Where are the renters?

[HiEquity]

Oh and one more thing...

I've been looking at some construction estimates for villas and a basic 3x2 on a multi unit site seems to cost around $200k to build. Same thing rents around $300pw in the areas I'm looking at, within 1/2hr of a major CBD on public transport. Equates to a net yield around 5.5% if ur lucky. Pretty unattractive for the risk of DA and construction etc and with IRs getting up to 7%...

Of course this all assumes the land cost you nothing in the first place.

With dynamics like that you can't tell me rents are anywhere near properly valued. We're slowly working our way through the over supply of past years - slowly but surely nevertheless. One day we will get to the point where rents justify bringing on new supply but it's a long way off from here... particularly with Banks behaving as they are.

 

[Ausprop]

the market does not appreciate the cost (and certainly the hassle) to build a villa hiequity. look at the price of near new villas in Mandurah - you can't build them for that yet the agents doddle around as if they can be thrown up overnight for $100k

it's heaper and way less stress to build a bog standard 4x2 house and the masses love it

 

[HomeBuyerStrike]

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.

Low by what measure? Rents are much more closely correlated with incomes than capital values.

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).

You're ignoring the fact that 'rent is dead money' is the deeply embedded heuristic. Buyers irrationally assume that a mortgage has the carrot of an asset at the end of a life of paying for it without accounting for the cost of interest. Just because people will happily pay over half their income on a mortgage doesn't mean they will do the same for rent. They will lower their expectations in a rental.

 

[HomeBuyerStrike]

With dynamics like that you can't tell me rents are anywhere near properly valued. We're slowly working our way through the over supply of past years - slowly but surely nevertheless. One day we will get to the point where rents justify bringing on new supply but it's a long way off from here... particularly with Banks behaving as they are.

Another flawed assumption I've seen many times before. Construction costs are not a floor on prices. With the amount of money chasing property in Australia over the last decade it's inevitable that there is fat in construction costs. These can go down if the market does.

 

[tom32]

Another flawed assumption I've seen many times before. Construction costs are not a floor on prices. With the amount of money chasing property in Australia over the last decade it's inevitable that there is fat in construction costs. These can go down if the market does.

A house in inflation adjusted and composition adjusted terms costs around about what it cost 10, 20 and 30 years ago. The building game is not rigged or has a regulated supply of bricks.

buildign is not where the problem is HBS. it is in and around land development. Specifically in the governments court. Taxes plus ridiculous prices to procure development parcels.

If it was so easy to make money building homes, why are you not building them as a value investor?

The fat is all in teh governments take and land procurement costs for greenfield sites. Agree both of these are arbitrary and could change. neither have a real cost component to them and as NSW has shown suddenly they can be taken away in teh case of off the plan stamp duty.

 

[BayView]

Rent is a factor of income. There's no shortage of supply in Australia. Plenty of latent supply which will increase in relative attractiveness as rents/interest payments increase.

If by "supply" you mean total amount of houses available for rent versus total rented, then this is an inaccurate assessment.

It is inaccurate because many vacant bedrooms and houses are that way on purpose. The people who own them either like lots of room, or they might be a holiday house etc.

Where I live there are loads and loads of vacant houses - all holiday homes/units. The owners have no interest in renting them out.

Another example; one of my friends and his wife (no kids and no plans to have any ever) live in a 35 square house. Yes; 35 squares. It's gorgeous.

Why such a big house with no other people? Because he is a bit of a poser, and shows his success in this fashion.

I'm sure there are plenty around just like them.

To have an accurate figure of "supply" you would need to get only the properties actually available for rent.

This is not too difficult; every property manager would be able to tell you the % of their listings which are currently vacant.

I would hazard a guess and say the average would be less than 5% across Aus.

That means a lot of available places in the "supply" total are already rented.

Now, if we take a hypothetical for the near future - a couple more interest rate rises and continuing immigration....

The result is likely to be no investors on the market, therefore less "supply" available to an increase in tenants. Rents would go up.

 

[BayView]

You're ignoring the fact that 'rent is dead money' is the deeply embedded heuristic. Buyers irrationally assume that a mortgage has the carrot of an asset at the end of a life of paying for it without accounting for the cost of interest. Just because people will happily pay over half their income on a mortgage doesn't mean they will do the same for rent. They will lower their expectations in a rental.

Rent is not dead money; but this is how most people think of it. But it is a cost of living.

Now, if everyone was to rent and invest the difference between their rent and what they would pay into a mortgage into some other investment, then they would be better off. This has been proven in various models.

However; the average person doesn't think as an investor, and has no or little investing knowledge, interest or inclination.

So, the money they should invest mostly gets spent on stuff, and maybe some super or a managed fund. No brainer stuff. Or, they might dabble in a few direct shares and think they are W.B.

They may think like this though; "If I buy a house, the repayment is more than my rent, but at least I'm buying an asset which is my own". It's a type of forced saving.

For the average person (which is the majority), the best investment they can make is to buy a home. It stops them from spending money on usless stuff, and provides them with some form of wealth at the end of their working lives to use in retirement. They can downgrade to a smaller dwelling for instance.

Is this the best investment they could actually make? No.

But, this is the limit of their expertise, so it is the best way for them to increase wealth, other than superannuation, and this is why people will continue to buy homes if they can afford to.

 

[joeExpat]

Where I live there are loads and loads of vacant houses - all holiday homes/units. The owners have no interest in renting them out.

This is why "deemed rental" income tax can be a good idea, to minimise this problem.
Owners are taxed on a rental income on a property whether they receive it or not, to reduce the incentive to leave it empty. Many European countries have this approach (e.g Spain, Switzerland).

 

[willair]

Another flawed assumption I've seen many times before. Construction costs are not a floor on prices. With the amount of money chasing property in Australia over the last decade it's inevitable that there is fat in construction costs. These can go down if the market does.

When you read something like this it makes you think,you may have it the wrong way round,building costs play a very important part but you can screw any price down in any market,the high costs these days is the land and Government Local Councils paper costs,and as i see you are in Brisbane and as you state you have seen it many times before ,my question is how many times have you seen property go flat for several years,I have been in this site for a few years and over that time I have seen many come with idea of the how if they wait they will buy for less,in a prime inner city property,the fact is it's not going to happen in the inner blue chip river areas,even during the 1990-1998 i was still making 13% per year,how about you..willair..

 

[HomeBuyerStrike]

A house in inflation adjusted and composition adjusted terms costs around about what it cost 10, 20 and 30 years ago. The building game is not rigged or has a regulated supply of bricks.

This is going to be an even more controversial assertion, but if property equates to (note: I did not say accounts for) about 30% of GDP then it has a big effect on inflation itself. Property is intensely important to the Australian economy, I would argue that it is vastly more important than mining.

If it was so easy to make money building homes, why are you not building them as a value investor?

I didn't say it was easy to make money building homes. It's a high risk game, and it's far from value investing.

 

[HomeBuyerStrike]

They may think like this though; "If I buy a house, the repayment is more than my rent, but at least I'm buying an asset which is my own". It's a type of forced saving.

It's a very expensive way of accumulating capital. If the average person understood the components of their mortgage repayment then they may think differently. We see in crashes that even after the dust settles these people still don't understand. There's plenty of people willing and ready to take advantage of their naivety.

 

[HomeBuyerStrike]

It is inaccurate because many vacant bedrooms and houses are that way on purpose. The people who own them either like lots of room, or they might be a holiday house etc.

The thing is that many of these people do not own these homes, the bank does. The bank can take them back if these people get in trouble. Only one of the reasons these dynamics can change.

 

[dan c]

The thing is that many of these people do not own these homes, the bank does. The bank can take them back if these people get in trouble. Only one of the reasons these dynamics can change.

We hear this all the time. Home foreclosures were supposed to increase wildly during the GFC, and after a couple of interest rate rises. It hasn't happened.

I'm not saying it can't or won't happen, but historically the level of defaults on home loans in Australia is among the lowest in the world.

 

[HomeBuyerStrike]

We hear this all the time. Home foreclosures were supposed to increase wildly during the GFC, and after a couple of interest rate rises. It hasn't happened.

I'm not saying it can't or won't happen, but historically the level of defaults on home loans in Australia is among the lowest in the world.

Europe's current cause celebre is Ireland. They still haven't had foreclosures. Historically the rate wouldn't have been high. Yet a large percentage of mortgagees in that economy are facing inevitable repossession and potentially huge costs depending on whether debt forgiveness law is changed to take pity on them.

 

[dan c]

Europe's current cause celebre is Ireland. They still haven't had foreclosures. Historically the rate wouldn't have been high. Yet a large percentage of mortgagees in that economy are facing inevitable repossession and potentially huge costs depending on whether debt forgiveness law is changed to take pity on them.

Again, you have totally ignored my point.

FACT - Australia's default rates are among the lowest in the world.
FACT - Doom and gloomers predicted wide scale foreclosures two years ago, and it hasn't happened.

As you have pointed out, PREDICTIONS are Ireland - which is not in Australia - may face a higher number of repossesions IN THE FUTURE.

 

[HomeBuyerStrike]

FACT - Australia's default rates are among the lowest in the world.

FACT - The future is uncertain. It's possible and arguably likely this will change.

FACT - Doom and gloomers predicted wide scale foreclosures two years ago, and it hasn't happened.

Did I predict wide spread foreclosures? Have I predicted widespread foreclosures are certain within any time frame? Can I attribute every claim made by a property bull to you personally, is that how it works? How about property doubling in value every 7 years?

 

[dan c]

Did I say you predicted wide spread foreclosures? Perhaps you should read what I post a little more carefully. I'm just letting you know that we see this sort of thing on a regular basis. Mercifully, after a month or two the D&G types tend to slink off with their tails between their legs.

FWIW, I'm not a bull at all, but I think your concerns are overblown. Yes, the future is uncertain, but if you let this paralyse you, as you clearly have, then you will NEVER buy anything.

FACT - The future is uncertain. It's possible and arguably likely this will change.

Why is it likely? Do you think it's likely, or are you just saying that somewhere in the future, something might happen that may or may not increase defaults?

If you are hypothesising (again) you're wasting everyone's time.

Here's what I think about property. If you do you research and by well, you don't need to worry about whether Irish people are defaulting on their loans or whether the Greek government can pay their bills.

If you can't get your head around that, then maybe property investing is not for you.

 

[Dazz]

FACT - The future is uncertain. It's possible and arguably likely this will change.

FACT - with only 98 posts in this thread, this is just a tiddler.

FACT - when this thread grows to a decent size of say 500 posts, I can absolutely iron clad guarantee...no wormy predictions necessary...., that not one person will have changed their opinion one iota.

FACT - whilst bashing away at this thread, no-one made any money.

 

[HomeBuyerStrike]

Did I say you predicted wide spread foreclosures? Perhaps you should read what I post a little more carefully. I'm just letting you know that we see this sort of thing on a regular basis. Mercifully, after a month or two the D&G types tend to slink off with their tails between their legs.

I'm posting here to get an insight into the property speculator/investor psyche. I do think it's likely that there will be an unmerciful crash in Australian property at some point in the future including widespread foreclosures, but in my opinion that would be the least of my worries in a property crash. Hence some of the reason why market economics are of interest.

It's likely that I will not continue to take such an interest in this forum, I have a bit of time to kill at the moment and decided to use it to learn about this mindset, in particular the strength of the cognitive dissonance. Aside from that I have little to gain from posting here actively in the long term.

FWIW, I'm not a bull at all, but I think your concerns are overblown. Yes, the future is uncertain, but if you let this paralyse you, as you clearly have, then you will NEVER buy anything.

I hear this a lot. There are different investments and there are different times. Maybe in the future property investment will be attractive, maybe it won't, right now it's not and I won't apologise for not following the herd.

 

[HomeBuyerStrike]

Interesting anecdote regarding 'Doom and Gloomers', the snake oil salesmen in Europe still refer to the dissenters as such even now that the dissenters have been proven right. This comes from the guys who now have bags under their eyes because they can't sleep at night, and many of whose peers have committed suicide in recent years.

The Irish prime minister famously made a speech (link) to a room full of Yes Men shortly before the inevitable crash to some applause. He said that the 'doom and gloomers' were negative people and should just go and end it all. How horribly wrong was he?

Those who throw that term around loosely should remember that and pause for thought. I certainly won't be emotionally effected by the property market economics, I have an excellent quality of life and have no exposure to this problem.