What IF: Rates up...Boom over....That leaves Rents?

[datto]

OK, chrystal ball stuff here.

What if, some time in the future, rates go up and the boom disappears in a poof of smoke.

It ain't all doom and gloom cause rents will have to skyrocket...no?

My year 9 schooling (prior to being kicked out) tells me that as demand for a product wanes so does the price of that product. And if people ain't buying then they gotta be renting (rubbing hands together with big grin).

So, in a nutshell the economics of what I'm alluding to is that if one can survive the initial impact of a slump then the the future is still rosy.

How to survive the slump? That will be in my next issue when I get around to finishing my research....now back to minecraft.

 

[willair]

OK, chrystal ball stuff here.

What if, some time in the future, rates go up and the boom disappears in a poof of smoke.

It ain't all doom and gloom cause rents will have to skyrocket...no?

My year 9 schooling (prior to being kicked out) tells me that as demand for a product wanes so does the price of that product.

Always try and keep ahead by keep reminding yourself of the obvious ,no matter what any media -banks-governments-side show real estate agents
tell you ,,the rates will go up at some time in the future,because even with my grade ten education it takes a lot of mastery to control silence ..

 

[datto]

Tanx for that great advice. Yes a rate rise in inevitable sometime in the future. I think the important thing is not to get caught short when it happens.

 

[kathryn d]

It will leave people who have lost their jobs...either illegally breaking their lease...or stop paying..waiting to be evicted

If things get really bad, people would start moving back home with their parents. Friends will share accommodation.

This means less demand for rentals.

Lots of rentals sitting empty.
LLs get worried, so they drop their rents

that is what I see happening, if there is a recession

 

[datto]

Yes interesting point Kath. Rental demand may soften due to defaulting tenants moving back with their oldies. Could lead to more domestics and pressure on the cops.

 

[knightm]

It will leave people who have lost their jobs...either illegally breaking their lease...or stop paying..waiting to be evicted

If things get really bad, people would start moving back home with their parents. Friends will share accommodation.

This means less demand for rentals.

Lots of rentals sitting empty.
LLs get worried, so they drop their rents

that is what I see happening, if there is a recession

This is true and will occur to some degree in a recession. The lower demand for rentals would be a worst case scenario in my mind as there will more likely be loads of people who would have possibly bought at some stage who will RENT LONGER. They will have jobs but be nervous about losing their jobs, so they will delay purchase (either ppor or investment) this results in MORE tenants. My study of previous interest rate cycles appears to demonstrate (at least in Australia in recent few decades) that high interest rates are followed by higher rents.

So my view is that capital values may stagnate or fall but rents will grow faster. I see it as win win for investors with real backbone.

Certainly in the short term there is pain but long term gain.

 

[ellejay]

This is true and will occur to some degree in a recession. The lower demand for rentals would be a worst case scenario in my mind as there will more likely be loads of people who would have possibly bought at some stage who will RENT LONGER. They will have jobs but be nervous about losing their jobs, so they will delay purchase (either ppor or investment) this results in MORE tenants. My study of previous interest rate cycles appears to demonstrate (at least in Australia in recent few decades) that high interest rates are followed by higher rents.

So my view is that capital values may stagnate or fall but rents will grow faster. I see it as win win for investors with real backbone.

Certainly in the short term there is pain but long term gain.

This has been our experience with a UK property that we got stuck with during the crash. We couldn't sell it but it's been rented the whole time and increased the rent three times. Interest rates dropped like a stone as well allowing us to pay off the mortgage.

 

[datto]

Knightm..No pain without gain so the saying goes lol.

So in the long term landlords will still be around doing their stuff keeping a roof over peoples' heads...providing that most basic human need....shelter. And some people have the audacity to criticise property investors!

 

[knightm]

This has been our experience with a UK property that we got stuck with during the crash. We couldn't sell it but it's been rented the whole time and increased the rent three times. Interest rates dropped like a stone as well allowing us to pay off the mortgage.

This is right, it hurts on the way up, but the joy comes in the next cycle as rates drop (rents dont) and you are in the cash flow!

As Buffet said wealth is the transfer of money from the impatient to the patient.

 

[knightm]

Knightm..No pain without gain so the saying goes lol.

So in the long term landlords will still be around doing their stuff keeping a roof over peoples' heads...providing that most basic human need....shelter. And some people have the audacity to criticise property investors!

There will always be media wanting to sell ads by criticising the owners of assets, and always be small minded folk who will listen to them. I have a much higher view of the noble act of housing other humans. I am proud when I supply someone with a home. I always try and do it well. I am patient, but I am not throwing away money. I deserve to be rewarded, and I will. For that I am grateful.

 

[antistar]

There will always be media wanting to sell ads by criticising the owners of assets, and always be small minded folk who will listen to them. I have a much higher view of the noble act of housing other humans. I am proud when I supply someone with a home. I always try and do it well. I am patient, but I am not throwing away money. I deserve to be rewarded, and I will. For that I am grateful.

Hey well said!

In recessions / downfalls / tough times (or in investing in general) a good buffer is a must. There is always those that greedy up and use up any available cash to rush into another purchase and repeat over and over again. Some with 95% loans! No wonder a recession will hurt if a tenant leaves or they lose their job. As hard as it is to resist the temptation no one should be investing without a lazy side pile of cash.

To quote Buffett again: When the tide goes out do you discover who's been swimming naked.

 

[Redom]

Haha this thread has some great advice...

I'm not so sure. Were building at a 50/50 investor to PPOR split during this cycle, while the renters make up 30 per cent of housing. This has been sticky for close to two decades.

A recession will bring those figures back closer to averages, but it will take a while to soak up the additional rental supply from the boom.

Cheers,
Redom

 

[marg4000]

In a recession people lose their jobs. They move into cheaper rentals, share with friends or move back home.

If demand falls, so do rents.
Marg

 

[Freckle]

In a recession people lose their jobs. They move into cheaper rentals, share with friends or move back home.

If demand falls, so do rents.
Marg

What most people don't realise is that all the action happens in only 10% of the market. The effects on that 10% and their reaction to those effects pushes the other 90% around. You don't need very big movements in a market to get significant swings in value/performance/activity etc etc.

A crash for example may only be a 5% fall in price/value but that may affect 30% of players resulting in a panic and subsequent route in market values. GFC 2 will be magnitudes bigger, have a broader impact and a much longer timeline to recovery than many actually expect. We have a system that has taken decades to corrupt. Fixing it will take decades.

 

[Freckle]

It ain't all doom and gloom cause rents will have to skyrocket...no?

Have a look at every market/economy that has crashed for your answer. Plenty of case studies out there if you care to look.

 

[datto]

Arhh! welcome Freckle lol. Welcome to my thread. I'm very pleased that you have arrived. If I only could, I'd offer you a beverage of your choosing,,,but as I can't, you'll have to head to your kitchen to help yourself.

Let me say that I am not the least surprised that you hold a "negative" view, No , that's perfectly OK. We co exist in a democracy and everyone's view is treated with respect and dignity.

When/If GFC2 hits I will certainly re read your posts.

Regretfully, and respectfully, I subscribe to the ism that rents will rise when the proverbial hits the fan. It shall be christened "rentism".

 

[Freckle]

Regretfully, and respectfully, I subscribe to the ism that rents will rise when the proverbial hits the fan. It shall be christened "rentism".

My wife still believes that if you slap a piece of steak on a wart and bury it in the garden the wart will disappear. The old man puts corks under the mattress to prevent cramps..swears by it

ROFL....

 

[knightm]

Ok here is one example from a previous cycle - an ip that I used to own, but don't anymore.

Purchase price 226k rent 250pw - I cleaned up the garden and got it to 280. In hindsight probably one of my worst deals it was near the beach and we got a bit emotional. It was IP3 and we thought we knew it all.
It was a refinance deposit so essentially 105% borrowed money (from memory purchase date was in late 04 ) interest rates at the time were somewhere in the 6% range at the time. (again this is all from memory and we had baby related sleep deprivation so it could be a bit off)

In the pre gfc interest rate rises in 07 and 08 went up and up. I was hurting. I had refinanced to a low doc (dont ask me why it seemed like a good idea at the time) so interest rates really went up. Nudged 9% at one point. My wife was at home making babies and I had fixed income job. We continued to tighten our belt, and eventually we sold a small unit purchased earlier off to take some profit and some pressure off. (luckily that one had peaked and had a good run so I was happy to sell)

Then rents went up. 20pw, 30pw, 50pw each review. And interest rates came down.

By the time I sold it in 2011 (to build our PPOR) it was renting for 500pw and worth 500k. Well and truly cf positive on original purchase as well as I had refinanced it once tuy another IP. So in summary overall the catchup took a few years but it happened.

Recessions happen, interest rate rises happen, markets (and people) hurt - things get tough sometimes. But not forever.

I decided I didn't care how hard it was I wouldn't be fire saleing that property. I knew the market would turn and it did. I knew rents would rise and they did. We sold at the peak of the market in that area, on our own terms and for the purpose of building our home - no regrets.

You need to work out what kind of investor you want to be, and whether you are ready for the sacrifices that will entail.

Its good to think about market scenarios, and plan for difficult days with buffers, but don't let fear cause inaction. That is more costly than anything.

 

[datto]

Freckle, sometimes things work, they defy logic, you have to accept that the world is full of mystery.

For example, I've been drinking Red Bulls all day and I've never felt so ALIVE. My brain is on FIRE from all the ideas I've got. That's why I started this thread. I sincerly believe that when the economy goes pear shaped, RENTS will thrive...that's what I believe.

But of course that's my view (and it looks like knightm has the same experience - look ^^^ read his post). Keep the steaks for the BBQ and the corks on the wine bottles but rents will rule!

 

[Deltaberry]

How to protect yourself against an Australian recession?

Hold enough cash to pay 36 months interest with no rent at 2.5% higher interest rates, and many many USD. Easy.