Will Mining Boom Towns Continue To Thrive?
Mining booms towns have been a great way to piggyback off the strength of the mining industry and gain solid capital growth and great rental yields, but will these mining boom towns continue to thrive? Many investors don’t think so, and here’s why.
First, How Do Mining Boom Towns Come About?
Mining boom towns grow for one reason, an influx of workers living in the area who are working at the local mine.
Picture this, a small town in the middle of nowhere. House prices are extremely cheap because it is far away from civilisation and employment.
A new mine opens and automatically there is a massive influx of inhabitants who have found work at the local mine. The town is not used to having so many people in it so the demand for housing is much greater than the supply. Also, the people living in the town are earning GREAT money from the mines and can afford to pay higher rents.
Rents go up fast and so do the values of these properties. To the point where you have old fibro homes that would blow over in a big wind selling for upwards of $1,000,000.
The Major Strain
The problem is that we have these mining boom towns that have properties worth massive amounts of money, that don’t hold much intrinsic value. Rents also go so high (often upwards of $2,000/week) that people can’t afford to pay rent.
But more importantly, miners and mining companies are paying MASSIVE amounts of dollars in rental accommodation. This leads them to look for cost savings techniques, because a dollar saved is a dollar earned.
2 Major Changes That Threaten To Destroy The Profits In Mining Boom Towns
There is the obvious major risk of a mine closing down, everyone leaving town and then all of a sudden property prices crash and houses are worth next to nothing. But there are two major changes on the horizon that are threatening to flatten house prices even if the mines stay open and stay profitable.
1. Councils Flooding The Market With New Land Releases
Local councils are looking to flood the market with new land releases to drop the strain that is occurring on local residents. More houses means more supply, and as supply outstrips demand then the renter becomes the one with the power, and prices naturally go down.
If there are two houses for rent and only one person looking to rent then those home owners will compete on price to get the tenant (otherwise they won’t get any tenant at all).
2. Mining Companies Looking To Provide Their Own Accommodation
This has already happened in Gladstone (where prices haven’t yet gone astronomical). Mining companies are building their own miner cottages where their miners stay. They then get to avoid paying $2,000/week in accommodation for their fly-in-fly-out miners. That’s about $50,000/year per miner, multiply that by 1,000 miners and you can see the cost savings that the mining companies can achieve.
If all mining companies start to do this then demand for regular rental accommodation will go down. Thus rents will become lower and so will house prices. Again, lower demand and increased supply almost always leads to price cuts.
What Should You Do About The Potential Mining Town Bust?
Firstly – Be very careful when investing in a mining area. Even if the cash flow is good and you pay down the debt on your property, what is to say that the property won’t be worth a fraction of its former self once you have paid it off? Be careful of the ‘get rich quick’ mentality that so many people have. ‘Get rich quick’ also comes with a strong side serving of a potential ‘lose all your money’.
Secondly – It might be a good idea to look for towns with a mining influence, rather than towns that only exist because of the mine. The town have a diversity of employment and industry that draws people to the area regardless of the mines. Newcastle is a prime example of this, when BHP closed in the past Newcastle had enough diversity of employment to strive on with little impact on the area.
There is no guarantee that these two changes will happen in all mining town, nor that housing prices will fall in the near future. The problem is that once it happens it will be too late. Prices won’t just fall, they will likely fall fast. Leaving you with a property that rents for a fraction of the yield you used to get.