Some investors are attracted to the cheap house prices and very high rental yields in resources sector towns but recent events in two of the nation’s iconic locations demonstrate why this can be a strategy fraught with peril.

 

Hotspotting methodology dictates that a diverse economy is a core factor in any location we are willing to recommend – which means locations dominated by one industry sector seldom make it to our hotspots reports.

 

A country town solely reliant on agriculture, a coastal enclave where everything depends on tourism and mining towns are all places we shy away from, because their reliance on a single industry sector makes them vulnerable, volatile and high-risk.

 

This is particularly so with mining towns. Many investors have lost big money buying into booming mining towns, only to see property values collapse when the boom bubble bursts.

 

Moranbah in Queensland had a median house price of $750,000 at the height of its boom more than a decade ago, but later the median fell below $200,000 when circumstances changed. Prices later recovered a little but today the median house price remans less than half of those peak levels.

 

Houses in Port Hedland in WA typically cost over $1 million during the resources investment boom but dropped to well under half that level when the boom ended. More recently they have partly recovered but the median house price today is around $700,000 – about half a million dollars below that boom-time peak.

 

Those kinds of risks remain today, as demonstrated by recent events in South Australia and Queensland. 

 

Whyalla in SA has a boom-bust history with its property market because its fortunes rise and fall with the resources sector. Today you can buy houses in Whyalla in the $200,000s and $300,000s and get 6% or 7% rental yields.

 

But the recent highly-publicised problems of the UK billionaire who owns the town’s biggest employer, the steel mill, illustrates how vulnerable Whyalla is. State and federal government intervention has been necessary to try to rescue the situation, at a cost of hundreds of millions of dollars to the public purse.

 

In far western Queensland, the iconic outback mining town of Mount Isa provides another example of the risks. A major mining operation which employs thousands of people is closing down soon, leaving Mount Isa in a difficult position. Local political and community leaders are campaigning hard to revive the town’s prospects, but the future may be grim.

 

A look at the price graphs for Mount Isa locations – which resemble a mountain range rather than a smooth upward curve – demonstrates how volatile this market can be.

 

You can buy houses in the $200,000s and get rental yields around 8% or 9%, but capital growth prospects look rather shaky at this point.