If property doubles in value every 7-10 years, do rents double approx every 10 years?

[CairnsInvestor]

Therefore, if an IP today rents for $200pw, then you should be raising the rent around $20 each year to catch up with inflation? Is this correct?

For the older folk here (I mean younger, younger folk ), were rents half they are today 10 years ago? Ie: 1997 the rent would have been $100pw in the above example?

 

[Rixter]

If property doubles in value every 7-10 years, do rents double approx every 10 years?

Yes! they do,

 

[Andrew_A]

None of my rents have unfortunately.

I have a CAGR of 4.09% over 21 years for one property, and similar examples in historical data for other suburbs around Brisbane, which is around 17 years for a double.

 

[wylie]

House we bought in Coorparoo ten years ago for $156K, spent approx $30K on over that time (new kitchen, huge back deck, re-roof, split air-con), so let's say base cost is $200K. Currently worth say $700K.

Initially rented for $190 per week (from memory) and we will be asking $460 per week next month when tenants leave. We should get $460 or close to that.

House hubby bought in Norman Park in 1984 for $54K was rented for around $100 per week (from memory) from about 1985 when he moved in with me. That house (now sold) would be worth maybe $600K now and rent for $420 or thereabouts.

I kick myself that we sold that house because it was pre-CGT but at the time we put the sale proceeds into our PPOR renovation so I suppose what we lost on the IP we gained on the increased equity in our renovated PPOR, but I still wish we could have kept it. Live and learn....

Wylie

 

[Sunfish]

If prices doubled every seven years and rents every ten, you are in deep dodo.

Why do we talk of property doubling every seven to ten years as if the difference does not matter? If it doubles every 7 years you have had a 10.2% cap gain. (rule of 72) Pretty good eh! You are making dollars on borrowed funds. But if it doubles every ten years you are only making 7.2% on the gross value and your cost of funds will be greater than that, so you will only make a profit on your equity less a bit, not allowing for tax.

There is a world of difference.

 

[alexlee]

Not necessarily. Rents don't always go up at the same rate as the price, nor does it always need to.

e.g. suburban house $300k, rent 300pw, yielding 5%. 20 years later, assuming 7.2% growth in price and 6% growth in rent, the property is 1.2m at 600pw (2.6%). That's a crap yield. However, the house can be demolished and a nicer house or duplex or townhouses built in its place. Then the yield 'resets' to say 5%.

Alternatively, the area can become SO filled with owner occupiers that yield no longer matters. This is especially the case in more expensive areas. Does anyone buy into Vaucluse (or the North Shore, for that matter) and really think about yield? Do people build their 'dream' home and think 'how much can I rent this out for'?

Also rental cycles don't always move together with price cycles. Nor does it move smoothly. Around 2000 - 2003 Sydney rents barely budged while prices skyrocketed. Now, prices are steadier or falling for the cheaper properties, but rents are increasing.
Alex

 

[alexlee]

But if it doubles every ten years you are only making 7.2% on the gross value and your cost of funds will be greater than that, so you will only make a profit on your equity less a bit, not allowing for tax.

That's assuming your LVR stays at 100%. But it won't. The 7.2% is on the GROSS value of your property, which keeps increasing. Your cost of funds is calculated on a mortgage that DOESN'T change.

If I have a $2m portfolio and $1m in debt, then a 7.2% increase is $144,000 per year, while my interest would only be 80,000. So I'm 'ahead' by $64,000 a year. Even if it increases only by 6% a year I'm still 40,000 ahead.
Alex

 

[Sunfish]

Merry Xmas Alex. We will never agree on many things, and this seems to one of them.

ps. Happy new year.

 

[alexlee]

Merry Xmas Alex. We will never agree on many things, and this seems to one of them.

ps. Happy new year.

That's ok. If I ever don't make sense, you can flame me. I know that my cost of funds as a % of my gross portfolio is falling (because my portfolio is appreciating) even with the interest rate rises. If my calcs are wrong..... I should be a lot poorer than I am.

Merry christmas and a happy new year to you too.
Alex

 

[dreaming]

even with the rate rises my rents are getting closer to my intrest only repayments making me better off and able to look at whats next. CG is for the further servicing loans is what I need to look at now.
merry christmas

 

[wylie]

I put the examples up above because they are roughly ten years ago and 20 years ago and I remember the rents. I know that not all houses double in that time frame, nor all rents.

In both cases, both houses have done very well, both in desirable areas close to the city, but there were plenty of years when the rent didn't rise by very much. Just looking at the figures now doesn't account for the uneven rises in both house price and rents.

And I would add that we never buy a house for the yield. I don't even know how to work out the yield. We are "position" buyers and buy for the capital gain. As long as the rent covers most (but lately, not even most) of the interest payment, we are happy.

Where we buy, rent used to (just about) cover interest, but we would need to buy elsewhere to do that now (if possible). It never ceases to amaze me that someone renting our house in Coorparoo (3 bedroom, one bathroom, one car lock up) could get a four bedroom, two bathroom, double car lockup with perhaps a pool for the same weekly rent if they wanted to live further out.

Obviously plenty of people do want to do that, but we never seem to have trouble finding tenants, so there are plenty of people who will trade the ensuite and pool to be closer to the action.

Plenty of times when we have bought, that things get tight until rents catch up a bit (but life expenses always seem to eat up rent increases ).

Wylie

 

[Rixter]

Dazzling, why were your resi yields so Low/Non existent? You had some nice CG over most your resi portfolio tho.

 

[Bazza]

e.g. suburban house $300k, rent 300pw, yielding 5%. 20 years later, assuming 7.2% growth in price and 6% growth in rent, the property is 1.2m at 600pw (2.6%).

Hi Alex,

I believe the rent is more in the order of $962 pw in the above case after 20 years making it 4.2% yield? But, could use a little more rent

Cheers & Merry Christmas all.

Bazza

 

[alexlee]

Hi Alex,

I believe the rent is more in the order of $962 pw in the above case after 20 years making it 4.2% yield? But, could use a little more rent

Point well taken. I wonder what I was drinking last night? In any case, it seems to be the case that as a property gets more expensive, the yield falls. i.e. price rises faster than rent. My own view is that at some point, a low-yielding old house will be redeveloped and the yield is 'reset'.

For example, in some of the upper-middle areas in Sydney, you're seeing 4%'ish yields. That's pretty low, but it doesn't mean the place is overvalued or that rent is low. It might just mean that there are so many owner occupiers that few people are actually looking at the yield at all. I look at some of the huge mcmansions being built in the area where I just bought my PPOR, for example, and the owners sure aren't looking at yield.
Alex

 

[sailor]

Bought a unit in 2003 for $75K, rent at the time $110pw. In 2007 now worth $200K and rent $200 pw. Happy with the maths on that one.

 

[BayView]

For example, in some of the upper-middle areas in Sydney, you're seeing 4%'ish yields. That's pretty low, but it doesn't mean the place is overvalued or that rent is low. It might just mean that there are so many owner occupiers that few people are actually looking at the yield at all. I look at some of the huge mcmansions being built in the area where I just bought my PPOR, for example, and the owners sure aren't looking at yield.
Alex

The other reason for such low yields with the higher priced properties is the cost of the rent is prohibitive for most people, so the size of the rental pool is smaller; less demand as well.

Basically, there are less people who can afford higher rents, so the level of rent starts to fall way as the property increases in price.

 

[yieldmatters]

This thread title is rather insightful. Could there be a link between house prices and rent prices?

I don't believe property will double every 7-10 years into the future - even if it did in the past. It can't when you are coming from such a high base. You are talking an exponential curve. If wages, inflation, and other numbers is not also exponential you soon get to an illogical place.

For example if I assume 4% CAGR in rent and wages but 10% CAGR in house prices (gives you the doubling in 10 years roughly) you end up with combinations like:

* Rent of $500 / wk, wages of $1700 / wk, house price of $1.5M (1.7% yield).

* Or if I take it out further you might get a combination of rent of $936 / wk, wages of $3120 / wk, and house price of $6.3M (0.08% yield).

In short, they can't stay disconnected forever and if you beleive the property doubling every 7 to 10 years story then you have to believe similar things will eventually happen to rent. Hence the thread title being rather insightful.

 

[alexlee]

I don't believe property will double every 7-10 years into the future - even if it did in the past. It can't when you are coming from such a high base. You are talking an exponential curve. If wages, inflation, and other numbers is not also exponential you soon get to an illogical place.

For example if I assume 4% CAGR in rent and wages but 10% CAGR in house prices (gives you the doubling in 10 years roughly) you end up with combinations like:

* Rent of $500 / wk, wages of $1700 / wk, house price of $1.5M (1.7% yield).

* Or if I take it out further you might get a combination of rent of $936 / wk, wages of $3120 / wk, and house price of $6.3M (0.08% yield).

In short, they can't stay disconnected forever and if you beleive the property doubling every 7 to 10 years story then you have to believe similar things will eventually happen to rent. Hence the thread title being rather insightful.

Wages, surely, increases at a % so it is exponential as well. However, historically the price of a given house increases faster than wages (the anecdotal evidence is that 'affordable' housing for people on ordinary incomes is moving further and further out).

Obviously, as YM's calc shows, it means that a given house becomes less and less affordable for the average income earner. Yet that's exactly what we've seen. How does this work? One answer: average wage earners rent average houses. The average wage earner today DOES not, because he CANNOT, rent the same house his counterpart did 30 years ago. Why? That house is no longer average.

For any given house, it starts as an outer suburb house (rented by average workers), then in 20 years becomes a middle-ring suburb house (rented by, say, young professionals and white collar workers) and in another 20 years becomes an inner city suburb (can only be afforded by highly paid people, or, even more likely, those average workers who bought the place 40 years ago and those now-middle-aged white collar workers who bought 20 years ago).

Somewhere along the line the old house is demolished and units / townhouses built in its place. That's why we talk about gentrification, and why areas get redeveloped.

YM's calc assumes the same type of people will keep renting the same house. In practice, that doesn't happen. The 'worker suburbs' of 30 years are NO LONGER the workers suburb of today. What used to be way out in the sticks 30 years ago would be a middle-ring suburb now. Why? Because the population is growing, and the number of low, average and high income people is also growing. If you have 500 highly paid people, they need, say, 200 houses. If the population doubles, and you now have 1000 highly paid people, they will need 400 houses. So they're going to buy into areas that were previously inhabited by people on different incomes.

Now, will property double in the next 7-10 years, if you use 2007 as a base line? Maybe not, because we've had such strong growth in the last 7-10 years. I personally am expecting a stagnant or falling market for the next couple of years. But if you use, say, 20 years, then it's more than likely that you will have 7-10% average growth.

Still not convinced, YM? That's ok. I gain nothing whether you buy or not. Whether you lose out by not buying....... that's your problem only.
Alex

 

[alexlee]

The other reason for such low yields with the higher priced properties is the cost of the rent is prohibitive for most people, so the size of the rental pool is smaller; less demand as well.

Basically, there are less people who can afford higher rents, so the level of rent starts to fall way as the property increases in price.

But they can afford to BUY, though. If they can buy, surely they can afford to rent. I do agree that the rental pool is smaller, because the buying pool is bigger (buying and renting being two sides of the same coin).

Human nature being what it is, people will prefer to buy if they can. Actually in some markets it makes much more sense to rent (where yields < interest rates), but humans are what they are. This is especially true with high-income people, who view buying a nice home as one way of saying they've made it. It that logical? No, it's purely emotional. Are they likely to think 'you know, I'm paying a lot of extra money to fuel my ego, so why don't I just be financially logical and rent instead'? Doubt it.
Alex

 

[BayView]

Yield,

The facts from history are that, ON AVERAGE, property doubles in value every 7-10 years.

It's the same scenario with the stock market, notwithstanding the biggest bull-run in history that we are experiencing, and the two major crashes of '29 and '87. The average per year of growth is different to property (I don't know what it is exactly), but it always goes up. For me, who is yet to really get into shares, I'm waiting for the next crash and then will come in.

But, as with property, some stocks will crash a lot, some will not do anything but continue to go up over the long term.

You can debate why property can't keep going up in the future, but I'm sure people were saying the exact same thing back in the '60's.

The rent is almost always out of kilter with the property prices. The prices surge ahead, then they slow down and wait for the incomes and rents to catch up, then the prices surge ahead again. And, as we've discussed before, the majority of houses are bought by owner-occupiers, so I don't think there is a link between rents and prices. If there is, it would be that at certain points in the property cycle, the cost of a mortgage compared to the cost of renting becomes attractive enough to give renters an incentive to buy.

Having said that, I reckon that most renters aspire to owning a home, regardless of the rent levels and house prices, and buy as soon as they can afford it, whether it is the right time to buy or not; they are oblivious to rental yields and property cycles generally. This keeps fuelling price rises.

At the moment I'm sure there are many (inexperienced) investors out there wondering how the rents can ever get back near the property prices, unless the prices crash.

This may take another 3-5 years to occur, but it always does, and has done in the past. At the moment we are in the phase of rents catching up to prices in many areas. Yay!!

For the investor coming in, the present yields are woeful, but the next few years should see an improvement. For the ones already in the game, the yields will only get better.

Your problem is you try to find a reasoning for why it SHOULDN'T occur. This is futile.

You can't change this pattern, and I don't expect the pattern to ever change; only the timing, so I would suggest that you just go with the flow and learn to profit from it.

Like Sailor has posted; the trick is to analyse what you have paid for the property, and what it's rental yield is compared to when you bought it. I've covered this before in another post; I look at the returns on MY purchase price; not what the purchase price is today or next year.

I only analyse the investment in terms of what the return is on my already invested dollars, and what the return on my next lot of dollars yet to be invested will be.