Will rents start to rise - now rates are rising?

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From: Mark Petterwood


To all,

I just wanted to initiate a bit of discussion on whether people think that rents will start to rise now that SVRs are rising.

Food for thought.

Always look for the positive!!


Regards


Mark
 
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Reply: 1
From: Andrew S


We won't begin to see rents rising until either demand increases, or supply decreases - basic supply and demand theory.
The question is will the rate increase cause either of these to happen.
It might cause some people to defer buying and continue renting. This will not create new demand but will help to sustain it.
The last couple of years have seen sustained advertising campaigns by the myriad 'property investment companies' selling their overpriced 'investment' property deals. The rate increases and the threat of more increases will probably shrink the potential customer base for these organisations. This will help to temper the increase in supply of rental properties.
What does this mean? If this analysis is reasonable then there should be at least a halt to the divergence of supply and demand, and possibly some convergence. If we get convergence then we get higher rents. But just now I think it's wait and see.

These are just my ramblings and I'm no economist. So feel free to pick them to pieces if you disagree.

Regards,

Mr Jolly

- "Don't look at things and ask why, look at things and ask why not"
 
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Reply: 2
From: Colin Mills


Bit of a fluke but I was chatting to my Sydney property manager about this same topic this morning. He also believes rents will now start rising. His logic is fairly straight forward. As rates increase it knocks more and more potential home buyers out of the game. Where do they live? Well besides with Mum and Dad they have no choice but rented accommodation. Demand increases but at the same time the development industry goes down the toilet curtailing supply. More demand - lower or static supply and up goes the price or in this case up goes the rent.
While I'm the first to acknowledge the above sounds a bit simplistic and there are other circumstances to be factored into the equation it strikes me my property manager (for a change) could be onto something!
Regards,
Colin
 
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Reply: 2.1
From: Mike TheBloodyIdiot


Colin,

Sorry, I am definitely not as bright as yourself and I am really confused.

Can you please clarify where you stand. Thing is that statements "development industry goes down the toilet"
and "Macfarlane is not just jawboning" are mutually exclusive.

I seem to gather that you have 7 figure IP portfolio. Would it be fair to assume that you read an API magazine?
If yes, I would assume that you have read this marvellous article about how GDP and "new dwelling commencements" are tied together.
I take a liberty to remind you Sir - GDP goes right where development industry goes, only difference is 3 months delay.

Besides, development industry does not even need interest rate rise - it is already in the toilet.
For the last two years it lived on a borrowed time, being fed by artificially inflated demand of pre-GST building boom and First Home Building Grant.
FHBG has 24 more days to go, and after that new dwelling market will go into the mode of absorbing excess stock.

Apart from that, insurance crisis does not help at all. In these conditions rate rises deliver fatal blow which sends the industry deep down the sewerage.

On the subject of Macfarlane - I do not know what you have heard from his speech, but to me it sounded like this:
"... Even a child understands that for the economy to feel the influence of rate movements no less than 12-18 months is needed...
Hence, by changing directions in rate movements every 6 months we admit that RBA is totally lost as to where economy goes and recognise our total inability to correctly interpret economic data..."

"...Having an excellent record in misinterpreting economic indicators RBA demonstrates an absolute commitment to follow this path.

We completely ignore that:

a. Consumer confidence surge is a result of artificial influx of inflationary money caused by FHOG/FHBG ($14K after tax~->$28K before tax~->nearly average annual wages)
and a waterfall of corporate collapses/retrenchements happened just before Christmas. People were spending their retrenchment money without realising there is no jobs out there.
b. Strong job figures are the product of erosion of full time jobs in favour of surrogate part time and casual ones

c. Building approval surge in March quarter flows mainly from application submitted before Christmas which have very little chance to materialise in present conditions

d. Surging dollar will kill exports in a blink of an eye and stimulate imports, causing further imbalance to National Accounts

e. Level of household debt is at 120% so any careless rate rise can send economy into tailspin before we even know it
f. US economy is seriously sick, and it is only matter of time when we start to feel the same symptoms..."


If you tired to read my delirious findings, read this:

http://www.smh.com.au/articles/2002/06/05/1022982720732.html

and this:

http://www.smh.com.au/articles/2002/06/05/1022982720727.html

(just keep in mind that i do not subscribe to an idiotic notion that "people will stop purchasing houses and again return to retail consumption")

and this:

http://finance.news.com.au/common/story_page/0,4057,4458889%255E462,00.html


(if you have troubles opening this one, it is under "HOME > FINANCE > STORY> Small firms fear double hit ")


Cheers,

Mike - self deluded idiot
 
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Reply: 2.2
From: Bob Robinson


This then raises the question "Is this the right time to purchase more property ?" or hold off untill the supply/ demand factor kicks in and the price of property drops..

Bob
 
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Reply: 2.2.1
From: Always Learning


IMO, the "herd" is the not called the herd for nothing.

<p>

Human behavior of the herd historically has always been and always will be the same. I believe our behavior is no better chimpanzees, an individuals main goal is to be part of the troop, doing what the troop does, it's part of our fundamental mental makeup. One of the worst punishments we can give to chimps/humans/dogs or any social animal is solitary confinement, correspondingly one of the best rewards is group acceptance or "social proof".

<p>
One core part of troop mentality is not wanting to miss out on anything, missing-out, being left-out, or ignored. One of advertising agencies prime tools is to linking "purchasing" of the "product" with social acceptance. Logically drinking 3 liter mega bottles of Coca-cola, has nothing (and maybe is counter productive) to do with being young, beautiful and "in". What has using copious quantities of yellow colored hydrolyzed vegetable oil got to do with being a "great mum"?
<p>As for property at least in Melbourne and Sydney inner city markets, fear of missing out, being left out is driving people to much more than is reasonable. Take a risk, buy now, extend yourself, otherwise prices will rise another 10% and you will not be able to buy ever!

<p>

The herd now is panicking/rushing in the "buy buy buy" direction. You can put up some warning signs, some members of the herd may even read the warning signs, but choose not to heed them. With a running herd it's also no point running behind them saying "stop stop, there's a cliff ahead", they will just keep on running.

<p>

From my "extensive" farming experience, what will stop a herd and turn it very quickly is something in front to jump out and frighten the leaders. It could be something really dangerous like a tiger (interest rate hikes), or something that just "looks dangerous" like some red balloons ( media feeding stories about how property is bad investment ).

<p>

This report is on www.realestate.com.au from the resident buyers agent(www.pkproperty.com.au).

<p>


<h4>Buyers grieve in present market</h4>
<p>
With such a hot market buyers are beginning to reach exhaustion levels when going through the property purchasing process at present.


<p>
Not even the agents know what a property is worth in this heated marketplace.
<p>
With some buyers doing up to six to ten building and pest inspections on properties and missing out on all of them, some people are choosing to not do them at all. At $500 a pop it soon starts to add up.
<p>
Properties that are going to auction are going way over what agents are quoting, and I would have to say that even the agents are getting amazed on what prices are being achieved.
<p>
My suggestion would be that if you are interested in a property that is going to auction, that you go to your limit and try and buy it before auction. If you are not successful move on to the next one.

<p>

At present if you wait four weeks for the auction and miss out, by the time you see another property and try and purchase that, the market has probably gone up another five percent.

Don't get dragged along to an auction just to be another number, be direct in your approach and move quickly when you decide you want to purchase.



<p>

Clearly the market is in a frenzy, it's hot, the herd is in unstoppable "buy buy buy" mode. As per Mike's comments, the logical analysis the situation is that the housing market should be much cooler than it is, this leaves only herd mania as the driving force market (more cashed-up, pumped-up buyers than sellers), not what Steve Navra calls the "rental reality" or economic rationality. If this is the case then I believe that prudent course of action is to wait for the herd to be frightened and rush from property, I would suggest it will happen quickly when it does happen!

<p>

There is a very reasonable argument that says: just buy, over time what you pay today just doesn't matter, in 20 years does it matter if you paid 500K or an inflated 600K if the property is worth 2M+? Maybe this is correct, but for me the last thing I need in my IP portfolio is negative equity. 100K of negative equity would strike a real blow to my ability to raise additional finance.

<p>

My strategy is thus to invest in my knowledge and understanding, prepare my finances, prepare my holding structures, build equity/purchasing power and learn learn learn, and wait for the market to cool. From the outside it may look like analysis paralysis but I am "actively" not purchasing in my target areas of Melbourne and Sydney. As an alternative am however looking outside my "target" into Hobart, Gold Coast etc.

<p>
 
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Reply: 2.2.1.1.1
From: Tibor Bode


Hi Mike,

I know you don't like that people would agree with you, but I am still doing it completely. I have been working in the past 20 years in the IT sector of the insurance and finance industry and it was NEVER so bad as it is NOW. I survived 82-83, 91-92 without knowing what does it mean not having a job for more than 2 weeks. Currently I am out of work for around 1 month with NOTHING in sight. All projects were cancelled a couple of months ago and contracting staff was released by several of our largest financial institutions. So I am absolutely amazed where is the growth the economists and the treasury are talking about. All I know that as a result of it, I am cutting back on expenses big time, and when the current stupidity will be over I will not be rushing back to pick up again those services I am "losing" now. And I know several people in the IT area who are in a very similar situation. So, the Reserve in spite of their "good" intention will stuff it up again. But obviously they only will see it once they managed to induce a recession or very close to it. This is just a personal perspective of what Mike have mentioned.

Tibor
 
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Reply: 2.2.1.1.1.1
From: Felicity W.


Hi Tibor
I have to say I agree with you, my husband works in the corporate world, and has contacts in many different industries, and his experience is similar to yours.
If business is already hurting, interest rates hikes aren't going to help.
I think (and this is a GROSS generalisation) that a large part of current consumer spending is baby boomers. They're reaching the age where their mortgage is paid off or negligible, quite often the kids are grown up and perhaps both partners are working, often in well paid jobs. This results in high disposable income, and it's been well documented that baby boomers love to spend.
My thoughts are, what effect will rate hikes have on them? Hopefully they don't have much in the way of debt and are spending disposable income.
In the meantime, business will hurt and first home buyers will hurt and many property investors will hurt.
I'm not convinced that rising rates are going to work very well this time.
And all of this is purely opinion based on enormous generalisations and stereotyping!!!
Keep smiling
Felicity :cool:
 
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Love your work... QUESTION

Reply: 2.1.1
From: Ross Sondergeld


Hi Mike,


Love your work...


Q. Do you think the base price (and/or gross price) of a NEW home will drop
in the next 3 months ?

Let's just say... a person is thinking about building... should they wait 3
months OR sign the building contract today ?


Ross Sondergeld ~ Buyer Agent

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
" Imagine buying real estate the easy way...
...with a Buyer Agent on your side!!! "

Buyerside Real Estate Mobile 0412 289 464
Office 9b, 34 Glenferrie Drive Office (07) 5562 1555
East Quay Corporate Park Fax (07) 5562 1248
Robina QLD 4226, Gold Coast Buyerside@hotmail.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


_________________________________________________________________
Chat with friends online, try MSN Messenger: http://messenger.msn.com
 
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The herd - Who's a lemming ?

Reply: 2.2.1.2
From: Ross Sondergeld


Hi Always Learning,


You said, "The herd now is panicking/rushing in the "buy buy buy" direction.
You can put up some warning signs, some members of the herd may even read
the warning signs,but choose not to heed them. With a running herd it's also
no point running behind them saying "stop stop, there's a cliff ahead",
they will just keep on running."


Ahhhhhhhhh... the lemming returns ?



Ross Sondergeld ~ Buyer Agent

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
" Imagine buying real estate the easy way...
...with a Buyer Agent on your side!!! "

Buyerside Real Estate Mobile 0412 289 464
Office 9b, 34 Glenferrie Drive Office (07) 5562 1555
East Quay Corporate Park Fax (07) 5562 1248
Robina QLD 4226, Gold Coast Buyerside@hotmail.com
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~


_________________________________________________________________
Join the world’s largest e-mail service with MSN Hotmail.
http://www.hotmail.com
 
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The herd - Who's a lemming ?

Reply: 2.2.1.2.1
From: Always Learning





A lemming in the high-arctic tundra of Igloolik Island, Canada.

<p>

<TABLE><TR><TD><A NAME="L0115200">lem&middot;ming</A> Pronunciation Key(l
m
ng)

n. <DL><DD>Any of various small, thickset rodents, especially of the genus Lemmus, inhabiting northern regions and known for periodic mass migrations that sometimes end in

drowning.</DD></DL>

<HR ALIGN="left" WIDTH="25%">[Norwegian, from Old Norse<TT> læmingi, læmingr</TT>.]</TD>

</TR></TABLE>

<p>

I don't know if the lemmings will migrate this year or next? Will it be a soft landing or a "blood-in-the-streets" mass suicide? A hot/frenzied market cannot last forever, there will be a time in the future when auctions will be leaving large numbers of disappointed and even desperate vendors.
<p>
If (that's a big "if") "as predicted" (nobody knows) interest rates could be nudging 10% in the next 18 months and for those "investors" holding IP's that in many cases return a gross of 3~4%, leaving maybe 2% after costs to pay the interest bill, creating a 7~8% black hole to be filled from income. Given the tax man will suck up 50% of that loss, I personally doubt a "blood-in-the-streets" scenario is going to happen. I choose to believe that many "investors" will want out, as the 5 years of good times of IP will appear to be over and the media will be telling the herd all about it! The herd will "discover" that greener investment pastures must be elsewhere. It will be just like finding lemmings who are actively investing in .com these days.

<p>
 
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The herd - Who's a lemming ?

Reply: 2.2.1.2.1.1
From: Bob Robinson


Team,

Why is it that the topic has been lost here.. the question was related to rent rising. Now we are off in la la land featuring tirades of animal similarities.

My original question was based on current timings, Jan's book points out that anytime is a good time to invest based on the long term, however she goes on to point out there is a short period that you should avoid. I believe we are on the cusp of that right now and wanted to see if anyone else felt the same.

Nothing at all to do with herd mentality or employment possibilities.

Bob
 
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The herd - Who's a lemming ?

Reply: 2.2.1.2.1.1.1
From: Always Learning


This is my opinion ( in reference to Melb and Sydney) and since in represents my opinion based on no meaningful research it should be taken with a grain of salt. <p>
<ul>
<li> As per Jan's "avoidance period" I think that time is now.
<li> Taking Steve Navra's tide's analogy, I think the high tide of property investment for this cycle is right now, the tide will go out shortly.
<li> Taking the "lemming" analogy, those cute little lemmings will be marching out of property very soon now. Just add another 1% to interest rates, then wait 6 months.
</ul>
<p>
Does that mean that all IP investments done now must be unprofitable! No way, just don't be a lemming! Have a look at what many members of this forum are doing, renovating, redeveloping, wraps, flips, options, looking outside the current accepted dogma of "chic inner city pads". It really has expanded my mind to possible opportunities.

Anyway here's that picture again of that cute little lemming :)
<p>
 
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