30 June 2013 What happens to property markets when commodity prices lose their glow?

If you’ve been strategic and capitalised on the booming mining industry and the myriad of opportunities coming from the Asian Century, you might have bought an investment property in a town or mining-related region over the past few years.

If you have been reading the news lately, you might now be getting jittery and questioning the cleverness of that move. The media is reporting declining commodity prices and job losses.

The prices of coal and iron ore (Australia’s two biggest export commodities) are down on their highs of late 2012 and there have indeed been layoffs. But is this cause for panic over the value of your investment property? Or is the better strategy a little education and a lot of savvy staying power?

The first part of the answer lies in whether or not your property is in a town that has more going for it than a couple of mines.

Clever investors look for locations with a solid economy and strong employment opportunities stemming from diverse industries and growth drivers.

Towns whose fortunes rise and fall solely on the back of a few mining businesses can quickly become ghost towns if opportunities stall or projects fail.Because, regardless of what else mining means to Australia’s economy, it is a boom or bust proposition and falling prices might mean it’s time for you to pull up stumps.

If the economy of the market in which your property is located has more strings to its bow than a few mines, I’d say a little education and some savvy staying power would be a wise choice.

Let’s start with education. We all know coal is big business. Despite pushes towards renewable energy, coal remains the world’s main fuel source. Coal is the world’s largest source of electricity (43 per cent).

Australia is the world’s fourth largest coal exporter (behind China, USA and India). Domestically we use coal to generate about three-quarters of Australia’s electricity.

Iron ore (used to make steel) is actually even bigger business than coal: it’s Australia’s biggest export commodity and we have the world’s second largest iron ore deposits. The greater majority of these are in Western Australia.

Both coal and iron ore are commodities, which means they’re useful, valuable and can be bought and sold. Just like money or gold, say. But commodities are, by nature, volatile and their price fluctuates for a wide range of reasons.

What we’re seeing now with coal and iron ore are some lower price points than we had six to nine months ago although still sitting above average for the past decade.

The price of iron ore has dropped from its late-2012 high, but even at today’s prices, it’s considerably higher than it was in about October last year.

That said, declining coal and iron ore prices plus a high Aussie dollar, rising wage costs, and the costs to miners of government red tape can put a brake on both mining operations and mining construction which can inevitably lead to job losses.

These cuts to workforces can then have a flow-on effect to rental returns because fewer miners and tradies need fewer houses to accommodate them. But economies are cyclical, good times follow bad times and circumstances change.

Job losses in the mining sector often create paranoia among some property investors, but it’s important to remember that job losses aren’t restricted to the mining industry. There are always market conditions at play in any industry.

State and federal governments have shed thousands of public sector jobs in capital cities throughout the country over the past few years, and major companies like Ford, Holden and Boeing (manufacturing) and various major retail chains have also shed staff.

So the lessons here are these: coal and iron ore are valuable commodities, their market price goes up and down depending on market forces, they won’t stop being valuable and they won’t disappear any time soon. Down times do bring job losses but good times bring growth.

There might well be short-term market volatility but the megatrends aren’t stopping. The Asian middle class is still getting bigger and richer and consuming more of what Australia has in abundance. The Asian Century has really only just begun.

Employing some savvy staying power with your investment property would clearly be the smart strategy then. If you’ve got higher vacancy rates in your location, determine the reasons for the downturn. If it’s caused by some of this commodity market volatility, but other industries and projects are going strong, be proactive:

•     Engage more with your property manager.
•     Find out your tenant’s intentions about six weeks before their lease is due to expire.
•     Be guided by your property manager about the likely rent your property is going to generate in the current market.
•     Accept less rent if necessary (because ninety per cent of something is always better than 100 per cent of nothing!).
•     Make sure your property manager is actively advertising for a new tenant the minute your current tenant notifies of their intention to leave.
•     Stay positive and stay pleasant with your property manager.

Above all, remember property is a long-term asset class. Like shares, you need to ride the waves with the distant shore in sight. In my opinion, falling commodity prices are not cause for panic if you’ve researched your investment location and are managing your asset to suit market conditions.

Over the past few years, my company, Propertyology has been actively investing in a few major regional towns that have benefitted from mining industry projects, a couple of smaller mining communities, and a couple of capital city locations.

Interestingly, even with declining commodity prices and the scaling back of some projects, rental returns still remain higher in our regional and mining-related communities than in the capital cities. The locations in which we’ve successfully helped investors to purchase property have multiple approved projects in their pipeline.

In some cases, falling commodity prices and rising costs have resulted in project commencements being delayed, certainly; but the resources have not evaporated and projects are still very likely to proceed once the economic cycle settles down.

Other industries supporting these communities provide stability and sustainability for their economy. It’s not overly important whether the best couple of years are now or in a few years time; the property market outlook remains just as promising.

So if you’re a property investor who’s been wondering whether you’ve made the right choice with mining, remember this: even a fire whose coals aren’t burning red hot still has plenty of heat!

Reproduced in full with permission: Property Observer What happens to property markets when commodity prices lose their red hot glow? 18 June 2013

Attention: This article is intended to provide general information only. Every attempt has been made to ensure the accuracy of this information at the date of publication. The opinions expressed in this article do not reflect those of DHA, its staff or agents. Property prices are subject to fluctuation. Prospective investors should seek independent advice. DHA will not be liable for any loss, damage, cost or expenses incurred or arising by reason of any person relying on information in this article.