The boys who cried rents

Economic forecasting – whether in relation to housing, currency, interest rates, or other markets – is tough. The world of economics and finance is very complex and predictions within a reasonable degree of confidence and accuracy 12 months hence are hard. Yet, the media continually publishes predictions by the nation’s economists and data analysts as if they are a foregone conclusion.

And so it goes with forecasts of rental growth. Over the past few years, I watched bewildered as the nation’s housing data providers offered bullish forecast after bullish forecast of sharply rising rents.

Australian Property Monitors (APM) have been especially bullish. In February 2010, they forecast that rents would rise by up to 11% nationally:

Research company Australian Property Monitors has forecast rent increases of up to 11 per cent in 2010 after little or no growth during most of 2009…

“An improving employment outlook means, overall, renters will be more willing and able to afford rental increases,” APM economist Matthew Bell says.

Ongoing housing shortages are expected to worsen as first-home owners opt out of buying and remain as renters.

Immigration continues to increase and more people are turning to bricks and mortar as an investment after being stung by the share market.

“On the supply side of things, there simply aren’t enough new properties being built for investment purposes to meet this increased demand,” Mr Bell says.

However, he says many rent rises will also be needed to recoup extra costs such as higher interest rates and land tax, not just additional profits for landlords.

APM ended up being way-off mark in their forecasts, with rental growth remaining subdued in 2010 according to RP Data. Still, this hiccup did not stop APM from predicting strong rental growth for 2011, again driven by strong economic activity and housing shortages:

“Renters should prepare for significant growth in rental prices throughout 2011, driven by accelerating economic activity, housing shortages and a depressed first homebuyer market,” said Dr Andrew Wilson, Senior Economist, Australian Property Monitors.

“Units in particular have seen a major shift in demand, with chronically low vacancy rates for inner-city residences in most capitals intensifying competition amongst prospective tenants for available properties.

“However it is expected that rising rental yields will renew investor interest in the market and may provide some relief for renters in the longer-term.”

For their part, RP Data have been more modest in their predictions for rental growth, albeit still too bullish.

In January 2009, RP Data made the following prediction about rental growth:

While many experts are predicting property values to remain relatively flat, rental yields are expected to strengthen further during the current housing shortage…

Cameron Kusher, senior research analyst with RP Data, noted that on a rolling six-month average basis, construction of new investment houses dropped by 7.9% in November 2008 compared to the month earlier. Over the year to November, the value of investment housing sank 17.9%, with volumes currently sitting at levels equivalent to those seen in mid-2007.

“The implication of fewer dwellings being built for investment and fewer existing properties being purchased is that the shortage of rental properties is likely to continue,” he said…

“With underlying demand increasing due to rising population growth, the housing shortage and the rental shortage situation is likely to become exacerbated,” he said.

“On the flipside, for those who own or are thinking of purchasing investment properties, it’s anticipated that rents will continue to rise as property values remain flat.

Then in 2010, RP data followed-up with this forecast of solid rental growth:

Rising house prices have pushed down the return for investors, with the gross rental yield for houses nationally falling from 4.7 per cent in January last year to 4.2 per cent this year.

The rental yield for apartments dropped from 5.3 per cent to 4.9 per cent.

“With rental demand likely to be higher during 2010 due to continuing strong migration and fewer first-home buyers, we anticipate that rents, and consequently yields, will improve over the year,” Mr Lawless said.

And in January this year, RP Data predicted that rents would rise 7% nationally:

“We expect rents to increase by around 7 per cent during 2011,” RP Data analyst Cameron Kusher said, adding rents would rise most for inner-city units and the more expensive housing markets on metropolitan outskirts.

“For the coming year we expect rental markets to tighten further and rental growth during 2011 will [most] likely eclipse that of 2010,” Mr Kusher said.

Now RP Data has released analysis showing that capital city rents have stalled, rising at only 2.7% in the year to June 2011 (i.e. below the rate of inflation):

Capital city weekly rental rates stalled in the June quarter, posting no growth in the latest sign of a cooling property market.

Median capital city rents were flat in the June quarter with only two capital cities showing increases in the quarter, in the latest sign of slowing activity in the real estate market.

In the year to June, capital city median rents – for houses and units – rose 2.7 per cent to $380 per week, according to RP Data…

To add insult to injury, rents have barely increased since the end of 2008 (most likely falling in real terms):

“As many investors will be aware, rental growth has been relatively subdued since 2008 due to a number of factors such as stimulus from low interest rates and the First Home Owner’s Grant Boost which enticed prospective new home owners into buying and eased demand for rentals,” said RP Data research director Cameron Kusher.

Certainly, RP Data’s own chart highlights the flattening of rental growth since late 2008 after a solid run-up in prior years:

Still, this hasn’t stopped RP Data from forecasting strong rental growth into the future:

Mr Kusher said he expected the pause in rental yield growth to be temporary.

“Limited new development during 2011 is likely to add to the upwards pressure on capital city rental rates and as a result we expect rental growth to revert to around five year average levels with inner city units and outer more affordable housing stock having the strongest prospects for rental growth,” said Mr Kusher.

I can only presume that Mr Kusher is not refering to Melbourne, which currently has the highest rental vacancy rates (and lowest yields) in the country, and thousands of new homes due to be completed over the next few years.

Some months ago, when The Australian secured Treasury discussions about the Australian housing bubble via freedom of information, economists there also expressed the hope that strongly rising rents would close the property valuation gap.

Right now, it appears a forlorn hope.

[email protected]

Leith van Onselen
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  1. Good work Leith – we can’t stop these real estate marketers continually making ridiculous claims, but at least we can document how consistently wrong they are.

    • The_Mainlander

      AB, I strongly object to your attack on ‘Marketers’ as being the culprits.

      If anything it is a collection of property RE Spruikers, State Government, Federal Government and Banks that are driving the discussion proper.

      There is no argument that the PR, Marketing and Advertising is a compent – but it is unreasonable to blame a cohort of professionals.

      How about the Financiers, Accounts, Sales, Operations etc.

      Please be careful with such a broad brush next you will be suggesting that Advertising and Marketing are the same. 😉


      • TM – I think you take my words too literally. Maybe “marketers” (with the quotes) or spruikers would have been more accurate as I meant the term to apply to all the professions you list.

  2. For “upward pressure”, no explanations given other than immigration and housing supply constraints.

    These two factors have been debunked a long time ago .

    Well, it must be “upward pressure” in Doc Wilson and Kusher’s nether regions that makes them regurgitate the same shit again and again.

    • This is a ridiculous comment that borders on being a lie.
      In Sydney we have high rents, high immigration and constrained supply.
      Did you keep a copy of the debunking that you refer to? Or did you lose it a long time ago?

      • Where did I ever mention just Sydney alone? As far as debunking goes – As this very blog post shows, spruikers have been relentlessly wrong in their rent predictions for the last 2 years.
        I know you are touchy when anyone talks about Sydney. But from a practical standpoint, do you expect high immigration and supply constraints to keep Sydney house prices/rents high, while the rest of Australia is going down?

        • Forgot to add:
          “spruikers have been relentlessly wrong in their rent predictions for the last 2 years while immigration and supply constraints have been just about the same year on year”
          Also, Steve Keen has done extensive work on delinking house prices from immigration/population and supply constraints. Please read up the stuff on his blog instead of snarling at random people who happen to (not) mention anything about Sydney.

          • I have read enough of Steve Keens work.
            Clearly there is no link between population growth and expensive housing UNLESS SUPPLY IS CONSTRAINED. Many items like TV’s and computers have fallen in price in the face of massive population increase. The reason being that supply is not choked by govt. Only when supply is choked can enormous price rises occur with no supply response. You should read more posts from the Unconventional Economist before snarling at your intellectual superiors.

          • I’m with claw on the link between supply constraints and housing bubbles/busts. Easy credit justs makes the situation a whole lot worse.

            Don’t get me wrong, I am not challenging Dr Keen’s work – he is the master on the demand-side of the housing market. But he needs to acknowledge the role played by restrictive land-use policies in creating this mess.

        • A very poorly worded question. But high immigration with supply constraints will force more people out of Sydney. Higher Sydney rents would be one way this could happen. Lower alternative city rents is another way. I cannot predict the level or direction of rents, but I know that a shortage of housing causes suffering. This is what we have in Sydney. Too few houses AND/OR too many immigrants.

          • “but I know that a shortage of housing causes suffering. This is what we have in Sydney. Too few houses AND/OR too many immigrants.”
            “I know” does not count as evidence. Got anything else to back that up, Mr Intellectually superior?

          • Half a generation of 30 locally-born 30-somethings have left Sydney because they cannot obtain decent housing. Is this enough evidence, or need I provide you with a list of their names and bank account details?

          • Well, I am still renting in Sydney. Is that enough evidence that there isn’t a shortage?

          • I suspect that you are one of the richer immigrants who has displaced one of the poorer locally born young families. You might think this good. I think it bad.

          • This is getting absurd. Anyway, your argument basically boils down to this – Poor bogans in Sydney are moving out and are replaced by richie rich immigrants, thereby increasing rent/house prices. Now where is the supply constraint here?

          • The supply constraint is the fact that the poor bogans (your term) must move out in order to make room for the elite migrants. In my opinion the migrants should be kept out unless enough extra housing is created for locals AND the migrants.
            If not extra housing then not extra immigrants.

          • That is NOT a supply constraint – because, as you said, the bogans are moving out, thereby reducing demand. It appears you have described a economic demand-supply equilibrium, but haven’t recognized it as such. Possibly because you are overly emotional about the immigration angle and have let your emotions rule over your ‘superior’ intellect.
            Come to think of it, I wish I could join the bogans in their migration out of Sydney. Barry O’Farrell even gives me a cool $7000 to do so and I quite like country air. But, alas, my job keeps me tied to the city.

          • It IS SO a supply constraint. If water flows over a dam wall that means the dam is too small to catch all the water.
            The fact that some of the water has now gone and no longer constitutes demand for storage capacity does not change the fact of shortage.
            I continue to be amazed by the lengths that shortage-deniers such as yourself will go to to deny the shortage.

          • Cameron,
            Because the world is not as simple as you would like it to be.
            Can you understand why your bedroom might get colder even while a heater is running in it?

          • LOL.. We are not shortage deniers. You just haven’t given us any evidence to show there is a shortage. Just show us some statistics (beyond the anecdotes of 30 of your friends) and we will quietly go on our way.
            As I said in another thread, nearly every children of first generation immigrants that I know of, have emigrated out of Australia. So can I conclude that new immigrants are pushing the children of old first-generation immigrants out of Australia?

          • Ah ha, a statistic-demanding shortage-denier. One of the worst kinds.
            Did you know that the ABS secretly surveys every person who leaves Australia and does not return within 12 months. They question the person why they left and then have the answer validated by detectives. They then compile the list of people forced out by high house prices and rents.
            I have a secret Internet link to their findings. Would you like me to post the link?

  3. Hi Leith,

    For the longest time I expected the correction to be sudden. I expected by now the Sydney market would have corrected 5-10%. When it didn’t happen as I expected, I started wondering the reasons why it wouldn’t. I commented before in MB that I think emotions are taking over the RE market in Sydney and inflating prices over reasonable valuations.

    I still needed to find if any, a fundamental reason the correction wasn’t happening (at least as fast as I thought). The reason, I believe, is the demand for rental property.
    I took the official data (from the ABS source, the NSW government) and plotted the median price to median annual rent ratio. This ratio is a wonderful tool as it takes into account the forces that drive up the cash inflows of the property investment vehicle.

    I will send you and DE the charts for your review. I got inspired to do this research by your blogs.
    It also gets rid of the nominal vs real debate as it is a ratio of either nominal or real figures. In my case, nominal.

    The ratio as of the March quarter is 25. The ratio where RE prices in Sydney started rising was 20.


    • “I still needed to find if any, a fundamental reason the correction wasn’t happening (at least as fast as I thought).”

      Don’t look for fundamentals because bubbles are not driven by fundamentals but by psychology (mass hysterias)

      • Hi jc.

        I am the first to acknowledge the mass greed that took the prices where they are. I needed to figure out why wasn’t fear setting in as I expected during the correction. Other than the full-recourse nature of the Australian loans, I had very little.

        I believe I found the answer in the steady growth of rent per week. NOTE: I only looked at Sydney. That is my area of expertise and study.


    • Sydney is their (spruiker’s) last stand and Sydney will be the last to fall.
      Ever noticed how the spruikers have stopped talking about other cities in general and focussing their efforts on talking up Sydney alone?
      I have long compared Dr Wilson to the former Iraqi information minister.
      Comical Ali kept insisting that Baghdad will never fall, even as American tanks were rolling on the streets behind him.
      Likewise, Dr Wilson will keep insisting Sydney will never fall, even in the face of mounting statistics. Some of the statistics like clearance rates look bad even after they have been clearly doctored to look presentable.

      • To be honest, no I haven’t. I gave up on MSM and all I get in those terms is via proxy by MB.

        I sent the charts to Leith. I haven’t found those charts anywhere else. So this is my own analysis. I trust it more than anything else, because I get convinced once I did it.

        What does your analysis of the Sydney market tell you?


        • “What does your analysis of the Sydney market tell you?”
          Anecdote wise, it is holding up so far. But no man is an island.. nor is Sydney.

          • Holding on………..just. The signs are that it is on the verge of falling over. A new building of shiny, granite benched dog boxes is about to open just doen the road from me. Initial expectations were for ~$550k for a 2BR unit, so I am watching with keen interest. I may even pop over to an open house and see what half a mil gets one these days.

    • I think what we’re now seeing is the bid/offer spread widening on property. Relatively few sales as the supply of fools dries up. Until it has dried up completely, owners prefer not to realise a “loss” of the gain they have mentally pencilled in. Once it has dried up completely, many will start renting out rather than selling, still unable to process the “loss”. At the same time, there will be some panic selling, which will see an acceleration in price drops, and this will come in many stages, those getting out first being the wisest. That’s what I’ve personally experienced in Ireland. It doesn’t tip quickly, but then it picks up speed once the love affair ends.

      • I am anxiously waiting for the next data piece from the Sales and Rents report for the June quarter to see what the change is. It comes out in 2 weeks.


  4. GReat post…as AB said, holding people to account for their poor predictions is neccessary as they were talking their own book with these predictions…

  5. Looks like you are better off flipping a coin than reading main stream media economic predictions.

    It would be interesting to find out proportion of rental property demand resulting from owners flipping properties. Most people I know were happy renting the property they rented two years ago but had to move due to it being sold and find themselves in the rental property market again. Could lowering property transactions lower rental demand?

  6. Antidotal evidence in Melbourne is that I can get a better place then I am I renting now for same price when I moved in over two years ago. There is far more places avalible as well.

    Prices are going ‘down down’.

    My rent hasn’t gone up either in this period.

    • Torchwood1979

      Similar story in Brisbane. Nice to be a renter in the current market. And in my local area the number of houses for rent appears to be exploding. The Wife and I are thinking of renting a small house for only $5 a week more than we’re currently renting our shoebox-sized unit for.

    • Our rent in Melbourne hasn’t changed in nearly three years.

      We pay $700 per week for a house that would sell (or would have sold six months ago) for $2 million. That’s a yield of 1.8% before expenses…

  7. With regard to Melbourne, the pollies are actively seeking increased development to increase the supply. The build it and they will come scenario. This is evidenced in the Melbourne @ 5 million plan and the Stonnington Development Plan 2013.

    I truly believe that this is because they want rents and inner city pricing to be more affordable. In other words, to create a livable city.

    The issue is some corners of the media and some analysts are painting the same property as a viable investment vehicle. Clearly, these are two separate ideologies where one party will be found to be wrong.

  8. Good one – thanks Leith.

    Further to APM’s predictions, I note last year they gazed into the crystal ball and foresaw ‘the decade of the landlord’.

    If I may, the Tenants’ Union’s take on the prediction:

    Another thing about APM: they include in their reports a measure of ‘asking rents’. A couple of years ago I compared ‘asking rents’ to what tenants actually pay: the asking rents were $40-50 per week higher.

    Finally, it’s worth keeping an eye on APM’s figures from report to report, because they are not always consistent. When I did that comparison, I found APM often revised (downwards) previously reported rents – so the increase appeared larger.

    Thanks for your indulgence – keep up the great work.

  9. Over the last few months I have been searching for another place to rent. I have noticed that some apartments have been left vacant for weeks on end and the vendors have had to drop their asking rent price and still no takers.

    Anecdotally it seems that rental prices have peaked for now as well.

  10. I see this whole process of rent rise predictions as being price signalling to landlords.
    It helps to stop landlords from selling up because it gives them hope that things might improve.
    It reinforces in the landlords minds to look at putting rents up when they next have the opportunity.
    I feel disgusted every time I see a rent rise spruik article.

  11. Thanks Leith – it’s good to keep on top of the Rental Meme.

    A know i’ve been banging on about it for a while, but it’s possible we’ve got a mini-bubble that will “pop” before the sales one takes its final leg down.

    We’ll see.

      • Yeah, you have 🙂

        it’s funny, isn’t it – one wouldn’t expect it at first, but then when we think about structure and dynamics, it makes a lot of sense:

        The former structure is unwinding, such that the elements of the status quo that are built upon those aspects that are now turning down (eg. continuous increases in debt), also turn down.

        eg. Rents are predicated upon incomes that were predicated upon structural debt increases; now that debt growth is turning down, income growth for the “rental class” may also be turning down, and, as such, rental price increases are also turning down.

        Interesting indeed.

  12. I thought that the predictions for increases in rents were odd when in February my brother told me that he had to lower the rent in his house in Perth (less than 10km from the city) to attract new tenants after a long term tenant left.

  13. Im seeking a rental in Melbourne right now. Ive been renting in this city for a long time & Ive never seen so much supply before. The housing stock available is – generally speaking – downright awful, but there is a lot of it.

  14. I live in a block of six in Elwood. Spacious 60’s jobs. A few years ago vacancies where snapped up by Indian students. Not now. It has taken 3 months for the landlord to let a spacious 2 bedroom flat. Had to drop the rent.

  15. it looks to me like part of what you are quoting are newspaper articles written by journalists, not research reports written by researchers. if so, you are being veru lazy with the truth and harsh with your acusations.

    you should refer to the original research reports or press releases. journalists often don’t understand statistics and will write headlines like “growth of up to 11%” when the 11% figure is for darwin and the rest of the country is only 3 – 4%. i agree that is misleading, but it is hardly the researcher’s fault.

    • aren’t the hournos basing their reports on the info of researchers, for the most part?

      Sure they, might be selective, but I don’t think the same can be said of Leith.

      Additionally, most of those he quoted, were actually the researchers of the data-houses themselves, weren’t they?

  16. The logic behind these spruiks is all the same. The claim that rents are going to up by such a large amount has two obejectives:

    i) Scare renters into buying

    ii) Encourage speculation by investors into buying property to feast on the ever increasing rents.

    Either way the message is the same. Don’t rent, BUY!

    They wheel these increasing rent lines out as alternative from their usual mantra – When the market is going up, buy now as you will miss out on future gains. When the market is cooling or levelling (never falling), buy now as this correction is only short term.

    There is NEVER not a good time to BUY.

  17. michael francis

    You can’t borrow to pay rent so rents can rise no higher that nett income minus cost of living.

      • I disagree and have the chart to prove it. I haven’t been able to find a rent/price chart so I made it from data in the NSW Sales and Rent report since 1996. As far as Sydney is concerned your statement doesn’t hold.


    • Is this true for a local market with a high immigrant student population?

      There was a story recently in the news about some suburbs of Sydney containing apartments sometimes with 10 students living in a 2 bedroom apartment. This could cause yields to rise far above income/CPI. And for some suburbs or Sydney as a whole it could significantly distort rental prices right?

      • Those articles where about how illegal landlords where stuffing lots of students into poor accomodation.

        I think because of this illegal accomodation I highly doubt the income the landlord recieved was recorded to be used in any statistical analysis.

  18. According to ABS house price indices and NSW housing rent data, Sydney rents have gone up faster than Sydney house prices over the last 9 years(March 2002 to March 2011).
    Victoria Housing say that Melbourne rents have increased at an average of 5.7% over the last decade ie 74%. Slower than house prices but faster than average earnings and much faster than CPI.

      • Most interesting information in that data is that the proportion of people who own their properties outright has dropped from 42% to 34% (that’s a massive change!) over a period of time with a shift in demographics towards a more aged popultion. That is surprising because other ABS data report the numbers of outright owners climbs in older age groups. So either the baby-boomers are keeping themselves mortgaged which isn’t particularly sustainable when they retire or the equity ATM has been tapped at younger age groups which will spell disaster in the long run.

    • Yes, it’s been great fodder for the ‘rent money is dead money’ parrots, but it’s truly unsustainable. Rent has increased as a proportion of people’s net income which is exactly why it can’t keep going up at the rate it has. You can see how stressed people are to pay the bills on reasonable incomes already so rent won’t increase past the wage increases given to those people. Unlike house prices which can be manipulated upwards when people consider their future wage increases and appreciation, rent is absolutely temporally constrained, once it reaches a maximum (take home pay minus necessities – which is probably where it is now given the plateau in recent years) it can only increase at the rate of wage increases.

      • Yes. It is terrible that rents have risen so much. In Sydney an ordinary home that used to cost 1/3 an ordinary income to rent now costs 1/2 an ordinary income.
        Most families cannot pay this so they end up renting inferior dwellings instead. When reading statistics for rent it is important to adjust for lower quality (few do).

    • That seems to be consistent with flat yields since 2002.

      See CJ’s chart here.

      Sydney does not seem representative of the rest of the country. This is important to consider since Sydney trends have a strong influence of Australian aggregate trends.

      Capital growth in Sydney since 2003 has been the softest in the country

      Notice how strong Sydney’s performance is on the National price trend.

      This might go some way to explaining why the Brisbane, Melbourne, Perth and Adelaide based comments seem at odds with your Sydney experience (I think the Claw has a similar Sydney-centric view which may very well be correct for Sydney, but do not apply to the rest of the capital cities).

      And perhaps use non-sydney people assume that Australia is the average of 4 boom capitals and neglect this important differnece in historical price performance (yes, I’m also guilty there).

    • Wasted Opportunities

      Housing NSW publishes quarterly rent data by postcode:

      It is based on bonds submitted so good integrity, but it can be volatile if there are not many new rental leases established for the postcode in a given quarter.

      I was suprised to find that rents are down 3.5% for the year in my inner-western Sydney postcode (2038) for two-bedders, a fact that came in handy in negotiating a recent rent increase.

      The ABS real rent index has tracked pretty close to flat for the last 40 years. Sydney might be higher than the index but rents have by no means followed the same trajectory as the house price bubble.

  19. Firstly, I think the “rents thru the roof” spruikers are convinced that by stating that prediction the market participants will behave as if that’s the case (i.e. landlords will raise rents and tenants will believe its just part of the market). While that has worked previously, its now pretty clear that a rental affordability ceiling has been reached in most markets.

    But of course the flip side of such predictions is just to placate infestors who were expecting ongoing real cap growth that these projected future rental returns mean they don’t have to sell up.

    But of course it all smells of the B(I)S Shrapnel school of economic modelling: 1) Identify historic exponential growth trend, 2) Assume past figures will predict future, 3) where compound growth doesn’t ensue, assume it will leap back to exponential growth any minute now…

  20. Aus’s spruiker tossers are lame compared to some of NZ’s spruikers.
    One dude here called Olly Newland recently predicted average rents in Auckland will double in “2-3 years”

  21. I have used the subscription service from RP Data and we were informed by a staff member that the rental data is derived from rental property that is “advertised”.

    So that is advertised properties only and does not include data of actual rental tenancy agreements. It is essentially guesstimates and does not include 100% of all market data.

    It is only a small sample of the market data as well e.g. might be 10% or 20% sampling.

    Do you need more proof ? Then check out the RP Data website and try to find any reference to weekly rental rates. Or better still e-mail RP Data and ask them where the data is sourced, how the data is constructed, what is the data sample size and why don’t they publish this on their website?

    Now here’s some reliable information for you. The NSW Department of Housing and Lands publishes rental reports and the rental statistics are derived from information provided on the rental bond lodgement form that is lodged with Renting & Strata Services Branch (RSSB) of the Office of Fair Trading. (not advertised rental properties) see

    Not all State Governments offer rental bond lodgement data.

    So most of the reports published by RP Data are based on ‘advertised property’, because that is what they can capture from websites