Single industry towns offer high yields but are littered with cautionary tales

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

For any investor, experienced or not, a diverse economy is a core factor to take into consideration when selecting a location in which to buy. That means locations dominated by one industry sector, whether that be mining, agriculture or tourism, seldom make it into Hotspotting’s investment selections.

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 the case with mining towns. History is full of stories of investors who lost big money buying into booming mining towns during the resources downturn.

Moranbah is Queensland’s Isaac region is a cautionary tale. Investors were paying a fortune to secure very ordinary homes but were encouraged by the fact that mining companies were forking out thousands of dollars a week to rent accommodation for workers – until they weren’t.

Moranbah reached a median house price of $750,000 at the height of its boom more than a decade ago, but later that 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 regional Western Australia typically cost more than $1 million during the resources investment boom but dropped to well under half that level when the boom ended.

More recently prices have partly recovered but the median house price today is only around $700,000.

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

Whyalla in South Australia 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 per cent or 7 per cent 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 that 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 per cent or 9 per cent, but capital growth prospects look rather shaky at this point.

It can be tempting and a risk that experienced investors may be willing to take but when it comes to one pony towns, Hotspotting urges caution.