House prices may be flat but you can bet on rent rises

[Tehanu]

Remember you are competing with many other things - utility bill increases, childcare increases, rego increases, etc. This stuff is already squeezing people. If people are squeezed enough that they can't buy things, how will they find the extra money to pay more rent? And note that you can at least buy Christmas presents on credit. You can't pay rent on credit.

This may be where the key difference between now and in the past is coming in. At the same time you might be seeking rent increases (because interest rates are going up and CG is not happening), renters are being confronted with a whole heap of other increases which hadn't appeared in the past. Another prospect in the future (besides the utility increases etc.) is China exporting inflation via price increases. In the past couple of decades China has been exporting deflation. Of course the landlords are also being faced with similar price increases so now it becomes a bit of a fight over which increases have the priority with the losing group having to wear more of the cost.

If the money isn't there, the money isn't there. Something will simply have to give.

The thing is demand for housing is actually quite elastic. The key options people have are: increasing household size (share house, moving in with parents) or leaving the area. This is especially true if jobs do not actually exist in the area itself.

 

[coastymike]

If we see an easing of demand from China and a reduced demand for our resources or even a general economic decline (retail is certainly experiencing this in Sydney) then we won't be seeing rental increases for quite some time. A sluggish economy could be offset with lower interest rates so at least this will provide some reprieve for those with debt.

As people lose their jobs they start to go back to sharing with family or sharing with others or moving to less expensive areas which is why I have always thought lower end properties with lower rents are preferred.

I am also curious as to where people are going to get the money for these suppossed rental increases. People I talk to are hurting. Their businesses are hurting. Cost of living is going through the roof and many are wondering where it all goes. Then we are told that wages will just increase because inflation is increasing. Well if businesses are struggling to pay the wages bills already how are they going to be able to afford more. Sorry I just can't see this happening.

Interesting times for 2011.

 

[Deltaberry]

That's why it's a two-speed economy. Anyone in mining/mining services/finance is laughing to the banks at the moment. In contrast, teachers/nurses/retailers are getting smashed.

 

[skater]

Not when interest rates continue to rise next year.

Correction! You don't have a chrystal ball. We don't know what interest rates will be doing next year.

Well then rents will continue to soar...

Yep! I'm happy either way.

Rents may go up a bit, but to suggest like skater that this will lead to another CG surge, is nonsense.

Rents WILL go up. There is no doubt about this.

Not when unemployment and interest rates risesthrough next year.

This is not a given. There could be unemployment and there could be rate rises, but there might not too.

The argument of shortage was used in every other country as well.

Just because other countries have had problems does not mean that Australia has to have problems.

And then the financial market have another heart attack when Alt-A's peak in 2nd half of 2011 (I'll openly predict another crash on Sep/Oct 2011). But that's another thing.

Yeah, yeah, we know. You think the sky is falling. Well, sunshine, not everybody has a glass half empty mindset.

Most renters cant qualify for loans. Thats why they rent.

Really? I'd like to know if this statement was a blanket statement about all renters, or just those who rent in West/South West Sydney? Unless I'm mistaken renters are not only made up of people on Welfare or those with little in the way of financial savy. People rent for a variety of reasons, not just because they can't afford to buy.

It is home owners that push prices up more than investors. Other than investors, this area is ripe with First Home Owners. Prior to purchasing their first home, most of those FHOs rented.

You do realise that you can buy a house for a little over $200k in the area(s) that I am talking about? Less for a unit. You can purchase something on very little income out this way, you don't even need to have two incomes coming in. Or are you saying that the whole of the West/South West is made up of bludgers, because if you are, then you far from wrong.

As people lose their jobs they start to go back to sharing with family or sharing with others or moving to less expensive areas which is why I have always thought lower end properties with lower rents are preferred.

I am also curious as to where people are going to get the money for these suppossed rental increases.

If people do lose their jobs, then this will put upward pressure on the lower end properties, which is the area I am talking about. At the moment a welfare recipient can afford to rent a home here. If the rent becomes too unaffordable, then I am sure that the do-gooder government will increase the rent assistance to help out with the costs.

If people are squeezed enough that they can't buy things, how will they find the extra money to pay more rent?

Are you serious? Take a look around at all the junk that the average person just has to have. None of it is a necessity, they just think it is. Go back in time and look at the cost of things then and compare to the average income. People just have to realise that the important things need to come first and the rest is just luxury. You need somewhere to live, you need food and you need clothing. You don't need steak every night, it's OK to eat rissoles & sausages, you can buy clothing at the discount stores and you don't need to have huge cupboards of the stuff.

The cost of electrical goods have gone down, power, water, phones etc, are a similar cost, so it's about time they did rise.

We were watching a video the other night that I had taped in the 1980's. The commercials advertising things were interesting. Clothing was a similar price to today. There was also a Mazda that was a similar price to a new car today. We bought our car new in 1998 for more than if we were to purchase it new today.

At the same time you might be seeking rent increases (because interest rates are going up and CG is not happening),

It's all part of the cycle. I can easily survive without the increases. My portfolio is making a profit. Rental increases happen with supply and demand. The more demand there is on properties, the more expensive they become. Most of mine have gone up over $100pw in the space of a few years. If I could survive then, I am sure I could survive now without any further increases, but the whole point of investing is to create an income.

 

[BV]

I am also curious as to where people are going to get the money for these suppossed rental increases. People I talk to are hurting. Their businesses are hurting. Cost of living is going through the roof and many are wondering where it all goes.

I'm wondering this as well.
I guess they'll just have to cut back on other things and you can see this in the complaints coming from retail stores.

Then we are told that wages will just increase because inflation is increasing. Well if businesses are struggling to pay the wages bills already how are they going to be able to afford more.

Not all businesses are struggling.
In fact, many businesses have increased profits.
Its just that CEO's want to keep in increasing company profits to maintain their fat pay and bonusses.
in recent times they've used the GFC excuse and threats of redundancy etc so they've managed to get their staff to work extra for no extra pay but people are sick of working like this and something will eventually give.

 

[evand]

It seems you have a crystal ball but no one else has one.

And i didnt make a blanket statement saying 'all renters', i said 'most renters'. Where did you get the 'all renters' from?

Correction! You don't have a chrystal ball. We don't know what interest rates will be doing next year.


Yep! I'm happy either way.



Rents WILL go up. There is no doubt about this.



This is not a given. There could be unemployment and there could be rate rises, but there might not too.



Just because other countries have had problems does not mean that Australia has to have problems.



Yeah, yeah, we know. You think the sky is falling. Well, sunshine, not everybody has a glass half empty mindset.



Really? I'd like to know if this statement was a blanket statement about all renters, or just those who rent in West/South West Sydney? Unless I'm mistaken renters are not only made up of people on Welfare or those with little in the way of financial savy. People rent for a variety of reasons, not just because they can't afford to buy.

It is home owners that push prices up more than investors. Other than investors, this area is ripe with First Home Owners. Prior to purchasing their first home, most of those FHOs rented.

You do realise that you can buy a house for a little over $200k in the area(s) that I am talking about? Less for a unit. You can purchase something on very little income out this way, you don't even need to have two incomes coming in. Or are you saying that the whole of the West/South West is made up of bludgers, because if you are, then you far from wrong.


If people do lose their jobs, then this will put upward pressure on the lower end properties, which is the area I am talking about. At the moment a welfare recipient can afford to rent a home here. If the rent becomes too unaffordable, then I am sure that the do-gooder government will increase the rent assistance to help out with the costs.


Are you serious? Take a look around at all the junk that the average person just has to have. None of it is a necessity, they just think it is. Go back in time and look at the cost of things then and compare to the average income. People just have to realise that the important things need to come first and the rest is just luxury. You need somewhere to live, you need food and you need clothing. You don't need steak every night, it's OK to eat rissoles & sausages, you can buy clothing at the discount stores and you don't need to have huge cupboards of the stuff.

The cost of electrical goods have gone down, power, water, phones etc, are a similar cost, so it's about time they did rise.

We were watching a video the other night that I had taped in the 1980's. The commercials advertising things were interesting. Clothing was a similar price to today. There was also a Mazda that was a similar price to a new car today. We bought our car new in 1998 for more than if we were to purchase it new today.





It's all part of the cycle. I can easily survive without the increases. My portfolio is making a profit. Rental increases happen with supply and demand. The more demand there is on properties, the more expensive they become. Most of mine have gone up over $100pw in the space of a few years. If I could survive then, I am sure I could survive now without any further increases, but the whole point of investing is to create an income.

 

[bluestorm]

Correction! You don't have a chrystal ball. We don't know what interest rates will be doing next year.

Can I use your crystal ball then. Yours seem to have be able to tell the future.

Just because other countries have had problems does not mean that Australia has to have problems.

Australia is a little player on the world stage. We have been lucky so far. We are far from immune to the effects of future problems in the world.

Yeah, yeah, we know. You think the sky is falling. Well, sunshine, not everybody has a glass half empty mindset.

This is not a given. There could be unemployment and there could be rate rises, but there might not too.

The problem I find with some of the longer term Somersofters, is that CG have been so extremely easy the past 10-15yrs, that it's been a blind mans game. No need for much analysis, because gains just happened.

As Australia is not immune to the world, the events in 2011/2012 will have an impact, and I like to factor that into my investment strategy.
Here's my crystal ball skater. Portugal has been downgraded again the past few days. Come Mar/Apr 2011 it will be the next country to get bailed out.

Now you can think that Europe, or US Alt'A won't impact your investment. I don't see it that way.

 

[Y33]

Just back from Darwin and attended a few auctions. Definitely some bargains in the air for those willing to wait and right out the current situation. Ist stage of water front is finished and only a handful of units available. 2nd stage is being prepared nicely as well as 3rd stage. Eventually these stages will cater for around an additional 5000 people or nearly 10% of current population. In some areas rents are staying the same but in others rising nicely. Had a few calls from people wanting to know if I had any places vacant or where there might be some decent rental properties available. The current Inpex project is only a starter to what is too come if certain go a heads are given. The Japanese deputy minister for trade was there for this trip as well as some other influential business persons. Discussions on Darwin's future was beneficial for those that came to the party and dinner. For those that didn't you may get updated later.

If you have a bit of cash around and don't mind forking out around the 800-900K range there are 2 or 3 excellent buys available including one passed in at auction in one of the best suburbs. If my money wasn't tied up I would've jumped at the opportunities.

The govt is releasing land around Darwin but it is being controlled to coincide with certain developments. One interesting project with minimal attention is the new 4klm wharf to be built outside of Darwin.

 

[bluestorm]

Location: Japan
The Japanese deputy minister for trade was there for this trip as well as some other influential business persons. Discussions on Darwin's future was beneficial for those that came to the party and dinner. For those that didn't you may get updated later.

If you have a bit of cash around and don't mind forking out around the 800-900K range there are 2 or 3 excellent buys available including one passed in at auction in one of the best suburbs.

800-900K, in backwater Darwin. Now there is a bubble if there ever was one.

Oh, the Japanese are involved. Might be as successful as the Gold Coast market then. I'm down for 5 of those 900K properties then Y33.

 

[BayView]

So if spending power is reducing, where are all the renting peeps going to find extra money for higher rents?

The stat about reduced spending power is a generalisation, and not all folk will be in this stat.

They are the ones who will fight over good properties in good locations and pay more.

Also, it will be a market within markets scenario.

 

[Y33]

bluestorm, why do you consider Darwin to be backwater? For those that know it is one of Australia's hidden treasures with a lifestyle and culture unsurpassed by anywhere else.

 

[Tehanu]

Are you serious? Take a look around at all the junk that the average person just has to have. None of it is a necessity, they just think it is. Go back in time and look at the cost of things then and compare to the average income. People just have to realise that the important things need to come first and the rest is just luxury. You need somewhere to live, you need food and you need clothing. You don't need steak every night, it's OK to eat rissoles & sausages, you can buy clothing at the discount stores and you don't need to have huge cupboards of the stuff.

The cost of electrical goods have gone down, power, water, phones etc, are a similar cost, so it's about time they did rise.

First, if retail goes down, given over a million jobs (that is five times mining) is in that industry that is likely to have a decent impact on employment.

The other thing is it is true that people need a place to live, but do they need *your* place to live and at the asking price? The thing is the part of a property that is surplus to the inhabitant's requirements is also consumption. Just like they might cut down on clothing and electrical goods, they could also easily choose to cut down on the amenities or size of their living space such as the extra spare room. And it is possible to cut down a *lot* on living quarters and still be OK, not necessarily happy but OK. And they can at least buy clothing and TVs on credit. They can't do that for rent.

 

[skater]

The other thing is it is true that people need a place to live, but do they need *your* place to live and at the asking price?

Ah.....yes, they do need "my" place. Most of mine are already tenanted by low income families. They don't have any European appliances or extravagances. They are simply "no frills" clean and tidy, well maintained, affordable homes. If things take a nose dive, I'll always have plenty of people that can afford to live there.

 

[Tehanu]

Ah.....yes, they do need "my" place. Most of mine are already tenanted by low income families. They don't have any European appliances or extravagances. They are simply "no frills" clean and tidy, well maintained, affordable homes. If things take a nose dive, I'll always have plenty of people that can afford to live there.

That is good for you. However a lot of other landlords are not likely to be in your position. Also you said you don't need rent increases. However some more recent landlords may not be in that position. In fact you by being in the position of being able to hold down rental increases will help prevent them from increasing rent. As landlords will be subject to the same cost pressures as renters (increased utility bills etc.) this makes their financial position even more marginal and hence increases the chance of them selling.

Of course right now it is not guaranteed that there will be no rent increases. However in the next few months we will see who ends up the main loser in "which of these many price increases are going to get priority with my wages which are not really going up". Another thing to add to costs is the phase-in of the new super benefits. Even if rent increases manage to end up not one of the losers, the battle will still reduce the amount landlords could have raised their rent by.

 

[coastymike]

It is why I prefer the types of properties Skater has chosen to invest. The costs of running those sorts of properties are lower and tenants are usually high in demand.

However this is not what the majority of investors hold. They hold properties in the mid range (500k - $1m) in which they are hoping to increase their rent by 5 % and fail to factor into the equation increase of council rates (same have been just over 5% this year), insurance (increases have been more around the 10% rate), interest rate, water rates and all the other costs. Strata levies are increasing significantly in some areas of Sydney.

If people think they can increase rents enough to cover the inflationary increases of all costs (not just interest) then good luck. As mentioned the Sydney economy is highly dependant on spending. Small to medium businesses make up a huge chunk of the economy and an economic downturn for them (already happening) doesnt bode well for the rest of the economy. Sure some of the large companies are making record profits and those same companies have Head Offices overseas where the profits are repatriated so after tax the money doesn't generally stay in Australia. Take some of those same large companies who after reviewing salary costs are realising with technology they can outsource the same work to the Phillippinnes, Thailand, China or India for much much less. Has been happening in the accounting and legal profession for some time now. You might be surprised how many business now operate their admin functions from offshore and have work done offshore.

Mining is different and agree that is where the two tier economy comes into play.

 

[BayView]

That is good for you. However a lot of other landlords are not likely to be in your position.

This is where the investor's skill in selecting the right properties becomes a crucial factor.

But it's not that hard; good locations, decent houses with decent floorplans, decent condition are about all is needed.

 

[oracle]

Australia is a little player on the world stage. We have been lucky so far. We are far from immune to the effects of future problems in the world.

You seem to completely misunderstand the underlying fundamentals that has supported current house prices, otherwise there is no reason why Australia should not have experienced massive falls in property prices during the GFC. It is a testament that current house prices are sustainable at the levels they are. If that still doesn't convince you. We have had 8 interest rate rises (7 from RBA and 1 courtesy of our lucky banks) and still no substantial fall in property prices. If that to you is just plain lucky may be you should do some more research on why property prices haven't crashed. Mind you I am not saying there is going to be a boom soon. All I am saying is there won't be a crash anytime soon. Current prices are sustainable.

Here's my crystal ball skater. Portugal has been downgraded again the past few days. Come Mar/Apr 2011 it will be the next country to get bailed out.

Now you can think that Europe, or US Alt'A won't impact your investment. I don't see it that way.

Just like Greece and Ireland were downgraded in June-July earlier this year. Just like a lot of D&G thought US was entering a double dip recession? Fast forward 6 months, the world has not ended. DOW is up 20% from it's July lows. My share portfolio is up more than 25% since July.

All I can say to you is I would be looking forward to Mar/Apr 2011 to buy some quality companies at bargain prices when most D&G are convinced the world is going to end.

Cheers,
Oracle.

 

[evand]

The 90s were very flat for house price rises (there were no sub markets booming )

In that decade rental yields rose as prices stayed down or went backwards to the point in the late 90s where investors started coming back in numbers enough to move the market (increase prices through demand), enticed by those high yields.

I remember reading an article in the Sydney Morning Herald in 1998 that Mt Druitt area had yields close to or at 9%. But that was just Mt Druitt area, which i think went backwards in price quite sharply. Most of Sydney had 6% - 7% yields i think.

This momentum built into the mother of all property price booms that finished in Nov 2003. What a ride that was!

Anyway, my point here is is took nearly a decade for rents to rise to a high level. Not a year or 2. They were creeping up all through the 90s as most people weren't watching.

 

[bluestorm]

You seem to completely misunderstand the underlying fundamentals that has supported current house prices, otherwise there is no reason why Australia should not have experienced massive falls in property prices during the GFC.

1) Increased FHOG fueling the market.
2) Record low interest rates

You must mean the "fundamentals of supply and demand". The same fundamentals that saw the peak in Jul/Aug 2010, and will now see prices fall moving forward.

Just like Greece and Ireland were downgraded in June-July earlier this year. Just like a lot of D&G thought US was entering a double dip recession? Fast forward 6 months, the world has not ended. DOW is up 20% from it's July lows. My share portfolio is up more than 25% since July.

Greece and Ireland were also smaller. But slowly it's dominoing to the bigger and bigger countries - Portugal and Spain. Even to the point where not only the ECB will try and keep these countries afloat, but now China is starting to signal that they will get involved to keep Portugal (maybe), by buying debt next year as bond markets target Portugal next.

China Is `Available' to Support Portugal Through Financial Crisis
Portugal May Get Frozen Out by Bond-Sale `Avalanche' in 2011


The US in entering a double dip. Your just to busy listening to all the BS news about how the US is on the way to recovery.

But those that are watching what is happening, know that 2011/2012 will see a lot of problems.

Anyway oracle, keep thinking that Australia is immune. I'm counting on it, along with all the other over extended sheep who will get crunched (my LVR now down to 27.9%). PPOR payed off, and positively geared on 2 investments.
Maybe Labor will give out more billions to the lemmings to stay in power.

 

[skater]

I remember reading an article in the Sydney Morning Herald in 1998 that Mt Druitt area had yields close to or at 9%. But that was just Mt Druitt area, which i think went backwards in price quite sharply. Most of Sydney had 6% - 7% yields i think.

That's right! Rents have been climbing for the last 5-6 years. It still has a little way to go, I think. At the moment you can buy a Mt Druitt house for just over $200k and you can get rent of around $300pw. Now, it's too late at night for me to do the math, so maybe someone else can, but that is a good yield.

There was a little movement in Sydney starting, and still is in some parts, but we didn't get the momentum happening to get all the way out to the edges. I think Sydney will get some more movement happening in the not to distant future and it will push right out to Penrith/Campbelltown once again but it won't happen until the yields are a bit higher.