Rent outpacing Inflation

the charts show interest vs rent,  the question was rent vs inflation.  The rent line if its adjusted for inflation indicates flatline,  this has not been my experience over short term in Melbourne with two properties in different areas.  Over 2 years rent moved 170 >215 and 240 > 300 .   Long haul you would think that rents can only outstrip inflation for short periods of time e.g. gentry-fication of areas driving up rents,  and driving out low income earners.  Sooner or later affordability kicks in and balance has to be restored which would get back to the flat line.   Long term it doesnt seen wise to base a strategy on ever escalating rents above CPI.

That's real (inflation adjusted) rent. A flat line indicates rents equalling inflation, rising indicates rents increasing faster than inflation, a falling line indicates rents increasing more slowly than inflation.

I included the cost of mortgage interest to illustrate the point that ‘you can borrow your mortgage but you can’t borrow your rent’.

Here’s a simpler, more direct look at inflation and rent, using Melbourne as an example:

That’s right, Melbourne rents are currently growing faster than inflation (as seen in the uptick at the end of the chart), but this comes after several years when they were declining in real terms. And remember that your examples of 25% increases over 2 years equates to 12%pa compound rate and a real increase of 8% to 9%. That’s still a hefty increase averaged over the last 2 years, but if you add in the previous 5 years of declining real rents the annual average falls further.

No doubt rents have been rising faster than inflation recently. But over the longer term they can’t.

I agree.

Cheers, F. [cowboy2]

Have I missed some basic prinicple here? Rent tracks wages. What happened to the arguments of ROI & yield ie rent reflected as a % of the property price – whose growth far outstrips CPI or wages growth.

Sure there are dips in yield when property prices take off and rents are lagging however in times of a tight rental market, yield plays catchup at a pace far greater than cpi.

Whereas, in the commercial market place there are many other options for rent increases including fixed %, %+cpi, % of turnover etc as the leases are of a much greater duration and you play with commercially parties.

Foundation, which graph? Rent v Interest or Rent v CPI – neither of these equate house prices to yield. If rents tracked wages (and were linked to cpi) then property prices would grow at the same rate ie at cpi and yields would remain constant.

What you fail to take into account is that land (in the major centres) is a finite resource, demand for well located property will increase due to population growth, desireablity, access to services etc (locational factors). The price of these properties will accordingly increase due to demand for scarce resources (outer lying areas will increase but not at the same pace). A person on average income, a number of years ago, could afford to be located closer to the centre of cities as these areas were 'less desireable' than other options available to them. These inner city locations have now been gentrified and are out of reach for a large proportion of buyers and renters – however this has not reduced overall demand for these properties nor their price.

I do agree in part, prices do fall in markets when they have reached unsustainable levels ie property bubble/stockmarket bubble/tech crash etc.

All of the recent research available (housing industry assoc, abs etc) indicates that housing affordability has decreased that is, the proportion of household income going towards either rent or mortgage repayment has increased. This is symptomatic of 2 issues – firstly the cost of rent/property has increased more quickly than any increase in wages (if this is cpi, then house prices have increased faster than cpi), secondly that interest rates (hence repayments) have risen faster than cpi [an increase of 0.25% on a loan rate of 7.0% to 7.25% is actually a 3.57% hike in repayments].

It may not be a direct correlation however it is closer than any relationship between wages, cpi and rent. That is, as an investor would you be happy that ROI is dropping? (regardless of whether you consider rent in isolation or as part of the combined capital & rental returns)

Please point to the bits on the chart where house prices go up and rents go up the same amount?

How on earth (with all the evidence available to all your senses) could you possibly think that was a closer relationship than this (which I provided earlier):

Are you an investor? Which lender do you use (I really feel like I need to ensure my deposits are safe).

F. [cowboy2]

I might have the wrong end of the stick here, but it seems an implication of your hypothesis that should all the investment properties in Australia change hands tomorrow for, say, a 20% premium on their sale price/value 12 months ago, that this would have a greater impact on the ability to charge more rent than the renters' capacity to pay.

Put another way, if the investment community's capacity to pay (i.e. borrow) increased by 30% and the renters' capacity to pay (i.e earn) didn't, that the former would have a greater impact than the latter and that rents would still go up. 

Regrettably, the fact that it would be desirable for a proposition to be true is not support for the proposition that it is.

So do you still believe in regards to the relationship between house prices and rents, that "it may not be a direct correlation however it is closer than any relationship between wages, cpi and rent"?