Is this a good or bad thing for investors?

[BayView]

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.

How do you come to this conclusion?

It may be the case if someone buys TODAY, but there are many investors with properties bought a while ago at a very low price, who are enjoying the current rent yields (not cap city rent yields of course).

You need to broaden your views YM; you are so macro about all this.

You're assuming that all Landlords have yields which are below the current interest rates, no depreciation, no cash deposits, buy only in cities, massive LVR's etc.

 

[yieldmatters]

How do you come to this conclusion?

It may be the case if someone buys TODAY, but there are many investors with properties bought a while ago at a very low price, who are enjoying the current rent yields (not cap city rent yields of course).

You need to broaden your views YM; you are so macro about all this.

You're assuming that all Landlords have yields which are below the current interest rates, no depreciation, no cash deposits, buy only in cities, massive LVR's etc.

Take 3 people. 1 buys a house to live in, 1 buys one as an IP, and the other rents the house that is the IP. Both these houses are in the same street, the same style, the same market price. If we think the owner occupier is paying more than the renter then the landlord has to be making a loss. Why? Because the landlord's costs are the same as the owner occupier's costs. But we just established that the renter is paying less than the owner occupier. Therefore the landlord's incoming is less then their outgoing.

In reality people have and do make money from IPs. Therefore either 1) the owner occupier isn't paying a premium when considered over a longer timeframe or 2) house prices and rent have both shot up so the only loser of the 3 people above is the renter.

For the time being though I would much rather be the renter. My rent would have to triple to come even close to closing the gap on buying the place. And I can't see house prices jumping ahead for a long while yet. So it's a window of opportunity for renters to pocket some cash.

 

[Minx]

Take 3 people. 1 buys a house to live in, 1 buys one as an IP, and the other rents the house that is the IP. Both these houses are in the same street, the same style, the same market price. If we think the owner occupier is paying more than the renter then the landlord has to be making a loss. Why? Because the landlord's costs are the same as the owner occupier's costs. But we just established that the renter is paying less than the owner occupier. Therefore the landlord's incoming is less then their outgoing.

In reality people have and do make money from IPs. Therefore either 1) the owner occupier isn't paying a premium when considered over a longer timeframe or 2) house prices and rent have both shot up so the only loser of the 3 people above is the renter.

For the time being though I would much rather be the renter. My rent would have to triple to come even close to closing the gap on buying the place. And I can't see house prices jumping ahead for a long while yet. So it's a window of opportunity for renters to pocket some cash.

I see where you are going with this. The tenants helps pay the mortgage, the tenant pays all their bills, the land lord pays the rates and water service charge. In 20 years time most likely there is not mortgage on the house, the land lord kicks the tenant out, the land lords kid moves in and they have a house that cost them nothing, and their parents a small % of the total (remember the tenant is subsidizing the mortgage).
Edit: The tenant is still renting and will have to look for a new house. That is how i see this property game.

 

[HiEquity]

Because the landlord's costs are the same as the owner occupier's costs.

I thought the landlord's costs were tax deductible? A fairly significant difference for some of us...

For the time being though I would much rather be the renter. My rent would have to triple to come even close to closing the gap on buying the place. And I can't see house prices jumping ahead for a long while yet. So it's a window of opportunity for renters to pocket some cash.

IF rents don't triple while ur waiting, with pressure on house prices in those areas as a result. No reason you can't afford triple the rent given 80% of new residents (the OOs) are in effect already paying that amount on their mortgages according to your reasoning...

In my mind the large premium on buying in these "exclusive" suburbs is a reflection of people who prefer the "lifestyle" of owning their own house in these areas. This is a huge factor for a family who just can't get security of tenure for more than a couple of years out of a resi lease but want to put roots down in an area. It's not an investment decision for them but that doesn't mean we property investors can't profit from their lifestyle decisions. Property investors have never driven the market in this country - it's all about the behaviour of owner occupiers. When we can understand their behaviour we can make money...

 

[depreciator]

For the time being though I would much rather be the renter. My rent would have to triple to come even close to closing the gap on buying the place. And I can't see house prices jumping ahead for a long while yet. So it's a window of opportunity for renters to pocket some cash.

YM, If I was younger, didn't have a family, chickens, and a shed full of tools, I would consider renting. But my renting days are behind me. So I gladly pay a premium for a PPOR. I don't know whether any renters around my area are pocketing much cash. My Annandale (Sydney inner west) tenant had a 10% increase in January and he'll be getting another 10% increase next January. He's hoping house prices come down to meet him. I'm hoping they don't. But neither of us (nor anyone here) knows what is going to happen. And things vary from area to area. In some parts of Sydney prices have come off 30-40% from the 02 peak. In other places the fall has been less. Some places have had hardly any movement. My PPOR suburb has gone up in value.
Scott

 

[wylie]

I am with Scott on this. If I had my time again, I would consider renting but only if I was also a landlord.

Once you put down roots, have kids in local schools etc, it would be soooooo annoying to get that phone call telling you that in four weeks you have to find somewhere else to live.

I would hate that. I also am happy to pay a premium for being "master of my own domain" (not the Seinfeld type ).

 

[The_Bludger]

In some parts of Sydney prices have come off 30-40% from the 02 peak.

40%? Your kidding right? So on a $600k property, that house is now worth $360K or thereabouts? Which area or was this just a particular suburb?

 

[Sunder]

40%? Your kidding right? So on a $600k property, that house is now worth $360K or thereabouts? Which area or was this just a particular suburb?

Try looking around Guildford.

Apartments which were selling $360-400k back in 2004-2005, are now listed for $230k.

I had this argument with someone here a few months ago. He claimed not a single region had lost value and kept looking past the suburbs I had quoted which had tanked. He accused me of cherry picking, yet he kept insisting that not a single region had lost value. You can't cherry pick something that doesn't exist

 

[depreciator]

Quote:
Originally Posted by The_Bludger
40%? Your kidding right? So on a $600k property, that house is now worth $360K or thereabouts? Which area or was this just a particular suburb?

Try looking around Guildford.

Apartments which were selling $360-400k back in 2004-2005, are now listed for $230k.

Bludger, you would have heard about those Kellyville places? They've been talked about here. A few in one street sold for around $950K in the boom and resold this year for around $550K - a couple of mortgagee sales I think. Now that DOES NOT mean the whole suburb tanked, these were just some isolated examples. The media loved it, though, and made some isolated cases into 'whole market stats'. (That's something we're probably all guilty of at times.)
Some of the southwestern suburbs (Bankstown area) have been hammered. There are often stories about houses that sold for high $300s now being offered for mid $200s.
I know a guy who bought some houses in the western suburbs for mid $300s and similar houses can be picked up for low $200s now.
Toward the end of a boom there is a fair bit of irrational buying (and unscrupulous selling) that happens. People panic about missing out and pay crazy prices for anything. Investors and home owners are equally guilty. Sometimes the houses they are buying don't have much to recommend them: lousy area, crappy building, no transport, hopeless services etc etc. Irrational demand pushed the prices up. This end of boom 'froth' gets blown off pretty quickly. Areas that have more to recommend them: better housing stock, closer to transport, city/beach proximity etc, fair much better.
Believe me, there are alot of investors quietly looking at the western and south western suburbs and buying properties there at what they perceive as bargain basement prices. But they could be wrong.
Anyway, the 30% falls that some of the recent posters here have been hoping for have been happening for a few years. So they have got their wish in part. And I'm sure there are more falls to come. I'm just not convinced ALL property will fall 30% or whatever. And yes, I could be wrong.
Scott

 

[normailson]

I see where you are going with this. The tenants helps pay the mortgage, the tenant pays all their bills, the land lord pays the rates and water service charge. In 20 years time most likely there is not mortgage on the house, the land lord kicks the tenant out, the land lords kid moves in and they have a house that cost them nothing, and their parents a small % of the total (remember the tenant is subsidizing the mortgage).
Edit: The tenant is still renting and will have to look for a new house. That is how i see this property game.

Yeah, It's great isn't it? And the problem is....???

Seriously though:

The tenants are paying for somewhere to live and the bills are for the utilities they use.

If I have taken the time to get off my bottom, educate myself, risk house and family, potentially make a loss for ten years, fix all the damage done by the ferals, wear the losses when they abscond, do capital improvements, work after-hours and utilise tools enabled by the government to help me subsidise cheap rent for tenants, all the while I turn up 9-5 to do a "normal" job then......I personally think I've earned it after 20 years.
Minx, somewhere at the moment there is an injustice going on near you. Go concentrate on that because this ain't one of them. Either that or there's this place called "Utopia" where you might want to think about re-locating to.

 

[vbplease]

Going back to Sunder's original analogy..

I don't follow the logic in why it's bad for CG if rental yields go up??

Why do you say that cattle farmers will realise they are asking too much for beef? Supply and demand says that prices will continue to rise if there is still not enough beef..

The way I've always seen it is that if people are sick of paying high rents, they will want to buy a house and this will cause house prices to rise..

I don't see how there can be an equilibrium of house prices reducing because rent goes up..

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.

 

[Minx]

Yeah, It's great isn't it? And the problem is....???

Seriously though:

The tenants are paying for somewhere to live and the bills are for the utilities they use.

If I have taken the time to get off my bottom, educate myself, risk house and family, potentially make a loss for ten years, fix all the damage done by the ferals, wear the losses when they abscond, do capital improvements, work after-hours and utilise tools enabled by the government to help me subsidise cheap rent for tenants, all the while I turn up 9-5 to do a "normal" job then......I personally think I've earned it after 20 years.
Minx, somewhere at the moment there is an injustice going on near you. Go concentrate on that because this ain't one of them. Either that or there's this place called "Utopia" where you might want to think about re-locating to.

Say what? I think you are being a little rude there. Riiiight so you start implying that i'm suffering from injustice and i'm in my own fantasy land. LOL. Yeah no worries buddy.

I thought we were on the same team, however judging by your comments we are not. Thats too bad.

 

[BayView]

Take 3 people. 1 buys a house to live in, 1 buys one as an IP, and the other rents the house that is the IP. Both these houses are in the same street, the same style, the same market price. If we think the owner occupier is paying more than the renter then the landlord has to be making a loss. Why? Because the landlord's costs are the same as the owner occupier's costs. But we just established that the renter is paying less than the owner occupier. Therefore the landlord's incoming is less then their outgoing.

In reality people have and do make money from IPs. Therefore either 1) the owner occupier isn't paying a premium when considered over a longer timeframe or 2) house prices and rent have both shot up so the only loser of the 3 people above is the renter.

For the time being though I would much rather be the renter. My rent would have to triple to come even close to closing the gap on buying the place. And I can't see house prices jumping ahead for a long while yet. So it's a window of opportunity for renters to pocket some cash.

AAH! Now I'm getting it.

There's one flaw in that argument YM - tax deductions.

If the combined effect of all the holding cost tax deductions, and the depreciation deductions - which are "on paper" deductions - they are "non cash" expenses that carry a deduction, are added onto the rental income (and they are income) - then it is quite possible for the Landlord to have a positive cashflow from the IP.

As I stated in the earlier post, this is probably not possible in the Cap Cities right now, but it is possible in several areas around the Country.

In this case, the Landlord is ahead of the O/O, because he has a property that costs him nothing to hold, while the O/O has to pay for his PPoR out of after tax income.

The renter is the better off than the O/O in terms of weekly after-tax cashflow, but unless the renter puts the difference between his rent and the O/O's holding costs into another investment vehicle that offers the same tax advantages, income and cap growth that the IP will provide, then he is worse off than both the O/O and the Landlord, because both of them are "in the market" with an asset that will go up in value over time.

As we know, most renters never invest the difference between their rent and what a mortgage would be unfortunately, so they never get ahead financially. They would be better off to pull in the belt and buy an IP and keep renting in this case. Then, if they have selected the right property and maximise all their cash and "on paper" tax deductions, they will be better off than the O/O.

In our case, and not trying to be smart - just illustrating the example, we have a portfolio that is cashflow positive after tax - they cost us nothing out of our own pocket to own. There is no loss. Well, there is - but it's an "on paper" loss. The reality is that after all the rent and the tax return dollars have been factored in, we get more back than we pay out, and we have exposure to cap growth as well.

All of our after-tax dollars are free to do with what we like; not have to allocate any of them towards a mortgage as the O/O does, so I'm better off as an investor than an O/O, and I'm not making a loss.

Of course, many of our after-tax dollars go back into the loans anyhow, for debt reduction and for an overall solid financial position.

 

[Francesco]

Going back to Sunder's original analogy..

I don't follow the logic in why it's bad for CG if rental yields go up??

Why do you say that cattle farmers will realise they are asking too much for beef? Supply and demand says that prices will continue to rise if there is still not enough beef..

The way I've always seen it is that if people are sick of paying high rents, they will want to buy a house and this will cause house prices to rise..

I don't see how there can be an equilibrium of house prices reducing because rent goes up..

I do not believe Sunder is implying that with his broad brush strokes of the RE market.

All things being equal economically speaking, when rent goes up the value of the property should go up, being financially more productive to PI. The increasing rent should also prompt the OO to purchase property in some future horizon, if access to mortgage loan permits. However, some things have changed because of RBA (and bank own) interest rate rises which curb PI and OO demand to bid up the price, hence vendor may have to realise that to sell in the lower demand market price has to be reduced. Migrants counteract the IR increases and may drive RE price up. There are lots of other factors which I will omit.

All these economic factors are considered macro-ly and generalised, they obviously impact differently at each geographical region.

 

[Sunder]

Going back to Sunder's original analogy..

I don't follow the logic in why it's bad for CG if rental yields go up??

Think I've had enough of the beef analogy. Let's talk straight.

The premise of the argument is that "all else being equal". Let's work this out from base principles:

Rent is rising. Why? Not in a slow controlled fashion in line with either CPI or wages, but outstripping both

Is it because supply has fallen? Have people exited property investment? Possibly

Is it because demand has risen? Have we had a population boom? Possibly.

So what can cause supply to drop. Did a whole lot of the market get declared unliveable? No. So houses still need to be there. Just ownership and use must have changed. The only other use for IP is either as a PPoR or sitting vacant. We're told we have record LOW vacancies, so it's not that. So if supply dropped, then investors must be dumping stock. If they're dumping stock, CG down.

So what can cause demand to rise? Did we suddenly have a lot of kids turn 18 and want to move out of home? Not that I can see. Did we have a immigration boom? Immigration growth, sure, but not a boom. Did we have a change in living arrangements? Over thirty years, yes, we've changed from something like 2.3 to 2.1 people per residence, but not enough for it to explain less than 12 months of rent spikes.

So seeing as there has been no massive change of fundamentals, the change in pricing has to do with preference between interchangeable goods. For example, if you could rent a property for $300pw, and mortgage payments are $400 a week, you might think "Why make the land lord rich, I'm buying". So the preference is to pay the premium for ownership.

But if repayments go from $400 a week to $700 a week, you might think you could do something better with the extra $400 a week you would save by renting. So you sell your PPoR and look for a rental property.

Unfortunately, everyone else thinks the same way, and there is increased demand for rentals, and so to get that place, you now need to offer $350... But someone else says... $350 vs $700? I'll still rent, Auctioneer! I bid $360! and so forth.

However, the pressure isn't one way. Some people have to sell their house. It's a fact of life - deceased estate, foreclosure, moving, upsizing, downsizing, etc. Just say I want to sell my house at $400,000. I know that anyone buying it at 9.25% interest will need to pay roughly $700 a week repayments. I know nobody wants to pay that much for a house, when renting costs half that at $360.

I can't affect interest rates, so the only variable I can change is my price. I'd love to hold out for a good price, but I can't. So I drop to $380k, it might sell, or it might not. But even if it does, it lowers the median for that area, and the next person to sell a similar house would look to see what I sold for.

The point is, rising rents is an indicator that the gap between renting and buying is too big. It'd be lovely to think that the gap only closes upwards one way - that is, rents have to rise and prices don't have to fall. But the market doesn't work like that. As long as there are people who HAVE to sell, they will pull down the price for everyone else.

 

[The_Bludger]

Think I've had enough of the beef analogy. Let's talk straight.

The premise of the argument is that "all else being equal". Let's work this out from base principles:

Rent is rising. Why? Not in a slow controlled fashion in line with either CPI or wages, but outstripping both

Is it because supply has fallen? Have people exited property investment? Possibly

Is it because demand has risen? Have we had a population boom? Possibly.

So what can cause supply to drop. Did a whole lot of the market get declared unliveable? No. So houses still need to be there. Just ownership and use must have changed. The only other use for IP is either as a PPoR or sitting vacant. We're told we have record LOW vacancies, so it's not that. So if supply dropped, then investors must be dumping stock. If they're dumping stock, CG down.

So what can cause demand to rise? Did we suddenly have a lot of kids turn 18 and want to move out of home? Not that I can see. Did we have a immigration boom? Immigration growth, sure, but not a boom. Did we have a change in living arrangements? Over thirty years, yes, we've changed from something like 2.3 to 2.1 people per residence, but not enough for it to explain less than 12 months of rent spikes.

So seeing as there has been no massive change of fundamentals, the change in pricing has to do with preference between interchangeable goods. For example, if you could rent a property for $300pw, and mortgage payments are $400 a week, you might think "Why make the land lord rich, I'm buying". So the preference is to pay the premium for ownership.

But if repayments go from $400 a week to $700 a week, you might think you could do something better with the extra $400 a week you would save by renting. So you sell your PPoR and look for a rental property.

Unfortunately, everyone else thinks the same way, and there is increased demand for rentals, and so to get that place, you now need to offer $350... But someone else says... $350 vs $700? I'll still rent, Auctioneer! I bid $360! and so forth.

However, the pressure isn't one way. Some people have to sell their house. It's a fact of life - deceased estate, foreclosure, moving, upsizing, downsizing, etc. Just say I want to sell my house at $400,000. I know that anyone buying it at 9.25% interest will need to pay roughly $700 a week repayments. I know nobody wants to pay that much for a house, when renting costs half that at $360.

I can't affect interest rates, so the only variable I can change is my price. I'd love to hold out for a good price, but I can't. So I drop to $380k, it might sell, or it might not. But even if it does, it lowers the median for that area, and the next person to sell a similar house would look to see what I sold for.

The point is, rising rents is an indicator that the gap between renting and buying is too big. It'd be lovely to think that the gap only closes upwards one way - that is, rents have to rise and prices don't have to fall. But the market doesn't work like that. As long as there are people who HAVE to sell, they will pull down the price for everyone else.

That's probably one of the best posts I have read on these forums.

 

[normailson]

Say what? I think you are being a little rude there. Riiiight so you start implying that i'm suffering from injustice and i'm in my own fantasy land. LOL. Yeah no worries buddy.

I thought we were on the same team, however judging by your comments we are not. Thats too bad.

Minx,

I am so sorry. I mistook you for someone else. Please accept my apologies.

Norm

 

[HiEquity]

So if supply dropped, then investors must be dumping stock. If they're dumping stock, CG down.

But investors are less than 20% of the market! Can we swing the market by that much? OOs set the price, not investors. The point is that right now more OOs than investors are buying, the investment portion of the market is at record lows, due to the factors we all know about. This drops the relative supply of rental accomodation, increasing rents. When rents increase, investors enter the market and take the pressure off rents.

All this is completely separate from what happens to price, which is all about affordability for OOs, driven primarily by interest rates as they can or can't afford their lifestyle decisions.

So what can cause demand to rise? Did we suddenly have a lot of kids turn 18 and want to move out of home? Not that I can see. Did we have a immigration boom? Immigration growth, sure, but not a boom. Did we have a change in living arrangements? Over thirty years, yes, we've changed from something like 2.3 to 2.1 people per residence, but not enough for it to explain less than 12 months of rent spikes.

Immigration and population growth, coupled with low rates of new construction as a result of escalating costs and diminishing CGs only add to the pressure on rents.

The point is, rising rents is an indicator that the gap between renting and buying is too big. It'd be lovely to think that the gap only closes upwards one way - that is, rents have to rise and prices don't have to fall. But the market doesn't work like that. As long as there are people who HAVE to sell, they will pull down the price for everyone else.

I agree there will be plenty of areas in the market which have and will drop in price due to the behaviour of OOs. However, the primary reason for the increasing rental situation is because investors aren't buying anymore! Prices are driven by the behaviour of OOs, rents by the behaviour of investors. These two are only weakly coupled - you can have increasing rents without price weakness - it's just the investors are trying to guess what the OOs are going to do to assess if the CG upside is enough to warrant the -ve cash flow. At the minute it seems most investors reckon it's not worth it - it's when we stop buying that the disadvantages of renting become apparent! When rents rise or IRs reduce sufficiently we'll be back out there increasing the supply of rental stock again to the great benefit of all those renters out there. I hope they know where their bread's buttered!

 

[The_Bludger]

Excuse my ignorance, but what's an OO?

 

[keithj]

Rent is rising. Why? Not in a slow controlled fashion in line with either CPI or wages, but outstripping both

Is it because supply has fallen? Have people exited property investment? Possibly

Maybe a few have, but those houses have been sold to either other investors or OOs, so supply hasn't fallen.

Is it because demand has risen? Have we had a population boom? Possibly.

Yes, We've just had the highest nett number of immigrants ever.

So what can cause supply to drop. Did a whole lot of the market get declared unliveable? No. So houses still need to be there. Just ownership and use must have changed. The only other use for IP is either as a PPoR or sitting vacant. We're told we have record LOW vacancies, so it's not that.

I agree so far

So if supply dropped, then investors must be dumping stock. If they're dumping stock, CG down.

This where the train of thought starts to go astray IMO.

So what can cause demand to rise? Did we suddenly have a lot of kids turn 18 and want to move out of home? Not that I can see. Did we have a immigration boom? Immigration growth, sure, but not a boom. Did we have a change in living arrangements? Over thirty years, yes, we've changed from something like 2.3 to 2.1 people per residence, but not enough for it to explain less than 12 months of rent spikes.

So seeing as there has been no massive change of fundamentals,...

There is a massive change in fundamentals, there's v. low vacancy caused by high immigration & low new building starts. People don't want to live in the crappy dump that's always last to rent out, they want a decent place, and are prepared to pay for it.

...the change in pricing has to do with preference between interchangeable goods. For example, if you could rent a property for $300pw, and mortgage payments are $400 a week, you might think "Why make the land lord rich, I'm buying". So the preference is to pay the premium for ownership.

But if repayments go from $400 a week to $700 a week, you might think you could do something better with the extra $400 a week you would save by renting. So you sell your PPoR and look for a rental property.

The only person I've ever heard who thinks like that is YM. I never hear of people thinking, for $400pw extra I need to vist a few REAs, spend 3%+ of my house value in agents fees for sell it, hire removalists, allow strangers to look through my house most Saturdays for 3 months, find somewhere as nice to rent.... and then do the same in reverse again next year when rents go up & they decide to buy another PPOR!

.............The point is, rising rents is an indicator that the gap between renting and buying is too big. It'd be lovely to think that the gap only closes upwards one way - that is, rents have to rise and prices don't have to fall. But the market doesn't work like that. As long as there are people who HAVE to sell, they will pull down the price for everyone else.

It's supply & demand that's caused rents to rise ... the rising population & low new building starts leads to a shortfall in vacant property. Supply is relatively low, demand is increasing so rents rise... simple really.

House prices rarely fall, more often they stagnate, and inflation causes them to fall in real terms, so as rents & wages rise the gap closes and the rent or buy emotional decision has to be made.