It's the New Year

It’s the New Year, and real estate lobbyists’ minds turn to making predictions for the year ahead. And journalists whose brains remain on holiday serve up this self-serving rubbish as news.

(Bull)

Let’s have a look at a couple of examples.

‘Renters say buy buy: mortgages cheaper than rent’ was the headline on yesterday’s mX, the freebie rag handed out to afternoon train commuters. Matt Sun was reporting on the prognostications of the Property Council’s Caryn Kakas and RPData. According to Karkas, ‘renters this year will find the cost of rent will match what it costs to purchase and many will start making that homeownership decision.’ What’s more, ‘this will probably be widespread, especially if you don’t see new rental stock in Sydney, where the vacancy rate is below 2 per cent.’

Let’s see. The latest Rent and Sales report from Housing NSW gives the median rent for Sydney as $380 per week. The median sale price: $425 000. Assuming the purchaser borrows 90 per cent of that price on a 30-year mortgage, at current interest rates they’ll pay $572 per week. If - and it's a fairly big if – as the article reports, official cash rates are reduced by 1.5 per cent, and if – even bigger if – the interest rate on the loan is reduced by the same, they’ll still pay $487 per week – more than $100 a week more than the current rent. A not-insignificant amount.

Of course, that’s comparing current rents with current purchase prices. How much do prices have to fall, or rents rise, for rents and repayments to equalise? A crash in that $425 000 median price to $283 000 would do the trick – that’s a fall of 33 per cent in a single year, and I don’t think the Property Council is looking forward to that. No, their line is that prices will be ‘flat’, which suggests that the median rent will have to rise by almost 30 per cent to match the cost of purchase. Yes, thirty per cent. Even the Real Estate Institute of NSW would blush at such a prediction.

Another example, this time from the Sydney Morning Herald. It’s ‘Time to buy – if job is safe’, said Jessica Irvine in a piece of ‘analysis’ in last Thursday’s Herald. The Tenants’ Union has encountered Irvine before, spruiking the Real Estate Institute's notorious '20 per cent rent hike' prediction. Here’s what she’s said this time:

You can almost hear the sound of cheap champagne corks popping. A generation of would-be first-home buyers are getting ready to escape the clutches of the rental market…. The rapidly deteriorating economic outlook is shifting the long-running debate about "rent versus buy" in favour of "buy".

Actually, Irvine does get a few things right, but does not follow through on these insights. For instance, she notes that property prices remain high relative to wages, and lending to landlords has decreased. In other words, prices have a long way to come down, and the smarter speculators know it – which hardly makes it an auspicious time to buy. She also, rightly, observes that recent rent increases have ‘stretched some renters to their limit.’ But the implications of this for prospective rent increases are left unexplored.

I’m not about to make my own predictions for property prices and rents in 2009, but I will suggest a couple of questions that readers might ask when they see stuff like this in the media. First, about predictions of steeply rising rents: where is that extra money going to come from – especially if unemployment rises, and wage claims are reduced, and so much of the rental market is already in housing stress? Second, about it being ‘time to buy’: this supposes that prices are not going to get any better – and by that, I mean lower. But again, where is the money going to come from to support price increases – or even maintain current, still hugely-inflated, prices? Can Australian households really take on even greater debts, and devote even greater shares of their incomes to paying interest?

Better put the champagne back in the fridge, and one’s brain back in one’s head.