Commodity price movement (Coal/Iron Ore) - in which market is this relevant and why?
Commodity price movement for both iron ore and coal can impact property markets that we invest in. Commodities, including iron ore and coal, are some of Australia's biggest export products. A significant decline in the prices of commodities can contribute to a sharp fall in Australia’s terms of trade. Terms of trade is a ratio of export prices to import prices calculated by the Australian Bureau of Statistics and published every three months.
As slowing demand causes the price of Australian resources to fall, it also reduces the need for Australian dollars, the currency used to buy them. The recent downturn in Chinese demand for iron ore caused a free fall in the resource price and mass job losses in mining towns situated in both Western Australia and Queensland.
It’s important that an investor understands the positive and negative impact this may have on property markets associated with commodity price movement.
An increase in commodity price movement can lead to the following changes in these markets
- Increase in construction due to accommodation pressures
- Lowering residential vacancy rates
- Residential rental increases due to increased accommodation pressures
- Aggressive uplift in median house price growth
- Higher investment activity with property investors chasing yield
- Increase in interstate and overseas migration due to strong employment opportunities. During the height of the mining boom, trades moved from Melbourne and Sydney to Queensland and Western Australia for higher paying employment opportunities, conversley this created a shortage in Melbourne and Sydney.
- Low Commercial vacancies in Perth and Brisbane in the office sectors
- Increase in wage growth
A decrease in commodity price movement can lead to the following factors
- Rapid job losses and higher unemployment and under employment in construction, mining, hospitality and real estate and rental hiring services
- Falling values in the housing sector
- Increased vacancy rates in the residential sector
- Decrease in overseas migration and interstate migration
- Negative equity created
- Increased vacancy rates in the office and industrial sectors within the Perth market due to higher unemployment
Some of these mining towns include:
- Port Headland
- Tom Price
Property values in some of these towns decreased by 50% within a 12 month period where unemployment increased as mining contracted. This also flowed through to investors with some making considerable losses.
Traditionally both Perth and Brisbane property markets are affected by commodity price movement. During the height of the mining boom in 2007-08, Perth was experiencing very low unemployment rate. Since then unemployment has been rising with a peak occurring in the first quarter at 6.5% bringing Perth’s unemployment above the national average. Mining is clearly the biggest industry in Western Australia representing 27% of Gross State Product, however in the City of Perth mining represents 14.94% of economic output. Western Australia is the only state which has an industry sector greater than 15% of GSP. However given the geographic size of Western Australia this could be expected. Historically this has not affected capital growth on residential properties in Perth with the long term capital growth rate almost identical to Melbourne, Sydney, Brisbane and Adelaide.
What this high concentration of mining means for investors is the entry point into the market needs to be well timed in order to get a low risk, high return investment outcome.