Where are the renters?

[Aaron Sice]

. If this is not the case then it would flip the market on it's head to one based on yield rather than capital appreciation.

clealry you're new and haven't been reading the forums a lot.

the market is doing exactly this - me included.

when yields are high enough, mum'n'dads invest. another investor class to add to the mix, putting more pressure on prices.

it's a pendulum - yield/CG to CG/yield.

 

[HomeBuyerStrike]

when yields are high enough, mum'n'dads invest. another investor class to add to the mix, putting more pressure on prices.

it's a pendulum - yield/CG to CG/yield.

Unless you're looking at areas with transient populations which I would profer are a niche market, yields have a long way to go to become attractive. You'd then have to consider the forces that would cause a swing back to capital appreciation if the demand side statistics have been eroded by increased utilisation of supply.

 

[HomeBuyerStrike]

LOL - just thought - how many lied to avoid letting on they're subletting?

That would further erode the demand side statistics. I'm sure it is the case for some properties. Have a look at the 'room available' ads on the lamposts around Haymarket in Sydney CBD to see the density some are living in. I agree, there are so many unknowns, such is the nature of market information.

 

[dan c]

You'd then have to consider the forces that would cause a swing back to capital appreciation if the demand side statistics have been eroded by increased utilisation of supply.

That's a big IF. And an unlikely one.

 

[HomeBuyerStrike]

That's a big IF. And an unlikely one.

It's the whole point of the thread. Clearly the supply/demand fundamentals are not currently adding up.

 

[Aaron Sice]

yields have a long way to go to become attractive.

where?

i can throw a dart at perth metro resi yields at hit 4%.

with a good structure, i can get 9%.

regionally, i can get 13-25%.

in fact, one of the deals i'm putting together now with a friend of mine is in a CG town and pulls a 15% yield.

 

[HomeBuyerStrike]

where?

In places where the majority want to live.

i can throw a dart at perth metro resi yields at hit 4%.

with a good structure, i can get 9%.

regionally, i can get 13-25%.

in fact, one of the deals i'm putting together now with a friend of mine is in a CG town and pulls a 15% yield.

I've no argument with that, unless you've discovered a niche then the return should equate roughly to the inherent risk. There's a lot of money chasing property but it's possible it's not flowing to these underexploited niches. More power to you if you can find a genuine niche.

 

[BV]

Clearly the supply/demand fundamentals are not currently adding up.

I'm glad you eventually saw that demand outstrips supply.
Better late than never.....

 

[tom32]

They are currently unavailable, if we changed our mind they would become available. When we finish our lease they will likely become available. So in the short term they are unavailable but in the medium term they will become available. There is also a vacant unit in the family as I mentioned that could be filled and there is also vacant space in a family home that could be filled. We're not interested in buying so our situation isn't probably that common. If we were of the mindset that many seem to be then we would be living in the vacant unit struggling to get onto the 'property ladder'.

At its heart your argument is, if conditions change then their could be more supply then required.

I agree completely.

Look at pictures of the great depression. People on the streets, people in shanty towns etc.

If we had a depression then house prices would almost certainly be in a tail spin and we would have a whole lot of supply. People who could pool their resources to buy or rent a home would. Conditions in between like a recession would go some way to doing the same thing. Utility is driven by prosperity and affordability. Make houses affordable with easy credit expect low utility rates make them unaffordable then utility rates increase.

This is not a condition I wish upon Australia even though I would advocate any policy that would make housing more affordable. In essence I would rather see our houses become cheap because the government freed up land supply and removed taxes from new builds including GST (A roof over your head is an fing necessity right?). Then drove affordable housing this way through more supply so we can all have our own homes assuming a full time job.

Do you really prefer a Hong Kong solution, make the costs of housing / development / production so artificially inflated that we end up living a family to two bedroom units etc just so those that bought before the policy change can reap the windfall profits of such policy changes? Saying there are enough homes now we need no more is pretty well the argument local govs use when they say we released 1500 blocks and we will release no more cause that enough. Let the market decide that not the government.

Bob Carr went for the urban consolidation solution for Sydney, and look what it now costs to create a new dwelling / block. It is ridiculous that as Australians with near limitless land similar to America we have this situation in any capital.

 

[HomeBuyerStrike]

Look at pictures of the great depression. People on the streets, people in shanty towns etc.

I think your extreme example is a straw man argument. Such an extreme shift is practically the polar opposite of what we have today.

 

[tom32]

It's the whole point of the thread. Clearly the supply/demand fundamentals are not currently adding up.

OK lets look at your supply demand fundamentals.

You have a housing market at equilibrium over a long period.

The government introduces an urban consolidation plan in 1995 and releases about half the blocks of greenfield they had over the previous 20 years YoY.

It then introduces a state government levy of 350k per hectare for greenfield developments in the metro area.

Local governments not to be left out of the tax loop increase council levies from around 5k to more than 20k.

The federal government then in 2000 says, we will introduce a 10% GST but this will replace state gov levies so should be all OK for house prices. Well we know what happened there...

How many houses would you expect get built at each of these above changes while prices remain at the previous levels. The answer is of course stuff all, price rises just to get new supply levels back to what they were at the previous equilibrium point.

It is well understood the supply of new dwellings is highly elastic. This Even though academics here in Aus sometimes say it is not elastic but I think thats because they ask themselves what went wrong with supply when prices in real terms doubled, my answer would be so did costs!

Ask a developer any developer on here or elsewhere if the market price remained where it is now and his costs of production were reduced by 50k per unit would he produce: a) less houses, b) the same houses or C) a hell of a lot more houses per year. Guess what the answer would be and guess what the answer on existing homes would be given a few years of supply response.

 

[tom32]

I think your extreme example is a straw man argument. Such an extreme shift is practically the polar opposite of what we have today.

Umm, no what do you mean? If we had a depression we would not have lots of extra homes? I think it is a rock solid argument quite the opposite of a straw man.

As I said conditions in between would cause a result somewhere in between.

It is your argument I am trying to put more succinctly. Maybe only for my own benefit as few people usually agree with me bull or bear...

Conditions change we utilise our stock differently. It is possible with no more dwellings and a population increase of 1million with bad enough economic conditions we still have a surplus stock of homes. But if underlying conditions don't change then neither will utilisation of stock just because we want it too.

Remember conditions like any of the following could change;

easy credit no more; surplus homes.
more expensive credit, interest rates rise; surplus homes.
unemployment rises; surplus homes.
sentiment changes; even this could create a surplus of homes.
wishing it were so but no underlying change in conditions; no surplus homes.

You have to have a change in conditions to move a market price in equilibrium. It is working out what a change in conditions will do to price is where the money is. Not just buying cause house prices always go up.

As you said people will not rent out their spare bedrooms. But they will if they cannot make ends meet any more, they will when they have to it is that simple, if conditions are right for it we might have 10% too many maybe 20% too many homes for the population. But only if the conditions are right for it.

 

[HomeBuyerStrike]

Umm, no what do you mean? If we had a depression we would not have lots of extra homes? I think it is a rock solid argument quite the opposite of a straw man.

As I said conditions in between would cause a result somewhere in between.

It is your argument I am trying to put more succinctly. Maybe only for my own benefit as few people usually agree with me bull or bear...

It is a straw man because that is not my argument, it's related to my argument but not the same. My argument is that the shift required to change the dynamics to great supply side utilisation is not that great. I think this is a position that one if not more bulls have agreed with.

Conditions change we utilise our stock differently. It is possible with no more dwellings and a population increase of 1million with bad enough economic conditions we still have a surplus stock of homes. But if underlying conditions don't change then neither will utilisation of stock just because we want it too.

I haven't estimated the latent supply so I couldn't comment. The price movements in the market would suggest that the undersupply is not there or is exaggerated by bulls. There are some indications that a shift may already be underway. The weakness in the undersupply argument I see are room utilisation and 'holiday homes'.

I think a few changes could cause this shift:
A) Interest costs putting pressure on new owners with excess space.
B) Ability of FHBs to raise deposits while renting (LVR and also prices)
C) Rents mismatching incomes, making housesharing necessary.

I've probably missed plenty there.

As you said people will not rent out their spare bedrooms. But they will if they cannot make ends meet any more, they will when they have to it is that simple, if conditions are right for it we might have 10% too many maybe 20% too many homes for the population. But only if the conditions are right for it.

People are seizing on the rent a room idea. The others are house sharing and sharing with families. All three are possible and in my opinion significant.

 

[HomeBuyerStrike]

Also, I believe the oft quoted static of a new person every 78 seconds pre-dates recent immigration law changes and is actually a bit high at present. The statistic is out of date.

 

[tom32]

People are seizing on the rent a room idea. The others are house sharing and sharing with families. All three are possible and in my opinion significant.

Yes it will happen if conditions change. If conditions don't change then nor will the utilisation rate. The market is not broken it is responding to easy credit, government regulation in housing supply and government taxation. Basically it is responding to a deregulation of finance and a more heavily regulated housing market. The worst possible combination!

Using the example of a depression was only to dispel the idea that it cannot happen.

I call it a straw man when I put your argument up and destroy it with the argument I put forward being weak but not yours. I used an extreme example using your logic to make a point.

From there when once there is agreement we could have an oversupply with the current population / housing situation in Australia in the "right" conditions you then explore what conditions could cause a change in the utilisation rate of existing dwellings.

But again I would ask why would we want to wait for this. Why not remove taxation from new dwellings and let the market solve it not a recession, credit crunch etc.

 

[HomeBuyerStrike]

I call it a straw man when I put your argument up and destroy it with the argument I put forward being weak but not yours. I used an extreme example using your logic to make a point.

Fair enough, I misinterpreted your intentions.

From there when once there is agreement we could have an oversupply with the current population / housing situation in Australia in the "right" conditions you then explore what conditions could cause a change in the utilisation rate of existing dwellings.

I think that the latent supply has to be priced into the market as a current risk based on it's probability of occurring and impact of occurring. This is what happens in other markets. I guess this is a feature of value investing, although I'm not sure I've fully thought that out. Value investors look for inefficiencies in the market pricing positive and negative risks and invest accordingly to those risks. Some will say this is a 'variable' but people make a living out of pricing risks, positive and negative.

But again I would ask why would we want to wait for this. Why not remove taxation from new dwellings and let the market solve it not a recession, credit crunch etc.

I don't think removing taxes will remove speculation. Similar to the FHOB it is a gift to vendors. The FHOB had the reverse effect of that espoused, but I don't think anyone is under any illusion that it's intentions were otherwise.

 

[Aaron Sice]

I think that the latent supply has to be priced into the market as a current risk based on it's probability of occurring and impact of occurring. This is what happens in other markets. I guess this is a feature of value investing, although I'm not sure I've fully thought that out. Value investors look for inefficiencies in the market pricing positive and negative risks and invest accordingly to those risks. Some will say this is a 'variable' but people make a living out of pricing risks, positive and negative.

wait - so we should take satellite images of all the quartz deposits on earth to take into account all the possible latent supply of gold out there?

 

[HomeBuyerStrike]

wait - so we should take satellite images of all the quartz deposits on earth to take into account all the possible latent supply of gold out there?

If you think it gives you sufficient competitive advantage then knock yourself out. Thankfully we have somewhat reliable demographics freely available from the ABS for the property market. Market information is rarely perfect, it's what you do with the information available (or obtainable) that makes the difference.

 

[HiEquity]

What a circular thread! It's all very simple in my mind. Yes, there are vacant rooms out there that may come onto the market. What is the one thing that will bring them onto the market?

....

Higher rents!

.....

We have an equilibrium now where resi rents across Australia are ridiculously low. Wait for demand to increase and rents will increase. New supply will only then become available - it's waiting for a sufficient price to make it worthwhile and it ain't there now, that's for sure.

FHBers can afford mortgages far higher than their renting cousins pay for rent so the only conclusion to be drawn in my mind is there's plenty of capacity to pay and upside in rents and perhaps less in CGs in this part of the cycle for your "average" RIP (whatever that is).

 

[tom32]

What a circular thread! It's all very simple in my mind. Yes, there are vacant rooms out there that may come onto the market. What is the one thing that will bring them onto the market?

....

Higher rents!

.....

We have an equilibrium now where resi rents across Australia are ridiculously low. Wait for demand to increase and rents will increase. New supply will only then become available - it's waiting for a sufficient price to make it worthwhile and it ain't there now, that's for sure.

FHBers can afford mortgages far higher than their renting cousins pay for rent so the only conclusion to be drawn in my mind is there's plenty of capacity to pay and upside in rents and perhaps less in CGs in this part of the cycle for your "average" RIP (whatever that is).

Actually good point at the risk of going one more time around the circle; it is a given IMO higher utilisation rates would be achieved through higher costs as well and I believe this is the trend we are sarting to see now with our shortage of homes. They are expensive so we are bunching up again for the first time in years where we continued to use more of them per person due to easy affordability.

So while affordability could worsen due to demand deteriorating importantly it could also deteriorate due to costs increasing. If there is one benifit of Carrs urban consolidation strategy it is that it did just that, per person in Sydney we now use a hell of a lot less land in residential per person due to the stupid costs of developing resi land.

Like the example of taking 50k out of costs of development causing dwelling number growth through new builds if the gov in stead implemented a 300k new development charge per block guess what would happen to rents after a few years of continued population growth? Guess what would happen to utilisation rates on homes? Up and up. I certainly don't advocate it. but it is how it is.