Vacancy rates Port Hedland. Climbing…???

Also from what I can understand, if you want to exercise your exit plan now you’ve left it too late.

Hello Everyone – this is my first post.

@ Freckle – if property is not in your long-term view – why are you here? A forum is indeed a place where all views could – and should – be aired – but I must point out a few things that don't quite stack up in the (many) posts you have made on this thread.

Firstly you provide a graph of property values from 1880 to 2006 – a period of 126 years – and then you proceed and without any explanation – to conclude this is proof property is not for the long-term. This is despite the fact the most recent few decades showed unprecedented growth. 

The faults here are many – starting with the period. One and a quarter centuries? I'm struggling to comprehend it. The value of an asset is determined by supply and demand – and the underpinnings of both vary over time so greatly that long-term analyses become more difficult to do the longer the period you choose – unless you carefully take these variations into account in your analysis. If you don't – your conclusions will only have relevance in the historical period you selected (ie an interpretation of what you see) – but would provide no basis for predictions.

Think for a moment. I can't even imagine the differences in the labour force in Australia in 1880 to now. What was the average wage? What was the unemployment rate? Was there even personal tax? Had anyone worked out what the inflation rate was back then – and what were the interest rates and just how much harder was it to get credit to buy housing back then? Or any period on your graph? What was the housing supply? And how do all of these supply/demand factors compare through the period of your graph to now?

I suspect you haven't the vaguest clue.

For a start you might like to inflation-adjust the graph. That would reveal a few things to you – I can guarantee that.

For a given level of housing supply – price demand (the $ value those who seek to buy property will offer) is largely a factor of people's ability to pay – as traditionally in Australia we try and buy the 'best we can afford'. This comes down largely to employment & wage levels and interest rates. In essence – these are the things that determine the size of the monthly rental payment someone can afford to pay – and hence govern how much they can borrow/pay for any given property.

My guess is as good as yours as to what the future holds for these parameters in the short/medium term – but in the long-term its difficult for me to see a massive decline in these factors. As a matter of fact – they are likely to improve – how much I don't know – but property prices will reflect them in national medians over time. 

You can actually see this in your graph…

Anyway – the discussion here is about Hedland and it's vacancy rate. Back on track now.

Hedland – according to Kelly Howlett (the Mayor) last time I spoke to her which was in July last year – Port/South Hedland had around 6,000 dwellings – and the 163 available on RE.COM as of a minute ago represents a 2.8% vacancy rate.

Um – big deal.

Hedland is a tight market and 75% of the town is investor owned – and hence when availability drops close to zero in a hot market rents jump as tenants over-bid each other for the small number of available properties whose leases end or new properties are completed and come onto the market. These artificially high rent levels are then integrated into ongoing leases by way of rent reviews.

As the majority of tenants in town are companies – who basically 'pass the parcel' of higher rents along the chain ultimately to the major exporters (who have gazillions) – in high demand situations there is no effective 'upper limit' on rents as would be experienced in say – Sydney – as individual dwellings are only rarely rented by companies for their staff there and most people's wages simply don't increase enough for landlords to bump their rent by a third in a year – as Hedland has seen in the last 2-3 years.

This is how Hedland has achieved the record rents it has in more recent times.

The way down is more interesting – and we're seeing it happen now. I'll now try and make sense of the increas in the vacancy rate from 0% to under 3% – still no cause for the world to end.

In the Pilbara there is ALWAYS a slowdown from late October-February due to people not wanting to be there due to the extreme heat of summer. School is out so teachers vacate for the holidays, non-essential contractors time their contracts so they don't have to hang around in 50+ degrees, and many construction-related activities avoid this period due to heat and cyclonic conditions from Dec-April.

So many of the vacancies referred to in this post relate to this annual effect.

BHP laid off many contracting groups in Sept/Oct last year – partly due to spiralling costs (in part due to massively increasing rents!!!) – and partly to offload 'dead wood' like Jan De Nul Dredging who had a codicil on their contract that was so unpalatable to senior management they were shown the door in no uncertain terms! These contractors ALL left town at roughly the same time – dumping more vacant capacity on the seasonally slowing market.

A further complicating factor was a zoning change that allowed for higher density development in early 2012 in parts of Port Hedland – and the slow process of getting around to building to these higher densities took until – you guessed it – late 2012 to come onto market. 

So there were unprecedented numbers of NEW dwellings – including something rarely seen in such numbers before in Port – one bedroom units/villas – completing at exactly this time.

The new one bedders's rentals peaked at around $1650 in July/Aug 2012 – and new two bedders were roughly $1850. So the cost to accommodate an employee was (and still is) astronomical for these 1br's and hence many of these are still on both the rental market as never tenanted properties and occupy for sale listings as well.

It will take another bull run for these to be taken up – that's for sure! Don't touch them with a bargepole whatever you do!

I was caught in this perfect storm. I bought a property and the reno wrapped late Oct 2012 – and it lay empty until 1st Jan and is on a one year lease. The rent last year would have been $3800pw – the rent is now $2800pw.

While that did make me sad it still is $145,000 a year for me to sit on my ass! Boohoo I'm not getting $180,000 – but seriously – where else do you get these returns?? Even if you halved them they're astronomical! And they won't halve.

Not at 2.8% vacancy.

What will – and has – happened – is that the 'silly' apppreciation in rents over the last 12 months is wiped back down to levels the town is more used to – with a nice 3×1 renting for around $2000 per week. Despite this my 2br's apartments in Port are all on $1900pw (one recently rent reviewed UP from $1650pw in Jan 2013) – so most/all of the currently leased properties are still killing it – but as leases end and rent reviews are done these will drop to market.

Remember there are two drivers to Hedland's rental demand – operational demand – and construction demand. Operational demand is largely static (the guys that run the Port infrastructure itself, Council workers, McDonald's staff, local bottlo, etc) and will slightly rise after the current MASSIVE Inner Harbour project is completed around 2015 This project has foisted huge construction demand on the town with the equivalent of 4 Olympic Games being spent in a town with a population on 28,000 over a 4 year period!!

The impact on the rental market when the Inner Harbour wraps will be a bigger version of what we are seeing now – possibly taking a year for vacancies to be taken up. But they will. At lower rents as the total demand in the town will be less and supply slightly higher as new housing comes on line.

The global outlook for iron ore is such that BHP's Outer Harbour is unlikely to be started anytime soon because as a standalone project it would single-handedly be creating worldwide industry overcapacity undermining the entire industry's returns – so isn't viable in the current economic climate. Without it there will be NO major iron ore project in town for who knows how long – so rentals will reflect the background operational demand vs supply for the next few years until the Outer Harbour kicks off or the pie in the sky gas projects get a green light – which depends on so many factors it may never happen – or if it does – may bypass Hedland entirely.

So there's my 2c worth.

Cheers!

jmsrachel wrote:

Freckle wrote:

Locks like Doc doesn't want to play Moxie.  

For a second I thought he was going to challenge you and stick it to you right to the very end! Obviously not game enough.

Hmmm….  maybe he's gone back to the OK Corral to fetch the Earp Brothers