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Dangers of investing in property in single industry mining towns

Thursday, October 04, 2012

Moranbah and Port Hedland unsustainable 'single-industry' mining boom hotspots: Westpac

By Larry Schlesinger
Friday, 07 September 2012

Moranbah, the heart of coal mining activity in Queensland's Bowen Basin region, was recently added to a list of WA and Queensland mining towns deemed by Westpac to be risky “single-industry” towns.

This means that investors will find it harder to get loans to purchase investment properties in Moranbah, with the bank deeming the town to have a potentially unsustainable housing market.

Its inclusion comes shortly before RP Data calculations that placed Moranbah top of a list of regional Queensland towns where it is cheaper – by an average of $4,000 – to buy a house than rent.

However, Westpac will now discount rental income listed as security on investor mortgage applications by 40%, taking into account the risk of rising vacancies.

“An application with security in a single industry town will have all rental income assessed at 60%,” says the bank in a note to mortgage brokers.

The new requirement is in addition to the rule that a 30% deposit is required in these postcodes for property to avoid the added burden of lenders mortgage insurance (LMI) – well above the usual 20% deposit requirement.

The policy changes apply to two investment loans – Westpac’s variable rate Equity Access Loan (EAL) and its fixed rate Investment Property Loan (IPL).

Westpac spokesperson Danny Johns told Property Observer recently the decision to add Moranbah and other mining towns to the list is due to concerns that in these locations the mining boom is driving house prices and rental yields to relatively unsustainable levels.

As an example, he says house prices have jumped 44% in Moranbah with yields at 13.5%, with property valuers telling Westpac that these figures are not sustainable.

Other towns added to the list recently include another Queensland coal mining town Dysart in the Isaac region south of Moranbah and Port Hedland and the East Pilbara region.

The full list of new towns included on Westpac’s list of “single-industry” postcodes are in Queensland:

Blackwater (4714)

Moranbah (4744)

Dysart (4745)

Middlemount and May Downs in the Isaac region (4746)

And in Western Australia:

Roebourne (including Karratha, Baynton, Bulgarra and Pegs Creek, 6714)

Port Hedland (including South Hedland, 6721)

East Pilbara (6753)

Real Estate Institute of WA president David Airey says the changes probably reflect a view from within the bank that “housing prices and rental returns in particular, in places like Karratha, Port Hedland, South Hedland and Newman are unsustainable”.

“The state government is anxious to address affordability in the Pilbara, and while this won’t happen overnight it’s clear that housing demands will be better met over the next few years.”

Airey says Westpac has the right to “calibrate its business model as it sees fit”.

“But it would be a pity if the result meant that investors were less inclined to supply much needed housing in the state’s northwest. In some ways it’s a catch-22 situation,” he adds.

Real Estate Institute of Queensland (REIQ) chief executive Anton Kardash says lending criteria for remote areas has been restricted for some time, given these areas are often reliant on single industries for employment.

“Investors in these areas need to be aware that lenders will require a larger deposit dependent on the element of risk lenders attribute to buying property in a specific region.”

Jane Slack-Smith, director at Investors Choice Mortgages, says the change in policies indicate that Westpac is less keen to lend in mining locations.

“The bank is discounting rental income to allow for vacancies,” she tells Property Observer.

Slack-Smith says Westpac is implementing these changes in places like Karratha despite her clients being able to ask rent of $2,000 per week over a five-year lease.

“Some lenders will take 100% of rental income, but Westpac only takes 60% of income.”

“Some lenders don’t have postcode restrictions,” she says.

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