Is this a good or bad thing for investors?

[exstatic]

Just read this article in the age. http://www.theage.com.au/national/155aweek-lalor-shack-highlights-rental-crisis-20080624-2w6j.html

1br 'shack' with external toilet, renting at $155 a week.. 1% vacancy rates reported in Melbourne..

So, how does these sort of media reports affect investors?

 

[buzzlightyear]

I hope the shack has insulation. Could be quite toasty in summer and wouldn't fancy the walk to the bathroom facilities during nice cool winter mornings.

What it shows is that, demand and the price that the market is willing to pay for accommodation is very robust. And for investors, that's a good thing. But then most of us know that anyway, don't we?

Its more likely to 'get' a reaction from community groups, government, social commentators and the general public about the same ol' chestnuts re more affordable housing etc.....

 

[peastman]

While there is not much cheaper in the area there are options.
http://www.realestate.com.au/cgi-bin/rsearch?a=o&id=403340709&f=0&p=10&t=ren&ty=&fmt=&header=&cc=&c=64088509&s=vic&snf=rbs&tm=1214349109
There are also a lot of share accomadation for cheaper.

 

[Sunder]

Here's one way to think about it.

If Lamb was $20 a kilo and Beef was $100 a kilo, which would you buy?

What if there was only 1 kilo left of lamb in the supermarket, and both you and another person wanted it? The person serving you says "I'll give it to the person who will give me the highest price for it, the other person can buy beef or go without"?

The demand is for housing, rented is one product, and mortgaged is another product fulfilling the same demand, and property investors are the counter clerks trying to get the highest price for their product.

Right now, Renting costs about 5%, where was owning costs about 10%.

So when there's a shortage of rental, people would still rather pay 6, 7, 8...% yields rather than buy.

So your article above is good for anyone who is after yields, bad for anyone after short term CG. Why bad for short term CG? Because sooner or later cattle farmers will realise that they're asking too much for beef, and will lower prices. Likewise, sales volumes are dropping on houses. Soon to follow is the realisation that buying a house is expensive compared to renting it, and if the sellers can't drop interest rates, then they'll have to drop asking prices.

 

[tubs]

Yes, once CG prices start dropping the RE market will crash down to 50% of what its worth, and all specufestors will be living in cardboard boxes on the street.

Well, not my opinion actually, but since he hasnt posted yet, I thought I'd do it for him.

 

[BayView]

Here's one way to think about it.

If Lamb was $20 a kilo and Beef was $100 a kilo, which would you buy?

What if there was only 1 kilo left of lamb in the supermarket, and both you and another person wanted it? The person serving you says "I'll give it to the person who will give me the highest price for it, the other person can buy beef or go without"?

The demand is for housing, rented is one product, and mortgaged is another product fulfilling the same demand, and property investors are the counter clerks trying to get the highest price for their product.

Right now, Renting costs about 5%, where was owning costs about 10%.

So when there's a shortage of rental, people would still rather pay 6, 7, 8...% yields rather than buy.

So your article above is good for anyone who is after yields, bad for anyone after short term CG. Why bad for short term CG? Because sooner or later cattle farmers will realise that they're asking too much for beef, and will lower prices. Likewise, sales volumes are dropping on houses. Soon to follow is the realisation that buying a house is expensive compared to renting it, and if the sellers can't drop interest rates, then they'll have to drop asking prices.

Brilliant analogy!

 

[the_captain]

Why would you pay $155 for a shed in Lalor, when you can have a 1 bed flat in Ascot Vale for only $40 pw more. If you worked in or near the City, surely this extra $40pw would be offset by taking public transport or not owning a car.

http://www.realestate.com.au/cgi-bi...&header=&idir=&c=19778433&s=vic&tm=1214370813

None of those places are The Ritz, but the location is pretty good.

Do we have a rental crisis, or an expectations crisis? I agree that there is pressure on rents, but I am not so sure if it is to the extent we all think it is.

 

[Alabex]

http://www.realestate.com.au/cgi-bi...r=&cc=&c=39211942&s=vic&snf=rbs&tm=1214373471

Really it doesn't look to unlivable inside, it is just the tin shed look from the outside...

although the point about insullation is a good one.

I like the point about an expectation crisis as well!

 

[Superstitionist]

Why would you pay $155 for a shed in Lalor, when you can have a 1 bed flat in Ascot Vale for only $40 pw more. If you worked in or near the City, surely this extra $40pw would be offset by taking public transport or not owning a car.

number of reasons...
- can't efford the extra $40
- work next door (if working)
- like the shed (personal taste)
- upgrade (from a smaller one)

 

[depreciator]

Soon to follow is the realisation that buying a house is expensive compared to renting it, and if the sellers can't drop interest rates, then they'll have to drop asking prices.

But it's always been more expensive to buy a house than rent one in lots of places? That's certainly the way it is where I have lived. Sure, it might be illogical, but many people prefer to live in a place they own (or at least they and the bank own) rather than be at the mercy of a landlord's whims. Most people pay a premium for ownership. I have always done that. Maybe I'm a dill? Can't see myself changing, though. So Sunder, I would go for beef over lamb and pay more for it.
Maybe things will change with Gens X and Y? They don't seem to be enamoured with ownership and like the idea of renting places they can't afford to buy. Though quite a few Gens X and Y that I know do seem to get sick of renting as they get older. Lot's of them earn good money, so when they set their collective minds to buying that's going to increase demand in their preferred locations.
But who really knows what's going to happen. I certainly don't. Most of us make predictions based on what we want to happen.
As for vendors now, those who need to sell are dropping their asking prices. Those who don't are sitting tight.
Scott

 

[Witzl]

Depreciator..

.. many people weigh up the comparative costs of renting vs ownership, and decide if they can afford the cost difference and this decides whether they buy or continue to rent.

They way i see it, in todays climate with rising rental prices, many renters would be looking at what they can afford to buy. Maybe will be doing the comparison, and are probably deciding that what they can afford now is not good enough to warrant the cost difference compared to renting.
Of course, once interest rates start lowering, these people will be able to afford more, and suddenly they will find that they can afford a house that to them is good enough to warrant the difference in cost from renting to owning.

Then of course this starts the demand on beef instead of lamb, because more people can suddenly afford to eat beef.

... at least thats the way I look at it, because that's what I was doing a couple of years ago when i almost bought a PPoR with my gf (so glad we didnt!!)

 

[depreciator]

A mate of mine who has been a determined renter and lamb eater is going through that dilemma. He's just had a rent rise and the difference between rent and a beefy mortgage is reducing. (I suspect that deep down he has secretly always wanted to eat beef.)
So he's hoping desperately that beef prices drop. And I'm hoping (but not with a sense of desperation) that they don't. So we're both punting. Time will tell.
Scott

 

[Sunder]

But it's always been more expensive to buy a house than rent one in lots of places? That's certainly the way it is where I have lived. Sure, it might be illogical, but many people prefer to live in a place they own (or at least they and the bank own) rather than be at the mercy of a landlord's whims. Most people pay a premium for ownership.

Yes, that's true, and that analogy represented a static market. Let me try again.

Assume that being mostly aussie here, we all prefer steak to lamb. And at one time, there was only a small premium. $20/kg lamb vs $30/kg beef.

So right now, 80% of Australian's prefer beef, even at the higher price.

Bovine spongiform encephalopathy hits Australia, and over a period of a few weeks, beef becomes scarcer, and scarcer, and more and more expensive.

At $35 a kilo, nobody blinks an eye. at $40 a kilo, pensioners start eyeing off the lamb, at $50 a kilo, the working poor think Sam Kekovich is a true blue Aussie hero*. At $60 a kilo, we start talking about invading New Zealand.
...
At $100 a kilo, only the richest are eating beef and turning their noses down at those scum of the earth tenan... lamb eaters.

The insanity starts when people start buying beef not because they want to eat it, but because they think it will go up in value. (Well, I suppose there is some truth to that, aged beef does cost more). Hell, you might even start seeing beef futures contracts, and listed beef trusts.

But anyway...

Of course, there's a limited supply of lamb too. Baby sheep aren't edible from day one, you know. Where as almost all the lamb being farmed was sold when it was $20 a kilo, all the beef deserters, are driving up the price of lamb. So lamb goes up to $25 a kilo... Then $30 a kilo.

Isn't the same thing happening to housing? Foreclosures at decade highs, increasing listings - and at the same time, record rental demand pushing up rental prices?

At the end of the day we'll find a new equilibrium. If in the mind of investors, there was never again the chance of capital gain, then for anyone to invest in housing, yield >= interest rates, and rent would either have to rise, or prices fall for that to happen.

Of course there will always be a small ownership premium that will keep house prices up, but the gap of 4-6% vs 9.25% interest is way too big at the moment. The market is not in equilibrium, and that, is why we're seeing rental rises. When the "price stickiness" has worn off, we'll start seeing asking price falls too.

*

 

[yieldmatters]

But it's always been more expensive to buy a house than rent one in lots of places? That's certainly the way it is where I have lived. Sure, it might be illogical, but many people prefer to live in a place they own (or at least they and the bank own) rather than be at the mercy of a landlord's whims. Most people pay a premium for ownership.

I tend to agree with you. But the interesting flip side to that is if owner occupiers are paying a premium for ownership (and setting the market price) then the landlords have to be losing money.

 

[Peter Parker]

number of reasons...
- can't efford the extra $40
- work next door (if working)
- like the shed (personal taste)
- upgrade (from a smaller one)

Or maybe they don't like Sunshine, where you can get a 1br flat for $140pw, eg

http://www.domain.com.au/Public/PropertyDetails.aspx?adid=5789002

or if you want something nice for $150pw, then there's http://www.domain.com.au/Public/PropertyDetails.aspx?adid=5783451

Note that Sunshine is nearer the CBD with cheaper & better transport (Zone 1)

 

[natmarie73]

My favourite reply-

I don't know what they are whingeing about $155 per week..
You would get $500 for that in Karratha Western Australia !!!!!!!!!!!!!!

Might be time to clean out the Titan.

 

[BayView]

I tend to agree with you. But the interesting flip side to that is if owner occupiers are paying a premium for ownership (and setting the market price) then the landlords have to be losing money.

Not at the bottom of my ledger, YM.

There you go again; your whole mantra is based on us greedy, dumb, destructive to the housing market investors all losing money on our IP's.

Why do you keep on bleating this cr@p? How long has it been now; 12 months?

If everyone was losing money, why would we all still persist?

Fortunately for you, we all still do persist, make money, and provide you with a roof.

PAY ATTENTION: long term investors with skill and experience MAKE MONEY.

How about listening to a few of them to find out how they've done it and stop telling them how bad they are doing.

 

[HiEquity]

Yes well... the reversion to the mean for rental growth is hardly surprising given how long rents have stayed down in the residential sector. I also agree that some price weakness is required and is being shown in some areas of the market to restore the equilibrium. In our properties we are seeing a 20% + growth in rents this year and a <10% drop in values from the peak. However, we have seen some (a few) properties in outlying suburbs drop further than 10%, more like 20%, particularly newer properties which seem to really have higher depreciation at the moment. None of this qualifies as a "crash" - more like a really good buying opportunity!

This is when quality locations offer some protection as there are still quite a few cashed up OOs out there looking to trade up into suburbs they previously couldn't afford thereby holding prices relatively steady... and there aren't so many people who need to sell in those areas either.

To make a huge generalisation, I see more scope for rental increases than price weakness as there is such a huge scope for most people to reduce consumption spending, which has got to ridiculous levels in this country. This is despite food and fuel inflation as these are also be discretionary to a point - eg stop eating out and driving everywhere for entertainment. For a couple who are both cleaners on the MINIMUM wage earning $52k / year between them (http://www.worksite.actu.asn.au/showall.php3?secid=4&page=article&artid=127), I don't think paying <$300pw to live somewhere should be beyond them. They wouldn't click over the definition of "mortgage stress" anyway - plenty of places fit this bucket and this is a pretty extreme example. A couple on the average wage each - well they have a long way to go to become "rental stressed" in most parts of Australia.

This is one of the reasons the aversion to renting is so entrenched in the Australian psyche - the older generation can remember what rental pressure is like! The lack of tenure security (only 1 year standard) offered by standard lease agreements being the other reason IMO.

 

[yieldmatters]

There you go again; your whole mantra is based on us greedy, dumb, destructive to the housing market investors all losing money on our IP's.

Wow - you are putting a lot of words in my mouth!

I was just making a point of logic - if owner occupiers pay a premium (relative to a renter) then a landlord must be making a loss.

If you want to talk reality (yawn) then I'll accept there are other factors at play. Owner occupiers might pay a premium to begin with but over 30 years they don't as they've hedged themselves against rising house or rent prices.

 

[Sunder]