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this ignores the other side of the coin, which is the supply of
rental properties created by two other players in such markets –
investors and developers.
¿ THE INVESTOR EFFECT
Not only do most households in mining towns rent, they tend to
move fairly often which can generate high rents and yields as
landlords reset the rent to higher levels with every new tenant.
Investors chasing such positive cash flow markets can easily find
them by looking up the current rental yield in a suburb or town.
As investors compete with each other to buy properties, prices
may start to rise but every investor purchase also becomes a
rental property and so the supply of rentals also starts to grow.
As long as the demand for rental properties exceeds the supply
of rental vacancies, rents will keep rising and the pattern keeps
repeating. If, however, the supply of vacant rental properties in
a mining or dormitory town starts to overtake the demand for
rentals, rental vacancy rates rise and investors must compete
with each other for tenants by lowering their asking rents.
Figure 2 shows how the decline in rental demand in some
mining towns has increased the percentage of vacant rental
properties to levels which are disastrous to those investors relying
on rent to make their loan repayments. Figure 2 also shows
that there are large numbers of currently vacant rental properties
in towns such as Roxby Downs in South Australia, and Dysart,
Emerald, Moranbah and Clermont in Queensland compared to the
number of investor properties. This is putting downward pressure
on both prices and rents as investors try to bail out because they
can’t obtain tenants. The graph shows that towns located in the
same mining areas such as Emerald and Blackwater or Moranbah
and Wandoan (all in Queensland) exhibit large differences in their
rental vacancies as a percentage
of total investment
properties, while in other mining towns such as Karratha
(Western Australia), Wandoan and Mount Isa (Queensland),
rental vacancies compared to total investment properties are
actually very low. This indicates the importance of avoiding over
generalisations about mining towns, because these last locations
provide excellent positive cash flow investment opportunities
with price growth potential due to a shortage of rental properties.
The key to growth here is continued and increased mining
activity to maintain strong rental demand with a ceiling on rental
supply. Rental property supply, however, can also be created by
other players in these markets – developers.
¿ THE DEVELOPER EFFECT
The reason some mining town housing markets deteriorate so
quickly isn’t entirely due to declining rent demand or the entry
of more investors – it can also be the result of overdevelopment
generating a surplus of rental stock. The greatest housing
shortages occur when the demand for employee housing grows
during mine development and expansion stages. Much of
this demand is temporary and when the mine moves into its
production phase housing rental demand reduces.
Without the benefit of any reliable predictive demand data for
housing, developers tend to rely on past performance to select the
best areas for new housing and use recent price and rent growth
to promote their developments to investors. Because it takes
housing developers years to work their way through the various
development stages such as project assessments, budgets,
finance approvals, development applications, environment
impact statements, tenders and contracts, rental demand in a
mining town or dormitory town may be falling just as a supply of
new housing comes on the market. Because most of these new
developments are marketed to investors, the supply of rental stock
rises. Figure 3 illustrates this sequence of events and shows that
even though development may match previous unmet demand,
a surplus results if rental demand falls. Such a result can be
disastrous, not just for buyers of new properties, but for all housing
investors in the mining town.
There’s nothing inherently wrong with housing development
in mining town markets. The problem arises with the risk of
overdevelopment, especially in outlying, remote ‘captive’ rental
markets where investors already own most of the properties and
rental demand is stagnant or declining.
FIG 1: MOST MINING TOWN RESIDENTS RENT
FIG 2: RENTAL VACANCIES AS A PERCENTAGE OF INVESTMENT PROPERTIES
FIG 3: THE OVERDEVELOPMENT CRISIS
2006 2007 2008 2009 2010 2011 2012 2013 2014
Rental demand Rental supply Over or undersupply
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