Rebound tipped for stagnant rents

Link: Rebound tipped for stagnant rents | The Australian

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Steven Richards
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How do you have stagnating or falling rents at the same times as a HOUSING SHORTAGE CRISIS??

Because there is no shortage crisis - the number of people per dwelling is at the lowest point in over 25 years - there has been a net shortage of new construction in the last five years, but this won't net out the buildup of wholesale surplus of housing stock around the country.

I routinely see empty houses here and huge rental listings around South West WA on my travels - but that's anecdotal only.

Considering rental yields are also at historic lows, this news does not bode well....if you "own" property...

Damn I wish the ASX created those Property Index CFD's with Rismark last year!!

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Rents are capped at an ability to pay and far out, many renters are stretched too far as it is. I can't imagine the market will take to the increases, they will simply seek out lower priced alternatives and the market will have to respond accordingly, punishing those looking for more... Possibly why rents have been stagnant and/or are falling? People can't afford to pay more regardless of how pathetic investor's yields are... You know, just maybe, prices are too high?

My sister rents in Richmond Melbourne, a renovated 2 bedroom place, quite nice... For $450pw. What was the price of that extremely poor condition hoel that sold prior to auction... $732k? Her place would have to be 'worth' $800k then, easy! Not a very tidy yield at all.

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The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. - John Maynard Keynes

The reason why rents have not risen as dramatically as housing prices is due to the extreme housing boom in recent times.

A rental property has two elements of return on investment.

A. Appreciation
B Rent

When there is long term high appreciation, owners accept lower rents. When appreciation is minimal, some owners sell, which causes the rental stock to decline, which causes greater competition in the rental market, which causes rents to appreciate.

I'm interested to know where things sit at the moment, is it high appreciation or high rent?

If prices fall substantially, my money is on rents falling substantially also. It has a lot to do with ability to pay, yields, demand for properties of varous types and of course, aggregate demand and employment. It happened in the UK. It's happened elsewhere. My money is on it happening here. I think it's something of a myth that if house prices fall rents will increase. I think people more people will be trying to get a tenant than focussing on flipping them, while the number of people per dwelling increases, showing an increase in supply.

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The essence of this convention — though it does not, of course, work out quite so simply — lies in assuming that the existing state of affairs will continue indefinitely, except in so far as we have specific reasons to expect a change. - John Maynard Keynes

One more thing I should add to what I said earlier, because of delays in property development, under normal circumstances, it is possible to have both high rent and high appreciation temporarily.

But because our regulatory system governing property development is in a constant state of dissaray, and demand pressure is continuing to grow very strongly (from a demographic shift + growth in population), it is possible to have high growth and high rent for a longer period because the market for new development is not as responsive as it should be. By OECD standards rents and property prices are both very high relative to incomes, particularly property prices.

I take exception to the spruiker advertorials that the papers are forced to accept to keep sweet with the real estate advertisers (rental property managers) and their peak bodies the REIs being labelled as 'News'.

We should put 'News' in inverted commas for most of these stories ghost-written by RE vested interests, thus:

'News': 'Rebound tipped for stagnant rents'

Louis Christopher's work at SQM Research has already demonstrated rental vacancies in Syd and Melb CBDs are at a record high at about 7% since the last attempted 'rental hike' by REI campaigns. With international students staying away in droves and international executives being recalled due to the GFC, and unemployment and underemployment and wage cuts still a problem, I can't see how you can spruik ever higher prices, or even predict the future quote so easily! Christopher himself says his firm makes no predictions for the future because the variables are simply too compllicated, but somehow the press keeps coming out with confident predictions from 'somewhere all the time -- and ALWAYS in an upwards direction -- virtually EVERY SINGLE WEEK.

What happens is the REIs decide they need rents to go up to justify the 'investment' decision their underwater landlords made buying an 'investment' property at the top of the market with a miserable return, so they decide to run a media campaign using a few tame 'researchers' who will write any report for cash, saying how rents will be going through the roof. When they do this, they also manage to scare a few renters into buying their own properties, which is all good for REA (their constituent members) commissions as well -- so the REIs and the RE lobby in general have worked out they can't lose -- write and run a series of stories about how it always goes up, and how rents will go through the roof, about low rental vacancies and shortages, then CARRY OUT THE STORY by simply jacking up rents in concert by agreement with member REAs. REAs who aren't members will even believe the same propaganda because it's in the papers. There are benefits all round in running such scare stories -- more renters buying, more investors buying, etc etc.

Remember that the newspapers get about 40% of their total operating revenue from RE interests.

It was very obvious to me in the last 'rents through the roof' campaign orchestrated by the REIs that their 'investors' were really financially suffering and wondering when their negatively geared underwater properties were ever going to stop making a huge loss every week, so they had to act to make property seem like a reasonable investment once again. It's not a good investment, unless you can pay 100% cash for a property with no leverage, and even then the returns on your cash are pretty bad once you take expenses like maintenance and body corporate and other ongoing costs into account.

REAs are just trading on the almost illusory capital gains of the recent past which were realised mostly due to suddenly liberalised bank credit and lower interest rates -- it's a trick that can't be repeated, and will most likely stop working very soon and go into reverse.