16 Nov Downturn in the resources sector vs. property market – Michael Yardney
New figures illustrate just how hard some real estate markets have been hit by the downturn in the resources sector. In today’s show Michael Yardney, from Metropole Property Strategists, tells us where and by how much.
Kevin: New figures out illustrate just how hard some real estate markets have been hit by the downturn in the resources sector. The figures show that homes in Queensland and Western Australia have been impacted by massive decreases in price over recent years. Michael Yardney from Metropole Property Strategists joins us.
Michael: Hello, Kevin.
Kevin: Michael, what’s the bottom line here? What are you reading here?
Michael: Recent studies have shown that the boom period for Queensland’s mining town house prices is over, and as investment spending has reduced in these areas by the big mining towns, demand for property has contracted, there are lots of properties for sale, there are lots of properties for lease, huge volatility, rental demand has decreased, and values of properties have, in some areas, dropped by up to 70%. This is devastating. In fact, in my mind, it will bankrupt some property investors.
Kevin: Yes, that’s a terrible story. It’s continues on. You’ve been warning for some time about mining towns. Let’s look specifically at why, Michael.
Michael: In my mind, they comprise of transient populations that are almost solely reliant on a resources project. Employment happens for that reason and because that experiences large swings in demand, I like areas that are underpinned by lots of owner-occupiers wanting to live there.
But people weren’t moving there to live long-term, and most of the properties were driven by investors buying, chasing the next hot spot and it’s just a repeat of what we’ve seen when investors have chased hot spots before. They’ll make short-term profits, and those who get in early sometimes do well but the majority of people get burned, Kevin.
Kevin: Michael, how many times have we said, “If it looks too good, it probably is”? Maybe we should extend that by saying, “If it looks too good, it’s probably too good to last”?
Michael: That’s probably better. One of the really popular hot spots, Kevin, was Moranbah. Its median prices grew roughly 30% each year and that was for about ten years so people said, “Yes, it’s going to last forever.” But this stopped in about 2012 when prices peaked at about $750,000, and Kevin, rents in Moranbah grew to $1800 a week. That is too good to last, as you say.
All of a sudden, the mining companies said they’re not going to be able to pay those sort of rents, so they suddenly had these fly in, fly out workers or built temporary camps themselves and now the median price in Moranbah has gone from $750,000 to $215,000. Houses, if you try to get out and sell, would now maybe take eight months to sell, if you could – because there’s no one buying – and rents have fallen from $1800 to $300 a week.
Kevin, we are regularly seeing people who have invested in those areas who come and ask us for help – not that we gave them the initial advice to do it and invest there – but we can’t and it’s devastating because they have what is called a negative equity. They own less than they owe so if they had to pay their bank mortgages out, they’d have to fork out a couple of hundred thousand dollars, and this is causing hardship, sleepless nights and probably if the banks pulled the rug out from under them – and the banks don’t want to – it will cause bankruptcies.
Kevin: Michael, apart from not doing it, what are the real valuable lessons that come out of this?
Michael: What you said right at the beginning, Kevin, if it seems too good to be true, it is. I think you have to stop looking for the latest hot spot, the next boom area, but invest in our four big capital cities where there are multiple drivers to the economy, which leads to job growth in a range of industries and therefore wages growth.
I’d avoid investing in regional or mining towns because they lack the multiple growth drivers and they’re dominated by investors rather than owner-occupiers. It’s owner-occupiers who bring the stability to our property markets that stops the volatility that you get in share markets, Kevin.
Then, of course, I’d only invest in those regions within the capital cities that are going to be driven by higher wages growth, so it’s being very selective in this more mature stage of the property cycle, Kevin.
Kevin: Thanks, Michael. We’ll catch you again soon.
Michael: Thanks, Kevin.