Friday, October 9, 2015

Want to help a cash-strapped landlord? Pay more rent!

We were alerted to the news of Sydney's latest 'biggest rent hike in xxx years' with a tweet from Domain editor Anna Anderson:
The article cites Domain Group's latest data, which puts Sydney's median rents at $530/week - an increase of 3.9% over the year. Other news outlets - citing other data - have Sydney's median rent at $592/week, with a growth rate of just 1.9% p.a. Go figure.

Or better yet, check out our rent tracker series to see why these data sources don't always give us the whole story...


But whichever way you look at it, the rent is pretty damned high.

Now that we're in agreement on that, let's take a closer look at the way the data gets reported.

Domain calls on the Domain Group's senior economist, Dr Andrew Wilson, to explain. He says it's all about an "undersupply" brought on by changes to the way investment loans are structured. Higher interest rates and higher upfront costs, he seems to suggest, are either passed on to tenants in higher rents or they result in a loss of rental supply as potential investors opt out. This, coupled with "strong immigration" to Sydney, will put the squeeze on rents for some time to come.

Business Insider provides another analysis, with RP Data's Cameron Kusher telling an impossibly different story:
The major factors contributing to slower rental growth are the construction boom across the capital cities coupled with slowing population growth, along with low mortgage rates and the heightened level of activity from investors.
It's hard to know which kool aid we should prefer here, or why they can't just talk to each other and get their story straight... Have artificial barriers to investment suddenly caused a reduction in the supply of willing landlords, or is an increase in new dwelling construction and investment activity taking the edge off capital gains? Either way the result may be the same - a slower market for speculators, with landlords going for yields rather than gains.

But in a market where prices are not supposed to go down, increasing yields means fishing for higher rents. And for many, this will be a simple matter of survival. Without the prospect of strong capital gains, many landlords will be unable to wear the ongoing losses. Those not in a position to sell up and cash out may see no option but to try to increase the rent. The Domain article picks up on this, when quoting Parramatta real estate agent Edwin Almeida:
A lot of people are cash-strapped and need higher yields to substantiate their property purchase.
This begs the question - with rents always going up and up and up, what gets our landlords crying poor?

The answer is simple: unaffordable housing. Landlords need to borrow extreme sums of money in order to purchase property. As prices go up, so does the amount of borrowed money flowing through the housing system...
... and, as we've discussed before, it costs an awful lot to service this debt. In fact, paying the interest on loans is the single biggest expense that landlords must cover - this absolutely dwarfs every other major cost. Rents go some way towards covering that expense, but in recent times landlords have traditionally relied on capital gains and preferential tax treatment to make their costly investments worthwhile. It stands to reason they'd become skittish when gains start to look a little less assured.

All the same, perhaps rents have continued to rise faster than they've needed to. Data from tax returns shows that NSW's landlords received $2175.00 more in rent per property in 2012-13 than they did in 2009-10. But their expenses, over that time, increased by a much smaller amount - an average of only $880.00 per property. This is in spite of property values increasing dramatically, giving landlords plenty of gains to bank on without having to dip into their tenants' pockets for higher rents.

Please do remember this, and have a nice warm, fuzzy feeling when your landlord comes a-knockin', cap in hand, because they need a little help to substantiate their property purchase...


3 comments:

  1. Two Property Analyst's with differing opinions fuelled by their own agendas and market speak. Yes Australia is open to Foreign Investmetnt but all the "eggs in one basket property". Increasing home prices r beginning to outstrip wages and affordability for locally employed people. It's beginnning to hit the wall but inthe meantime the market continues to be fuelled by in particular Asian purchasers. Theres a crisis coming twofold, we will be overun by foreigners and if not then the asset value of home ownership will collapse from it's present over-hyped values

    ReplyDelete
  2. Hi Robert,
    I keep hearing that it is Asian - or more specifically Chinese - investors who are pricing us all out of property at the moment... but I'm yet to be convinced. To the extent that international buyers are becoming a stronger force in our property market, this is more likely the symptom of an affordability problem, rather than its cause. Domestic speculators have pushed prices up to the point of unaffordability, and in doing so have constricted the pool of potential "greater fools" they might one day be tempted to sell to... The emergence of international buyers within our property market is perhaps an expression of this.
    Cheers,
    Ned.

    ReplyDelete
  3. Rent rates in major cities across the world are out of control! It is hard to imagine how much the rates are going to potentially increase over the next five to ten years and who will be able to afford to live in these major cities. As it is now, many are having to leave.

    Kendrick @ RPM Long Beach

    ReplyDelete

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