More rent hysteria

It’s been interesting watching the change in perceptions regarding the housing market. Around this time last year, several well-known housing commentators were predicting strong gains in home values, including:

With home values down in all capital cities but Sydney over the past 12-months, the consensus view has shifted from an expectation of solid capital growth to expecting a prolonged period of price stagnation whereby incomes will slowly catch-up with home values.

However, the price stagnation meme has created a headache for the property industry. With prices now expected to flat line and rental yields well below both mortgage interest rates and term deposit rates, there is reduced incentive for first-home buyers (FHBs) and investors to enter the housing market.

Therefore, in order to re-ignite buyer interest (and maintain home values), the property industry has created the illusion that the rental market is tightening and rents are about to rise sharply.

For the past few years, housing data providers APM and RP Data have consistently forecast strong rental growth (see here for details). Likewise, in a recent interview on Switzer, the chief of BIS Shrapnel, Dr Frank Gelber, made the factually incorrect claim that “rents are rising quite aggressively because of the shortage of stock and rental yields are going up”.

And yesterday, so-called “staff writers” for joined the fold penning the hysterically titled article: Tenants in Australian capital cities feel the heat as rents skyrocket.

In the interest of restoring rationality to the debate, I have brought together the recent data on rents to show that they have not “skyrocketed” as claimed, but rather flat lined in real terms for the past nine quarters.

First, the latest RP Data rental review shows that both capital city and national rents have grown at a rate below inflation since March 2009:

Similarly, APM rental data shows sluggish rental growth for both houses and units since March 2009 in most capital cities:

I long for the day that the mainstream media reports facts relating to the housing market accurately, rather than running hysterical spin pieces aimed at lining the pockets of vested interests within the property industry.

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Unconventional Economist
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  1. Interesting observations yet again m Leith. Most long term investors will have no problem with flatline asset growth and poor rental return – it’s the people who buy in for a quick capital gain with huge amounts of debt who will most likely be under stress in the coming years.

    As I have observed myself on these pages, my own part of Melbourne is becoming saturated with rental property. More recently, a house directly across the road from me has been on the rental market twice this year and remains empty as I write. According to the internet, the landlords have dropped the nominal weekly asking rent twice this time but nobody’s rushing to take out a lease. Meanwhile around the corner there’s a new block of ugly concrete units replacing a Georgian brick house and they’ve put the “For Lease” signs out before its even completed. That whole street (mostly 3 storey flats) is a sea of “For Lease” signs all the way up and down and flats certainly seem to spend a long time on the rental market before somebody leases them. All of this is totally contrary to the spin … even if 2.5% vacancy rate for Melbourne is reasonably accurate I’m sure it doesn’t reflect how many properties are actually ‘vacant seeking tenants’.

    • you might think that the census distributers and collectors might be able to give us a heads up on the empty houses. I read somewhere that the real vacancy rate in some places is 2x the stated amounts.

      I think we should start monitoring the “rooms to rent” section of the paper – as singles move out of their appartments and rent a room this should drop while rentals increase ???

      • Spot on Jack…some basic calculations and we have MILLIONS of spare bedrooms for rent.

        ITs not just abotu houses…its about bedrooms. I am yountg bloke renting in a share house and thinking of moving cities…I am not looking for a vacant house…I am looking for a spare bedroom!

        • Just think of all the young singles who only rent for “lifestyle” reasons (which for many young men is the dream that they will be bedding a different fair maiden each night away from the prying eyes of mum and dad).

          How much economic pain do they really need to endure before making the easy decision to do a “prodigal son” and go home to the old rent-free bedroom at mum and dad’s?

        • I can’t say I would imagine a confined room to slumber is the sole consideration with a dwelling.

          My experience would be that many enjoy solitary use/control of a kitchen, bathroom, garage, etc., in terms of promptness of use and periods of cleaning.

          The fact we have a structural over-supply of bedrooms concurs with Leith’s supply side constraints and urban boundaries argument.

          We have too small land being released at too high a price.

          With a price that could be perceived well above fair consideration of utility, thus to reclaim real costs, we are forced to place an investment focus on it.

          Thus developers don’t consider the one bedroom dwellings with low margins and consumers cram their land with extra bedrooms they don’t need to optimise re-sale value.

          • Spot on RP. When land is inflated to crazy levels, such that the land component in new fringe housing comprises 50%+ of the purchase price, both developers and consumers are incentivised to add an extra bedroom/bathroom or two since the percentage increase in costs is not very large (i.e. the extra utility/cost trade-off is favourable).

            But in well functioning housing markets, where the land component costs only around 20% of the total new fringe home purchase cost, the addition of extra bedrooms/bathrooms represents a large percentage increase in price, thereby discouraging such behaviour.

            Think about it like a McValue meal. If a small McValue meal costs $7 and only an extra $1 to upgrade to large, most people will do it as the extra $1 provides a large increase in value. However, if a small McValue meal cost only $2 and an extra $1 to upgrade, most people would not bother upgrading as the extra $1 provides far less additional value.

          • Following UE’s 20% component for the land logic. This means that if a house costs $150,000 to build the land should cost about $37,500 for a total of $187,500. By my estimate, land prices need to drop about 85%. Even if the cost of building didn’t fall this would make home prices affordable again presuming incomes didn’t decline.

        • Stavros, congratulations on finding one more form of oversupply that in no way helps the average first home buyer. WOW! an oversupply of bedrooms according to your definition.
          All along my street there are hundreds and hundreds of horsepower in oversupply. A 1960’s car used to have maybe 50 horsepower and that was enough. Now they have 200 and 300 horsepower. Also many cars on my street are parked and the motor is not even running. More horsepower being wasted.
          The relevance of this? ZERO.

          • The Claw strikes again – at random people on the internets (especially at those in the comments section of Fairfax websites) who even dare to obliquely suggest that Sydney does not have a housing shortage.
            Mate, get a different hobby.

          • Many of the spare bedrooms that Stavros lusts after are in fact used by old property owners for other purposes. Eg Granny raised 4 children in 3 bedrooms. The children grew up and moved out and now granny has one sewing room, one games room for the grandchildren and one guest room where the cat also sleeps.
            Is Stavros obliquely suggesting that Granny should be dragged away somewhere to free-up those rooms for his purposes?
            Does Stavros propose any method whereby the rooms he deems to be spare can be somehow converted into suitable housing for those suffering from one of the many shortages in Sydney?
            Regarding my hobby, I am tiring of wasting time on morons so you might soon have your wish.

          • I actually agree with Claw that Sydney does have a genuine shortage. Its rents have risen far quicker than the other capitals and its new home construction has been depressed for a very long time. It has also suffered from many years of emigration from residents seeking more affordable housing elsewhere (e.g. Canberra, Melbourne and Brisbane).

          • Leigh havent you stated in the past (when looking at the California bubble) that pent up demand and perceived housing shortages can be very fickle.

            If that is the case surely what Stavros has said has some merit as many young renters have the option to rent a room somewhere or more specifically move back home.. how much economic pain till the current perceived housing shortage becomes a housing surplus?

  2. There needs to be more focus on net rental income (i.e. after rates, body corporate, maintenence etc) to provide a realistic assesment of property as an investment. Also, as we all know, the increases in property prices over the last few years have significantly reduced yeilds (and net yeilds). And then there is the small issue of stamp duty to throw into the mix…

  3. Rental vacancy rates claimed in media are not vacancy rates. That number represents a percentage of rental properties that are total excess – not needed even as moving vacancy (between renters) or renovation reserve. Real vacancy rate is likely to be 3 times higher. Just moving vacancy is likely to be around 1-2% (property is vacant only one week between two moving tenants once in 1-2 years). In addition, renovation vacancy is around 1% (three weeks vacant for renovation every 5-6 years).
    Estimates for these “natural vacancies” assume that new tenant is found before old tenant moved out. This is unlikely to be true for all properties, in some cities unlikely even for a majority of properties. For a property to be leased it often takes property to be vacant, because searching tenants like to see empty property to decide. Everyone who was looking for a rental property knows that majority of properties is vacant at the time of inspection. This means property is vacant but not counted in vacancy rate if listed for lest than 3 weeks – and most of them are leased after first or second inspection.

    In other countries vacancy rate is determined by surveys of rental properties. These surveys include all vacant properties (for any reason including natural vacancies). In Australia nobody uses surveys but rather listings and assumptions that select only properties that cannot be leased out (i.e. sitting on the market for a long period). These rates do not include vacant properties due to moving, renovation, search for new tenants shorter than some predetermined period, etc.

  4. Not a "true believer"

    Don’t take any notice of any stats that originate from vested interests. Have a look at and see the number of discounted houses and rentals by postcode and region and the time on the market. If that doesn’t tell a true story, nothing ever will!

  5. This is just a reaction to the fundamentals. Australian properties are at least 40% UNDERVALUED. I just signed off on my 23rd portfolio property in Glebe this week and I am looking forward to capital gains and increased rental returns. Keep on paying for my sportscars, loser renters. Clever investors get in now there’s never been a better time to buy. Incidentally I have a small number of properties for sale.

    • …at the same time, it’s not like no one “succeeds” from property investment…it’s just that the current system has ended up being a wealth-transfer scheme, and that one has to get out before it collapses on itself…

    • First Home Buyer

      Oh i’m soo angry now – he called me a loser renter!

      I think i’ll go buy a very expensive house to “get back” at him 🙂

  6. An on the ground perspective. We are looking for a new place to rent (for various reasons) Our current place of residence is being advertised at exactly the same rent we hav paid for the last year. So zero rental growth there.
    We looked at a place that has clearly been empty for at least a month, in need of some repair, where the asking rent has dropped $20 recently. Took me about 30 seconds to decide that it wasn’t worth it. After a chat to the agent my husband comes out and asks how much would we consider paying!
    So the agents are now indicating that they will allow people to bid the rent down? The rent at which I would take the place would be a 15% drop on the original asking rate, which is apparently what the owner was getting before. hmmm
    This is southside Brisbane, an area which is apparently going up, according to the property raters.

    • Business must be drying up. They sent me an email with the subject line “WHAT IS REALLY HAPPENING?”
      “With all the concern and speculation around interest rates, housing affordability and market conditions – how can you know where the opportunities are in the market? You see the headlines in the media every day, and every day they are different!
      What do they really mean to you? Do you want to grow your property portfolio? Are you wanting to understand the current market? Would you like to develop a property action plan?
      If you answered yes to any of these…….You should attend this event!
      Craig Wright – Head of Investment Sales at RUN, will present the research used by industry professionals and show you how smart investors are investing their money in today’s changing market.”

    • These are the same genuises who have continued to send an update newsletter to a previous (perhaps owner) resident of our house despite multiple RTSs. I saw that article, compared to what seems to be actually happening,I assume they are hunting for business.

  7. Its about time government controlled this outrageous criminal behaviour.

    I see it as a mixture of insider trading and obtain benefit by deception.

    It is such a shame that the scum of the earth have inherited the real estate sector!

    • We do have the ACCC – who overlook this practise…and would rather stop mergers that would be efficiency enhancing…the Chairman is a corrupt cronie that is is jumping straight from being chief watchdog to working for a private company where his inside knowledge and influence will be a great advantage for his company.

    • The new guy can be fairly entertaining. There’s a good chance he’d be open to taking this kind of thing on.

  8. Confidence in property set to improve?
    Confidence set to improve with steady interest rates. Andrew Wilson reports.”
    That is the latest Comical Ali parody video by the talented Dr Andrew Wilson.
    However, I noticed the usually self-assured Doc has put a question mark at the end there. Is reality and self-doubt creeping into his mind? Is this Dr Wilson’s Minsky moment?

  9. > I long for the day that the mainstream media reports facts relating to the housing market accurately, rather than running hysterical spin pieces aimed at lining the pockets of vested interests within the property industry.

    On the other hand, the truth is now insider knowledge! Just don’t get too popular MB..

    • BEN – “Just don’t get too popular MB.”

      To late, the Trolls have found the site. What remains to be seen is if the site can survive as they have notches.

  10. There was a terrible shortage of housing stock in California as it inflated – but “miraculously” a massive surplus after it crashed.

    Interestingly – on a population basis, California (a bubble State) has about a million less housing units than Texas (where housing markets are normal) – baseed on a Federal Reserve paper at the time.

    I covered this issue within a March 2010 article “Housing Bubbles: Jumbo Morgages = Jumbo Problems”.

    What does need to be researched and reported on, is the amount of new housing stock that has been put in place in Australia and Texas these past 10 years, with the appropriate adjustments for population growth.

    My view is that production has been greater in Australia and that the current high production numbers will assist in triggering a faster fall in prices, than most expect.

    The deflating Australian housing bubble will likely be a very messy affair indeed.

    • The key to understanding supply constraints is to focus on the speed and cost by which new supply is added. If there are:

      (1) large lags between when home prices rise and new construction; and/or (2) large differences between the cost of fringe residentially zoned land and nearby undeveloped rural zoned land (e.g. on the other side of the growth boundary), then supply is being constrained leading to higher land/housing costs. It’s really that simple.

      • Hi UE – re your first sentence above, I couldn’t agree more. The other problem about slow supply response is that there are disincentives to keep titled stock on hand, meaning it is difficult to rapidly respond. At the moment we try to adopt a “just-in-time” approach to supply where we really only build the minumum number of new lots at a time, rather than say 10% or 15% more than we need and keeping them up our sleeve. The rates, taxes, levies, etc make it too expensive. If we could pay infrastructure contributions out of settlement proceeds rather than up front, this would allow us to carry more titled stock.

        • Land developer and Leith – it is critically important to have an adequate “supply cushion” of new affordable lots on the fringes, so that as demand kicks in, there are adequate numbers of “construction ready” lots available.

          There needs to be research done of the Texas metro fringes, to ascertain the volumes of fringe lots available for construction.

          This then allows subdividers time to bring more new lots on stream. And most importantly – to ensure artificial bubble scarcity values are not triggered.

          Over production is far far less of a problem (e.g Atlanta, Georgia) than scarcity triggered bubbles.

          It is well past time the Australian and New Zealand authorities STARTED to research the affordable North American housing markets, as identified for the past 7 (yes 7) years by the Annual Demographia Surveys.

          • Hugh – we have a couple of large urban projects in West AU. I’m not sure how long ago this occurred, but the state planning authority increased the validity of subdivision approvals to 4 years. This has helped somewhat in speeding up supply responsiveness, because we can get approvals in place and then sit on them until the time is right to bring them on relatively quickly (say 6 months). Its not perfect, but its a little help.

      • Unless the supply contraints are simply a case of speculators buying up property.

        Then we’re talking housing ponzi.

        In which case, ‘building’ supply becomes a major issue – in about 10 years time (due to lack of development after housing bubble pops).

        I’d rather think of the supposed supply shortage as simply a ‘reduction in the velocity of house exchange’. Is the reason for such a supply issue simply a case of increased artificial demand? If that demand drops, then supply becomes proportionately higher.

        • I agree with a lot of what you have said there Pete and it certainly concurs with the experience of the bubble markets of the US, Ireland and Spain (amongst others).

          My issue with artificial supply constraints (i.e. any regulatory measures that slow development or add significantly to its cost) is that it crimps the construction industry’s ability to respond quickly to increasing demand with AFFORDABLE new stock. As such, whenever demand increases – be it through easy credit, population growth, income growth, or some other factor – this increase in demand manifests (at least initially) into higher prices rather than new construction, which then leads to a positive feedback loop between FHBs buying ‘before they miss out’ and investors chasing capital gains. If/when the supply response finally comes, it is often too late to mitigate the price rises and instead makes the downturn much worse (e.g. Miami, Las Vegas, Phoenix, Ireland and Spain).

          Responsive supply is the key circuit breaker that prevents the positive feedback loop of demand feeding price rises feeding demand from developing in the first place.

          • Land Developer, Pete and UE –

            The point you make LD in that it takes 4 years to ?validate: new subdivisions in WA, illustrates to me just how unresponsive the system s there – and throughout the rest of Australia and New Zealand for that matter.

            This is why it is critically important elementary performance disciplines are inculcated in to our planning processes, to ensure timely response to market demand, so that artificial scarcity values do not occur.

            I simply dont know how to make it clearer, with the definition of an affordable housing market on my website . On the Welcome Page, I spell out the performance measures required – and expand on these further within the paper “Getting performance Urban Planning in Place”.

            Industry people should be pressing for this – because artificially inflating land costs, is simply just chopping out all the lower bands of the new housing market. Its well past time those in the HIA and other organisations realized this.

  11. The graphs show real median asking rents have risen 10%-20% in all places except Hobart.
    A 10% – 20% rise in one of life’s biggest expenses in a 5 year period is extremely worrying. To me this screams shortage.
    If the situation was a mere bubble caused by excess credit then I would expect overbuilding to drive real rents DOWN. But the rents are UP. Explain that shortage-deniers.

    • 10%-20% increase over 5 years works out to be 1.9%-3.7% annual increases, hardly an issue wrt to incomes and CPI.

      Counting 200hp cars in lieu of attending year 11 maths class?

      • But, hey, Rota – 200hp cars are so much more fun than boring old maths.

        Looks like he might have been wagging classes when English Comprehension was being taught, as well.

        “…shows that both capital city and national rents have grown at a rate below inflation since March 2009:”

        “… shows sluggish rental growth for both houses and units since March 2009 in most capital cities:”

        “In the interest of restoring rationality to the debate, I have brought together the recent data on rents to show that they have not “skyrocketed” as claimed, but rather flat lined in real terms for the past nine quarters.”

        Don’t see any mention of what has happened over the last five years – just a clear and concise demonstration of what has occurred since March 2009, and how that is clearly at odds with all the hype and spruik.

        • Stop cherry-picking data and look at the whole graph. The graph slopes upward over the full 5 year period. This is bad news for renters.

          • “This is bad news for renters.”

            ‘Was’ bad news for renters.

            Rents are a factor of incomes. Are incomes rising?

            I’m thinking this might be a pointless discussion if you’ve already made up your mind.

          • I have not cherry-picked any data – I have posted exact quotes which clearly demonstrate that the article was about the current state of the rental market vis-a-vis the prevailing hype, and not about what has happened over the last five years.

            As for you changing your hobby and leaving us morons to stumble on without your ill-mannered interjections, please let me know if you need any help to pack your bags.

      • The nominal graph is just above the real graph. The nominal graph shows price rises of 28% – 44%.
        The real median graphs show real median asking rents have risen 10%-20% in all places except Hobart. I assume the real graph has already been adjusted for CPI.
        You are trying to adjust the rent down twice for the same CPI. The lengths shortage-deniers will go to continues to amaze me.

        • Claw. My articles on the rental market have nothing to do with shortages/oversupply or whether rents are expensive/cheap. They are simply aimed at countering the spin that rents are “skyrocketting” and the implicit argument used by the property industry that FHBs and investors should buy now before they miss out.

        • 10%-20% increase over 5 years in the price of ANYTHING (Truffles? Kelpie Pups?) works out to be 1.9%-3.7% annual increases.

          You have to tip your hat to the old greeks, their maths is still todays.

          You should have attended more maths classes matey.

  12. Not a "true believer"

    However you want to interpret graphs from the past, that’s not what the future will be; Look at the number of rentals on the market, amount of dicounting and length on the market. Rentals are heading down the gurglar(with various degrees by location)same way as the for-sale markets.

  13. Further to comments by the Claw and others here, my own observation is not that rental property is unavailable – its just that it is rather pricey and many people just can’t afford it. I work in a welfare job where part of my role is to try and help people get into private rental (if they can). Usually a lot of people end up sharing house with friends/family simply because they can’t afford the prices being asked for studio apartments/bedsits – either that or they move to the country where there’s lots of available rentals but sweet FA if you want to find a job.

    Rents can’t keep accelerating for the same reasons that mortgages can’t keep going up, up and away… there’s actually a limit to what people can afford to pay and beyond that they try for alternatives – sharing, moving away from Melbourne etc. At least with a (potential) excess of rental stock it gives a chance for people to get into the market… and if we have a steep rise in unemployment then there’s almost certainly going to be a corresponding drop in rents.

    • Aha, THAT is the issue not some shortage waffle.

      Its about the ‘market’ and what people are willing to pay (widgets, phones, rent, etc)).

      The Dublin market had far far less buildings to population than Sydney and their prices are down 50% in 4 years and rents down 30%.

      Don’t take your eye off the ball.

      • Rota, 30% cheaper rents in Dublin sounds lovely. Is there any way that we in Sydney could get the same falls?
        I want to write to my local politician. What should I ask her to do to get these rent falls?

        • Unemployment will do the trick. An owner occupier might be willing to eat beans on toast forever becuase 50% of their income is paying off the mortgage, but a renter rarely feels that way about the rent. Once rents tip past the magical 1/3 of income people start looking elsewhere- either share houses, downsizing or moving. When the ecomony as a whole is doing ok, this is hidden because everyone else can afford the rising rents- once that goes, it becomes a serious issue.
          I find it funny when re agents (and the MM) say things like “interest rates are going up and this will affect rents” No it won’t, you raise my rent by the rate of increase and you will have to find a new tenant. When rates went up, my income didn’t and I don’t care that the owner’s expenses are higher. It increases the competition at the bottom of the market, but leaves the middle and high end struggling- so guess what, rents drop there. At some point they will drop to the point where it is reasonable again.

  14. I was doing my tax return today trying to figure out if my inv property is making me or losing me money…
    Its a leveraged CBD unit, rented at 4.7% of the (most optimistic) market value. It is marginally positively geared after mortgage and all expenses, but on top of that it generates tax losses. So if I havent screwed up a calc somewhere it works out about 6% cash return after tax on my initial investment (deposit+stamp duty). I used to be happy with that considering it costs me nothing to keep, but now I’m not so sure what I want to do with it, if rents drop substantially I might get in trouble.

    I hate economics, especially combined with tax.

  15. While I believe we have a housing bubble, and stand firm on the boycott on property investment, I can only concur with the article “Tenants in Australian capital cities feel the heat as rents skyrocket.”

    I rent a modest 2 bedroom unit in Sydney’s inner city suburb of Surry Hills for $575 a week, which I think is a high price to pay compared with what I would get in all other Australian cities. However in line with the claims in the article, recently purchased units identical to the one I rent, in the same complex, are now being leased for $795 a week (after being recently purchased by investors for $795K).

    Furthermore, having looked around for similar rental properties month after month, this seems to now be the normal price now, with small single bedroom units now asking the same price I currently pay for a 2 bedroom unit.

    This massive jump in rental prices has only occurred in the last 6 months, and it appears there is no problem finding people to rent them as they are off the market after one open inspection.

    I want to move for personal reasons, but I cannot justify a voluntary rental price increase of this magnitude – just like the article states.

    The facts are that there is an entrenched principle used in the rental market – the weekly rental price is set by dividing the last comparable (or actual) property sale price by 1000. So as the property sale prices are still increasing in inner city Sydney – and leaped dramatically in the past 2 years – so rents are rising.

    I can’t see it changing until China stops buying and makes our quarry based economy fail, unemployment hits, wages are cut across the board, and mass numbers of tenants default on their rent. Once that occurs then I believe rents may fall.

  16. I can say with first hand experience that there is a severe shortage of rental units in Sydney, in any price range up to $1500 per week.

    I helped a property manager friend of mine hold an open house last week. It was an average apartment about 20 minutes from the CBD. Went for $650 in less than 5 minutes after opening. (I had two applications straight away)

    And I know for a fact that the unit only costs the owner $650 per week including fees so the place in neutrally geared from the get-go.

    Looking at graphs and tables does not always paint an accurate picture.

  17. Dan, greetings. I believe that the residential real eatate market in Australia has already entered the ‘self-sustaining feedback loop’ of vendor panic increasing the reluctance of potential purchasers to buy – which induces further panic and so it goes. The unique demographic circumstances which played a largely unacknowledged part in bringing about this massive house price bubble are now beginning to work in reverse order to bring about a severe and prolonged house price crash. 2011 was the year in which the oldset baby boomers turn sixty five. They are now begining to find themselves in competition with each other as vendors rather than as purchasers. The truth about the extent of the looming trouble is being kept from the general public. Many ‘baby boomers’ are about to learn that they have placed a massive losing bet on residential real estate.