Australia’s biggest investor myth

On the surface, mining towns offer a high return on investment, but dig a little deeper and the picture becomes muddied

Prospective Mount Isa investor Dale Collins was checking a well-defined crack in the walls of an old miner’s cottage when the real estate agent spoke of domination.

They were in the house’s kitchen, a closed off room with dusty brown walls and vinyl flooring, and Collins had just remarked that the setup reminded him of the inside of a 1970s caravan. The agent, draped in a black suit and tie in the outback heat, didn’t take kindly to the comment and decided he’d set Collins in his place.

“He told me it didn’t matter,” says Collins. “He said that the kitchen didn’t need to be pretty because the house would get high rents anyway. He said that once people came into Mount Isa they had to submit to their landlords. There was such a need for rental accommodation they’d rent anything and pay a high price for it.”

While the agent failed to persuade Collins, he touched on a growing theory among Australian investors. This line of thinking proposes that the best way to ensure a stream of high rental income and own a property that will quickly double in value is to invest in a mining town such as Mount Isa.

The theory isn’t backed up simply by hearsay. The facts speak for themselves. Of the 50 best performing markets across the country last year, 10 were in mining towns. Look further back and their case is even stronger. The fastest growing market in Australia over the last 10 years was a mining town – Wandoan in Queensland’s coal rich Darling Downs region – and most of the markets that follow close behind are also mining areas.

Then there are the now legendary towns. Coal community Moranbah has had roughly $650,000 added to its median house price since 2003, while Port Hedland, the gateway to the iron-rich Pilbara region in Western Australia, has done even better. Its median house price has increased by more than $1m. In fact, Port Hedland now has the distinction of having the highest median rent in the country, a cool $2,600 a week, according to RP Data.

Astonishing as these increases have been, mining towns have had no shortage of bad press. “I had heard that you could get some good returns in Mount Isa, but yes, you do get worried that you could be making a mistake by investing there,” says Collins. “One of the things I had to check when I was researching Mount Isa was that the place would do ok even if the resources market went a little crooked. That’s what you hear goes wrong in these places. They close a mine and all the people that would have been your tenants split town.”

The list of things that could seemingly go wrong with a mining town investment is long. Mines close, workers get retrenched, developers build too much rental accommodation – any and all of which could happen at one time.  

NSW’s Broken Hill is a perfect example of such fears coming to life. Over the first half of the 20^th century, the desert community was not just the third largest settlement in the state but one of Australia’s biggest cities. By the 1970s a lot of the mines that had nurtured the city’s growth began to close and this sent the local employment market into free fall. The population, which at that stage had been 30,000, quickly dwindled to 10,000. Property prices plummeted. What had once been a boisterous real estate market had a hole blown from under it and investors had no escape. In the forty years since, the population has slowly increased to about 17,000.

For some investors, like Dale Collins, such risks have proved too great. “I was interested in Mount Isa, but to be honest, with my budget I wouldn’t have got the right property for that kind of market. I thought I could sniff out a good deal on an older property and renovate it, but it’s hard and I’ve learnt that you can’t half-chance it. You have to spend a lot of money in a mining town.”

For other investors, like Your Investment Property Investor of the Year 2013 winners Kate and Matt Moloney, such risks are part and parcel of the mining town deal. The young couple continue to invest in big projects in Queensland’s Mackay region – particularly Moranbah – which they believe offers great opportunities.

“There is a severe shortage of all types of rental accommodation in Mackay, so it’s helped us to organise some great deals,” says Kate, who adds that thanks largely to mining town investments, she and Matt have built a portfolio of roughly $8m in just a few years.

Kate is quick to admit, however, that she and her husband plan to start diversifying away from mining towns. It’s a viewpoint that hardly reassures new investors. What else can they conclude when even the best investors have doubts about mining towns?

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.