Australian mining town house prices affected by coal industry

It's not just underground resources that drive prospectors to mining towns. Mines need workers, and workers need housing - so the mother lode for property investors in Australia's resource-rich mining states such as Western Australia and Queensland is staggeringly high rental yields, and low or even zero vacancy rates. Which is all very well while the sector booms, which it seemingly did for a long time, in one part of the country at least.

But as fortunes are made in mining towns, they can just as easily be lost. It's Queensland's turn, as plummeting prices of the state's prime export, coal, cause mining companies to rationalise their businesses, and lay off staff en masse. For places such as Moranbah, a remote central Queensland town built on coal in the early 1970s, when there's no work, townsfolk leave.

Agents speak of home prices crashing to a third of their peak just a few years ago - of rentals plummeting, and hundreds of homes lying empty. At the height of the mining boom, Moranbah real estate agents did not have a rental property to spare. Now, there are an estimated 300 vacant properties for a town which during the best of times had a population of less than 9,000.

The spin-off extends 200km north, where the regional city of Mackay has the highest rental vacancy in the state, at 8.4 per cent, according to Real Estate Institute of Queensland (REIQ) data. Farther afield, property markets in Gladstone, Rockhampton and Townsville have been similarly affected.

REIQ Mackay zone chairman Peter McFarlane says the downturn in coal prices has also come at a time when the industry is transitioning from a construction to production phase, which runs on a leaner workforce. "Initially, [mining companies] retrenched a lot of construction workers, and when coal prices dropped dramatically, some of the older, outdated mines, which were no longer cost-effective, were mothballed," he says. "When coal prices rise again, those mines, which cost billions of dollars to build, can reopen at short notice."

The controversial move by some mining companies to adopt a totally fly-in, fly-out (FIFO) workforce put further pressure on jobs locally.

As a major service centre for the mine industry, Mackay was ultimately affected. "People are leaving Mackay," McFarlane says. "We've gone from no [rental] vacancies, and 10 people standing in line, to 10 properties for one tenant."

Agents who collectively sold around 600 houses per quarter in 2011 are now lucky to manage 200. Compounding the situation is an oversupply of houses, built to accommodate the boom years.

In Western Australia, house prices and rentals in Karratha in the iron ore, gas, nickel and salt-rich Pilbara have dropped by 40 per cent in the past 30 months. Contrary to popular belief, says Richard Naulls, Real Institute of Western Australia (REIWA) Karratha-Pilbara chairman, this is not a result of falling resources prices, but because, as in Queensland, mines have moved from the construction to production phase.

"[The price drop] was always going to happen," he says. "Statistics show that the Karratha property market has two or three good years, then stabilises. This time, we're coming off five to six good years." His "gut feeling", supported by REIWA's September data, is that the market has already bottomed, and may stay there for the next 12 to 18 months, when the next wave of construction kicks off.

The gold and nickel mining areas of Western Australia have fared slightly better: Brett Thorp, REIWA chairman of Goldfields and Esperance (incorporating Kalgoorlie), estimates that prices on his patch have dropped by 32 per cent over the past 18 months.

The coastal city of Esperance has a major port and a big agriculture industry, so, while not totally reliant on the mining sector, "we do feel it", Thorp says. "Being on the coast, Esperance is an area goldfields people like to invest in, so we've seen a drop in that activity. For pure gold-mining towns like Kalgoorlie, though, owners have no choice but to wait it out."

Mining town markets are cyclical in nature, but they always rebound - "it's just a timing thing", Thorp says. "If people invest in the goldfields they can make good money, but they need to be in a position to ride out the quieter times."

McFarlane agrees. Mackay's economy is diversified, he points out, its pillars including sugar, tourism, commerce, and a large export port. New mines are planned, and McFarlane expects demand from India and Japan for the high-quality coal Australia produces will stabilise the industry - and, therefore, the property market.

Tim Lawless, RP Data's head of research, agrees that service centres with diversified economies lessen the risk for investors seeking the higher-yield profiles available in mining regions. "Most mining areas have historically shown substantially higher rental yields than in non-mining areas. Even with the soft conditions that most mining areas are seeing, gross rental yields typically remain above the 7 per cent mark," he says.

On this month's Property Observer website, analyst Terry Ryder, who founded hotspotting.com.au, notes that while long-term price growth "can be impressive" for mining sector properties, "there will be stressful periods along the way".

Investors who panic and sell now will lose money, he says. Those who hang in there "are likely to benefit from future growth". For according to hotspotting's research: "The locations with the highest growth rates - average annual rise in prices over the past decade - were all mining towns or regional centres impacted by the resources sector, even with the sharp decline in fortunes in the past year or two."

For would-be investors, Lawless points out that the price correction has made properties in these regions more affordable. "For those investors that aren't averse to risk, they have a lot of stock to choose from, and they hold the upper hand when it comes to negotiating."

A decision to buy into a mining region comes back to the buyers' confidence in the commodity sector that is relevant to the region they are investing in, he says. "Other factors to consider are the growing trend towards FIFO workers where housing demand is more often absorbed by dedicated workers' camps."

Buying Guide

What you can buy for less than A$200,000
A renovated, three-bedroom low-set home in Moranbah, air conditioned, with a refitted kitchen and bathroom.

What you can buy for about A$1 million
A three-bedroom home on the Mackay beachfront, complete with private boat ramp, visitor accommodation and spectacular Coral Sea views.