I read with interest the views of Steve in this month’s newsletter’s, and yes the market turned quite a while back, not as far back for people in W.A., in relation to housing prices, however, Steve also mentioned that rent has not appreciated at the same rate as price of homes….to this end I have the view that all is not lost if you decide to keep the asset rather than sell off! There will be a huge pressure on rents to rise, seeing that net yields will be higher. I believe that now is the best time to re-invest through banks by getting values on your existing property, re borrowing upto 80% LVR, then wait until the prices do drop when the “emotion” hits and reap the benefits of patience. I would personally lok at locking the interest rates in at the same time for a period of 3 or more years. This maybe a little difficult now that the “mood” is for a rate rise, but there are other things that you can do rather than “sell off the farm.”
Just a thought.
I disagree. Rents are closely linked to wages, not house prices.
Cheers, F.[cowboy2]I recall reading something recently saying that rental yields have already started to rise in Sydney over recent months. And I think this is what generally happens in the cycle. Values rise so fast, rents can’t keep up. Values then stagnate and the rent starts to slowly creep up again.
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With all due respect, I still disagree. The recent increases in rent have at best been in line with wage / broad inflation. If rents adjusted in line with house price inflation even in a delayed fashion, they would have to increase by 50-150 percent (depending on location) over the next couple of years. That is clearly not going to happen.
Cheers, F.[cowboy2]Hi Foundation,
I respect your opinion, however, wages don’t actually have any affect on Rent…I don’t typicaly care how much my tenants earn, all I care about is supply and demand for my types of properties in the areas that they are located in. I know that if the level of investment in my areas drop, then the amount of homes available for rent decreases and the supply of tenants will increase will the increase in interest rates. Banks will change their qualifying criteria for loans, and more more people will be reluctant to extend their income to mortgage payments, maintenance, rates, insurance etc etc. If I have locked in my interest rates at rates of 6.7% not too different from what we have been paying for the last 18 months, then any increase in rental income is a positive move. Over the next cycle 7 -10 years typically, history has proven that property values will be stagnant and rent will go up unitl the property values agian rise to the occassion of “emotional” investing where property is again flavour of the month.
Originally posted by Investigator:Hi Foundation,
I respect your opinion, however, wages don’t actually have any affect on Rent
Good morning Investigator, forgive me for jumping in here, but I’m fascinated by fundamentals discussions and I abhor your apparent oversight.
You are correct to state that supply and demand affects rents. Less rental properties on the market will indeed require the renters to compete. But they can only compete within their means! Supply and demand imposes short term trends on the longer term trend dictated by wage growth. Or how are these people to pay? Keep in mind that there are alternatives, if rents begin to consume 30-40% of the average wage in an area people will move out. This will reduce the demand, reverting the graph back to the underlying wage appreciation trend. If you’re a buy and hold investor wage growth is far more significant to your long term rent increases. If you can predict a supply shortage will affect and area for 20 years (my arbitrary definition of long term), then you are an exceptional investor. Over this 20 years there may well be periods of short supply, but there will also be excess supply. These are only ripples. Wages are the trend.
Another point from your first post, I understood you to imply rents will increase simply because yields have fallen. I agree that there will be additional upward pressure from investors fretting about their low returns, trying to make renters pay for their over commitments. However, there is a balance of power. Renters can move out and they do! If they don’t, they will ask more from their employers to live in the area, voila, wage growth!!!
Finally, “history has proven”, is an example of inductive reasoning. Inductive reasoning cannot offer proof. However I do think your suggestion is quite astute and a possible, if not likely scenario, that unfortunately does not bode well for residential RE investment.
Hi, Superman,
This is an interesting discussion. I agree that the rent rise will somehow be limited by wage raise in the short term. But thinking in the broader economic sense: oil price rises are not capped by the wage raise, but push the general inflation higher. I think the same will happen with rent. The same demand/supply stuff.
Gamay
On the supply/demand issue,
Oil prices are factored into CPI, and can therefore influence wages. However, the price of oil is set by the market – higher demand = higher price.I don’t see that demand for rental properties has significantly increased of late, or why it will in the near term. Demand for investment properties caused house prices to inflate much faster than wages, but that demand has largely expired. Rents have been unnaffected during this time, so I fail to see how falling demand for investment properties or falling house prices would push up rent.
On interest rates – I personally wouldn’t fix interest rates beyond 2 years, although if I was in the 22% of high income earners ($80k+) who feel they will have trouble paying the mortgage (AAP 01.03.05) if rates increase by 0.5%, it might save some stress.[blink]
Cheers, F.[cowboy2]
F are you saying demand for rental properties is inelastic? If not, the increased supply of rental property that has failed to move rents (tho this is presently changing) will surely see rents go up as that supply is wound back. Therefore I can’t see why you “fail to see how falling demand for investment properties… would push up rent”. What did rent do upon the abolition of negative gearing in the late 80’s out of interest? My guess is they went thru the roof?
there is something wrong with the logic there but it’s doing my head in… I think I meant to say fully elastic.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
I totally agree with you Investigator and sorry foundation, disagree with you.
Rent is based on supply and demand. I know agents who specifically target low income earners because regardless of how much the rent is set at the government just comes along and tops up their rent allowance. Most low income earners do not have alot of choice when it comes to where they live. Things like public transport, shops ect are the main driving force that determmine where they rent.
I own a property in a large country town in Victoria and the agent says that you can’t rent anything in town for $125 a week and therfor I could raise the rent to $135 with no problems keeping the tenant as there is knowwhere else to go.
Look at the price of fuel and cigarettes for example. Do you see people not buying fuel or smoking because of the massive price shifts? No. People pay because they don’t have a choice really. If they can’t afford to buy their own place then they have to rent. Sure, they might move from a more expensive place like Canberra to say Adelaide but realisicly they don’t. They just cant afford it and its too scary.
Wages have very little effect on the average rent. If you earn more you simply live in a nicer area and of course pay alot more for it. But it is not the wage that dictates this, just the lifestyle choice.
You will always miss 100% of the shots you don’t take!
Originally posted by AUSPROP:I can’t see why you “fail to see how falling demand for investment properties… would push up rent”.
I can only imagine the falling demand would have the opposite effect to what the rising demand had… ie. very little whatsoever!
What did rent do upon the abolition of negative gearing in the late 80’s out of interest? My guess is they went thru the roof?No, certainly not through the roof. During the time of which you speak, I concede that rents did exceed the rate of wage inflation, but not by more than 3 to 4 percent pa. While this is hardly insignificant, nor was the fundamental change in the RE investment environment.
Here you can find on page 4 a graph of rent inflation vs price inflation. I think the relationship is very clear.
Cheers, F.[cowboy2]Originally posted by foundation:On the supply/demand issue,
Oil prices are factored into CPI, and can therefore influence wages. However, the price of oil is set by the market – higher demand = higher price.When OPEC cuts production or the war in Iraq reduces supplies then market forces are being directly influenced – lower supply = higher prices. Any monopoly or oligopoly can directly influence prices.
Wages are also subjected to the forces of supply and demand – not enough builders = higher wages.
I don’t see that demand for rental properties has significantly increased of late, or why it will in the near term. Demand for investment properties caused house prices to inflate much faster than wages, but that demand has largely expired. Rents have been unnaffected during this time, so I fail to see how falling demand for investment properties or falling house prices would push up rent.In property investment there are both investors and speculators. With rental properties we would want income to cover most costs therefore the properties we buy aim at supplying that market segment who are renters – one criteria before you buy is what they can afford. This in itself would put an upper limit on the value of houses investors are buying.
Speculators on the other hand are prepared to forego the income in order to take advantage of anomalies in the market. These anomalies occur because there is a large proportion of the housing market that are not investors but owner/occupiers. They buy on emotions, perceived values and the like, fundamentals just go out the window. Affordability and disposable income are prime drivers and not the return on investment. Do these owner/occupiers lose if the market retreats? No, because they intend living there and don’t intend to sell.
So, when you take away some of the investment properties and they become “homes” there will be a lower supply of rental properties available – lower supply = higher prices. It is a perceived change in the nature of the product that changes the value.
On interest rates – I personally wouldn’t fix interest rates beyond 2 years, although if I was in the 22% of high income earners ($80k+) who feel they will have trouble paying the mortgage (AAP 01.03.05) if rates increase by 0.5%, it might save some stress.[blink]Cheers, F.[cowboy2]
This would depend on what rates are on offer. As much as we try to pick the highs and lows we can never be sure so to remain flexible it would be wise to maintain a mix of variable and short to medium term fixed rates, or better still, cap the rates.
Cheers
JeffOriginally posted by Ibuycashflow:So, when you take away some of the investment properties and they become “homes” there will be a lower supply of rental properties available
And conversely a lower demand, as those houses are now homes to ex-renters.
Once again, if the flood of additional ‘investors’ didn’t have an impact on rents, why would an exodus?
Cheers, F.[cowboy2]
There will always be more renters than home owners. Thus the rental demand will always be there.
An exodus of investers means a glut of homes on the market.This reduces prices which allows homeowners back into the market which then causes rental properties to be scarce again. Causing high rents. Supply and demand.
Let’s go back to the basics of asset value. Why is an asset worth something? For anything to have a monetary value, it needs to satisfy two conditions
Serve a purpose, i.e. someone wants it – continued demand;
Has scarcity, i.e. there is not enough for everyone – limited supply.However, not everything with a demand has a monetary value, e.g. the air we breath – there is no scarcity of it. Conversely not everything that is scarce is worth something either. For example, used shoes – as there is no continued demand for it.
For an asset to appreciate in value, we need continued demand and limited supply, simultaneously.
You will always miss 100% of the shots you don’t take!
Originally posted by Ronulas:There will always be more renters than home owners. Thus the rental demand will always be there.
Sorry Ronulas, I must correct you there. According to the ABS it is actually the other way around:
More than two-thirds of Australian households owned or were buying their dwelling at the time of the August 2001 Census.Home ownership is an aspiration for many Australians and has widely been referred to as “the great Australian dream”. This desire for home ownership is consistent with relatively high home ownership rates in Australia compared with many other developed countries.
http://www.abs.gov.au/Ausstats/[email protected]/0/9bc82f7e8a1ed7c7ca256d39001bc35f?OpenDocument
Originally posted by Ronulas:An exodus of investers means a glut of homes on the market.This reduces prices which allows homeowners back into the market which then causes rental properties to be scarce again. Causing high rents. Supply and demand.
Oh, and I forgot to add that foundation has already countered that point with the following:
Originally posted by Ronulas:
And conversely a lower demand, as those houses are now homes to ex-renters.Once again, if the flood of dditional ‘investors’ didn’t have an impact on rents, why would an exodus?
It would be nice if we could all make an effort to read what others have posted before repeating the same argument.
Originally posted by OSienna:Originally posted by Ronulas:An exodus of investers means a glut of homes on the market.This reduces prices which allows homeowners back into the market which then causes rental properties to be scarce again. Causing high rents. Supply and demand.
Oh, and I forgot to add that foundation has already countered that point with the following:
Originally posted by Ronulas:
And conversely a lower demand, as those houses are now homes to ex-renters.Once again, if the flood of dditional ‘investors’ didn’t have an impact on rents, why would an exodus?
It would be nice if we could all make an effort to read what others have posted before repeating the same argument.
Firstly,
I was not repeating his argument, just adding my own opinion to it.
An exodus of investors does not change the supply and demand issue. If investers sell up then homeowners buy them. Either way the demand for rentals does not alter much as most people in some areas of the population can not afford buy.
Secondly, regardless of what the stats say, where I invest very few own their own homes so stats are meaningless. The reality of the situation is that there are large pockets of people can not afford to get into the market and therefor must rent.
You will always miss 100% of the shots you don’t take!
Originally posted by foundation:And conversely a lower demand, as those houses are now homes to ex-renters.
Once again, if the flood of additional ‘investors’ didn’t have an impact on rents, why would an exodus?
Cheers, F.[cowboy2]
Home buyers are not all ex renters so it is not necessarily directly proportionate.
If the flood of investors created a number of vacant tenancies then that would be an oversupply and it would impact on rents. If there are no, or few vacancies, then supply is merely meeting the demand.
Emotions and perception also affect the rental market as well. People have preferences to certain areas for numerous reasons (schools, transport, shopping, security, beaches), hence demand may increase in one suburb and not in others. Not all renters are transient either, when rents rise it may be more of a mission to move than to just pay the increase.
Unfortunately we do not have a perfect market and all things are not equal. Rents will rise more in one area than another – thats just the market.
Cheers
JeffIn some areas there is a pressure on rents already. One of my IP’s (3 BR house), which was tenanted @160/w and was recently vacated. It is in a relatively good area: close to shops, schools and 500 m from the train. I advertised it for $175/w and was bombarded with phone calls (more than 20). Finally tenanted @180/w.
Gamay
Originally posted by foundation:I can only imagine the falling demand would have the opposite effect to what the rising demand had… ie. very little whatsoever!
Quote:Surely if an increased supply of properties was soaked up by an increased demand for rentals (thus creating balance of supply and no price change), then when suplly falls – along with continuing increasing demand for rentals – then prices can only go up. I certainly can’t envisage demand for rentals falling just because demand for investment property falls – assuming that the demand does indeed fall which is arguable in itself.
http://www.megainvestments.com.auExtensive list of ‘Off The Plan’ property available for sale in Perth.
John – 0419 198 856
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