumped so much of their capital into these projects that cancelling or scaling back production in the short-term would be near impossible.

A report by Deloitte Access Economics is not as optimistic. Their January Business Outlook report forecasts late 2013 as being the peak point for mega-mining construction projects, but the report also warns that a little perspective is required. Resource related construction will start to wane, it says, but will still remain huge relative to times past.

BIS Shrapnel senior residential manager Angie Zigomanis agrees. “From a domestic perspective, there is still a lot of mining investment activity in the pipeline. If you’re a mining company and you spend $4bn of a $10bn project, you’re going to finish it. The next couple of years of spending are pretty much locked in,” he says.

Zigomanis says that a lot of the projects currently underway are two, three and four year projects and while they are still being built Australia’s resource-affected states – Queensland, WA and Northern Territory – will benefit strongly.

“The question mark is beyond that period,” he adds. “If there is a slowdown or a fall-off from reducing mining investment, there might also be other parts of the economy picking up some of that fall-off so the property market might only start to be affected by 2015 or after.”

Looking at a more regional level, the January Business Outlook report notes that as resource-related building work peaks and passes, the economies of resource-rich Queensland, WA and Northern Territory will still be well supported by the mining sector. “Despite cost cutting from miners, these states still look set for a solid short term growth outlook,” it says, adding that a lot will depend on the strength of the Australian dollar.


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  • by Rosemary 3/07/2013 10:04:43 AM

    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.

  • by Jess1 3/07/2013 10:33:58 AM

    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!

  • by PeterT 3/07/2013 12:35:31 PM

    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.