A tale of two mining states
Queensland and Western Australia have experienced the highs and lows of large-scale investment in the resources sector over the past decade. Following the peak of the ‘boom’ around 2012/13, many mining and mining services companies faced severe distress as activity rapidly contracted, but the flow-on effects were also felt by businesses, landlords and workers, particularly in the states’ major mining towns.
Fast-forward to 2017 where economic and housing statistics suggest Qld has already exited the ‘bust’ phase of the cycle, while WA is perhaps only now reaching the bottom of the downturn.
In this update, we look behind the differences between Qld and WA, and how they impacted the housing markets in the key resources centres in each state.
Throughout FY16, increased export volumes supported Gross State Product (GSP) growth in Qld and WA despite a reduction in capital expenditure. However, State Final Demand (SFD), which is a measure of the demand for goods and services within an economy, continued its decline in WA during the year to March 2017, while Queensland’s SFD has been growing since the start of 2016, driven by household consumption and public-sector expenditure. The 8% reduction in SFD in the 12 months to March 2017 was WA’s largest annual decrease since the ABS started recording this data in 1985, reflecting the fall in private sector demand – not surprising given WA had the lowest wages growth rate in Australia in FY17 (and its lowest growth rate since 1999).
The divergence between QLD and WA can be explained by the mix of activity in each state’s economy
The dominance of the resources sector in WA far surpasses Qld, which amplified its boom and bust cycle. In FY16, mining was estimated to have directly contributed 28% of value-add to WA’s GSP compared to only 7% in Qld.
WA is highly susceptible to the performance of its exports, particularly those to China. Exports accounted for 42% of WA’s GSP during FY16 compared to around 20% in Qld. Additionally, WA exports a much larger proportion of its output to one country (51% to China) and its exports are also over-weighted towards a single resource (iron ore 53%).
The relatively sudden change in Chinese demand for iron ore in 2014/2015 therefore had a profound impact on the WA economy.
Concentration of product
As noted above, iron ore accounts for more than 50% of WA’s exports. While the coal industry in Qld has been through its own share of distress, the graph below shows how extreme the movement in iron ore spot prices was compared to coal.
Regional housing markets
Over the past 24 months, regional property markets in Qld and WA have suffered the consequences of the fall-out from the slow-down in the resources sector. Job losses in mining/mining services, as well as in other local businesses, saw many people leave town, directly impacting house prices and rents.
But when median house prices for the main mining towns in Qld and WA are lined up against each other, aside from Moranbah, which had a relatively sharp, short peak in 2011/12, the volatility in Qld was nowhere near that experienced in WA.
What caused greater volatility in WA?
A key cause of the sharp price rises during the peak of the boom was the significant migration into the major mining areas, but the more pronounced volatility experienced in WA was due to the size of its regional centres.
WA towns have significantly smaller resident populations compared to Qld towns. When the mining boom peaked, it caused temporary population explosions that placed significant stress on the local housing markets.’
In the 2011 census, The Pilbara was the fastest growing region in Australia. By 2016, population growth in Karratha was -0.5% and 0.7% in Port Hedland.
Concentration of mining activity
We have highlighted earlier the concentration of mining activity in WA relative to QLD. This is also a reason why WA experienced greater volatility in its regional housing markets – there isn’t other substantial business activity to counter slow-downs in the mining sector. Contrast this to Qld, where agribusinesses create their own need for services in regional towns, and provide a more stable population base to support local businesses.
The WA government sought to address the issue of liveability in the Pilbara by investing in public infrastructure ($1.7b to date) to broaden employment and training opportunities, and at the same time create construction jobs. Whilst the attractiveness and amenity of several towns has improved, the local economies are still very much resource-centric, and likely to remain so for the foreseeable future. Further, unlocking the potential of significant agribusiness enterprise in the North of WA around the Ord River irrigation scheme is unlikely to provide the balance that is found in Qld towns because of the vast distances between places like Kununurra and the Pilbara mining towns.
Where to from here?
While there is a significant drop in employment opportunities between construction and production phases of major resources projects, the production phase tends towards a permanent rather than temporary workforce, which will benefit regional centres in the medium term.
The outcomes of this are now being seen in regional housing markets, as markets move around the property clock into the ‘bottoming’ section. Our take on where the regional cities currently sit within each stage is shown below.
- Falling – the market is past its peak and prices are decreasing.
- Bottoming – significant decreases in prices have been experienced and the market is closing in on the bottom.
- Rising – house prices are showing signs of growth.
- Peaking – house prices are increasing steadily, but are expected to close in on their cyclical peak.
It is unlikely that WA’s economy will undergo a major recovery within the next couple of years without a sustained rise in commodities prices, or major government-sponsored capital investment. While it’s anticipated that exports will support GSP growth, it will be countered by a decrease in employment and spending as the Wheatstone and Prelude LNG projects reach completion in 2018. This will add to the already substantial job losses during the resource sector’s transition from the exploration and construction phases to the production phase, which has been a major drag on the WA economy and, to a lesser extent, Qld’s. The loss of jobs has led to negative interstate migration during 2015 and 2016 and this trend is expected to continue in the short term, meaning the housing markets in the main mining towns will continue to cool.
While Qld has been improving, there are also some major risks to its outlook. Like WA, Qld has a number of significant LNG projects almost, or recently, completed. Additionally, the commercial and residential construction activity that supported the Qld economy during the mining downturn is losing momentum, with the number of dwelling commencements falling sharply since 2016.
Despite the risks there are some green shoots.
National wage growth for the June 2017 quarter has showed moderate improvement on the prior quarter, with the mining industry recording the highest quarterly rise, driven by increases in WA.
Qld and WA LNG production and exports are continuing to grow, and the recent resurgence in price of some commodities is generating new investment in exploration and the re-opening of mines that had been in ‘care and maintenance’ mode.
Regional towns in WA and Qld that have limited exposure to the resources sector have been doing comparatively well economically. In these areas, house prices have been relatively flat with some recent signs of growth in areas such as Busselton and Albany in WA, and Bundaberg and Cairns in Qld.
In metropolitan markets, Perth has underperformed compared to the main Qld centres of Brisbane, Gold Coast and Sunshine Coast. Since peaking in 2014, Perth median house prices have fallen over 10%, whereas Qld’s cities have shown year-on-year growth. But the rate of decline in Perth is now starting to slow and the Property Council of Australia predicts that WA is coming to the end of a 5-year cycle, where the number of property transactions reached the lowest level since 1991.
While we may now be seeing improvement in regional property markets in Qld, our property clock suggests that it may be some time before the WA towns most susceptible to the boom and bust cycles of the resources sector (and that includes Perth) show the same improvement. In our view, the main reason for this is the comparatively diversified nature of the Qld economy, and the current lack of a strong catalyst to drive growth in the WA economy.