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Property Investment Updates

Adjusting to the ‘New Normal’

A few weeks ago we completed a dual occupancy project for our client. It was a typical corner block development where we built two freestanding, three bedroom, single story villas and a two lot Torrens title subdivision. Our very studious client chose to sell one and keep one as after completing a law degree, she decided she’d like to start a degree in medicine (bless her).  So she asked Property Bloom to help her appoint a selling agent and assist in the process of sale.


The villa she kept was leased quickly. I’ve calculated she took about a 15% discount in rent than she would have achieved about 18 months ago (before the ‘mining slowdown’). Not too bad really.


For the villa she was selling, the first thing we did was get three sales appraisals.  Not surprisingly, they were all a little pessimistic (due to the ‘mining slowdown’) but one agent was more optimistic and open to achieving the valuation figure than others.  Next we managed the styling of the villa to present it in its best way.  I’m a strong believer in styling or staging when selling. 


Within one week of listing she had an offer very close to the asking price which was higher than the independent valuation. I was very pleased and it made me reflect on reports that the Hunter Region was now at the mercy of what everyone seems to be referring to as the “Mining Slow Down”.


Terry Ryder most eloquently addressed this week a question from an investor asking about what to do given the ‘end of the mining boom?’'sterryryder


The end of the mining boom?  Property Bloom has worked in the Hunter Region for over ten years and I love to research the local economics closely.  What I’ve found recently is interesting.  I’ve heard comments bantered about...”we’re headed for recession”, “there’s no jobs”, “the mining boom is over” and the most bizarre; “China’s stopped growing!”  In the meantime, every time I drive to Muswellbrook, I am seeing nonstop coal trains heading for Newcastle Port. Someone is digging this stuff out of the ground and loading it on the trains.

What the Hunter Region is doing is adjusting to the ‘new normal’.  We’ve seen over the past few years a response to the large increase in commodity prices and the terms of trade, and investment and employment in the resource sector grow strongly. This placed upward pressure on prices and wages. Wages rose more rapidly in the mining industry than in the rest of the economy since the beginning of the terms of trade boom.


All of a sudden, young trade apprentices were being lured to the mines by outrageous pay; this was key in facilitating the reallocation of labour between sectors.  The mining industry could afford to pay the higher wage rate and so draw labour away from other sectors.

This saw builders and other industries that utilised tradies suffering the loss of labour. 

Now the mines have moved from the more labour intensive expansion phase where we saw a vast investment in transport infrastructure, such as the soon‐to‐be‐completed Hunter Expressway and the upgrading of the rail links for coal, and considerable private investment in community infrastructure such as shopping centres and also in the expansion of some mines.


Now that phase is coming to an end, we move to the less labour intensive supply phase. I hear that the other sectors; mainly construction are enjoying a choice of highly skilled labour (thanks to the training in the mines) which may mean these other sectors now have capacity to increase production. 


So I think there is a redistribution of labour going on, rather than a drain on the region. Whilst some mining employees will move away to other mining locations, others will stay and find new employment (or go back to their old jobs). Their new jobs may not be paying the high rates as the mines had in the past and so the property rental market must adjust, tenants can no longer pay the ever increasing high rents investors were happily achieving over the past few years. 


The Region is effectively experiencing the downside of the preceding exceptional upturn.

The purchasers of our villa are first home buyers who are happy to get the $15,000 NSW First Home Owners Grant as they are buying a new dwelling, and both are working in good, local jobs that are not in the mining industry.


In reality what we are seeing is less growth than we’ve had over the past few years...but still growth.


And investors are also adjusting their expectations. But you know what? The yields being achieved now are still higher than they were before the mining boom, plus there has been some good capital growth so what’s the big deal?  We all need to adjust to the ‘New Normal’ and put things into perspective as my friends from the Hunter Valley Research Fund so well summarise below...


“The economic outlook for parts of the Hunter Region requires perspective. Relative to the construction phase of the coal industry’s expansion, the prevailing period and the short term outlook, feels profoundly soft, as the stimulus for suppliers and construction employment wanes. The passing of the construction phase is being overlaid with the cost efficiency drive...The Region is effectively experiencing the downside of the preceding exceptional upturn and the indirect benefits for other sectors are now being felt as losses. In line with this transition, business expectations for the Region’s economic outlook over the next three and 12 months remain pessimistic. However, relative to business activity prior to the boom, this perspective seems exaggerated.”


“The Hunter Region is emerging from this cycle with a larger productive capital base in the mining, trade and accommodation sectors, a more highly-skilled workforce, which is increasingly cost-sensitive, and a larger employment and population base from which to progress. In the meantime, a period of adjustment remains before the ‘new normal’ becomes established. Assuming this rationalisation is modest, the economy will emerge larger than pre-boom, albeit that this base, the ‘new normal’, is yet to be found.”


Here’s to the ‘new normal’, a strong emerging economy and to my studious client for such a quick sale on her villa, now all she needs to think about are her medical studies.


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