Resource-Driven Real Estate Booms and Busts

What can cause real estate prices to jump by 39 or 52 percent annually? For Perth, Australia, and Edmonton, Canada, respectively, those 2006 appreciation rates demonstrate the effects …

What can cause real estate prices to jump by 39 or 52 percent annually? For Perth, Australia, and Edmonton, Canada, respectively, those 2006 appreciation rates demonstrate the effects of a resource boom.

Western Australia is an excellent case study of a resource boom. Cities throughout the region, including Perth, have benefited from a massive rise in foreign demand—particularly from East Asia—for their mineral, oil and gas resources, according to the Australian Department of Foreign Affairs and Trade.

The strong demand has pumped up Perth’s local economy, particularly the real estate market, where the annual percentage growth in housing prices in 2006 was 31 percent, according to Australian Property Monitors.

Vacancy rates in Perth stand at .08 percent, according to the Real Estate Institute of Western Australia. The situation is similar in the rest of Western Australia, where vacancy rates remain less than 1 percent, according to the Herald Sun of Melbourne.

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When rental markets are that tight, landlords tend to increase rental rates, and they have done so in Western Australia to the tune of up to 40 percent increases, according to PerthNow, a subsidiary of Australia’s News Network. Additionally, landlords have begun renting their properties to the highest bidders and are encouraging prospective renters to put down hundreds in deposits to be on the shortlist for the property.

With real estate driven by demand from people benefiting from the resource boom, a drop in demand for Western Australia’s resources could leave a lot of people in the lurch in the same way that Exxon’s withdrawal from its oil shale projects in Colorado’s Piecance Basin caused a “Black Sunday” bust. (See our article on oil shale development in the Rockies for more information on “Black Sunday.”)

In Edmonton, the capital of the Canadian province of Alberta, oil sands projects helped spur property appreciation of 52 percent in 2006. (See our article on investing in Edmonton for more information on boom towns.)

Dump truck drivers in Edmonton are earning $150,000 per year and even babysitters can earn more than $3,500 per month, according to the newsletter DailyWealth.

While investors can make amazing profits in places such as Edmonton and Perth when things are going well, it is important to be aware of the possibility of a bust. It is prudent to sell while the market is still hot.

It’s easy to see a boom happening, but watching for busts is an exercise in futility because of their inherent unpredictability. Investors enjoying the profits of a boom should continue to think about diversifying so that if a bust happens, their eggs aren’t all in one basket.

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