One of most poorly understood and misreported areas of property is the residential rental market. Not only do journalists tend to mindlessly follow the “expert” advice of self-interested real estate agents, but because many rental market participants are unsophisticated (even more so than property buyers), few have the knowledge or inclination to dare criticise even the most absurd of opinions. The most commonly proffered fallacy is that an increase in costs (be it higher interest rates or other charges) will lead to higher rental costs as landlords seek to maintain returns.
Even shrewd property writers such as the Financial Review’s Michelle Singer fell for that line last week, when she noted that “rising interest rates and tightening vacancy rates will force rents up well above long-term averages”. Singer also quoted Australian Property Monitors’ Matthew Bell, who claimed that “we’ve also had three successive interest rate rises and that will start to flow through to the owners’ bottom line this quarter”.
Singer was half right and half wrong. That is interest rates or other costs incurred by owners have virtually no effect on what rental rates are able to be passed on. Despite what some experts appear to think, owners do not have a target yield that needs to be met and are not able to simply flick a switch and adjust rental amounts upwards (at the end of the lease) in order to achieve that return.
Rental prices are impacted (almost entirely) by the levels of vacancy rates. Most landlords (not all) are fairly rational market participants — along with property managers (who are paid based on a percentage of the rental collected), they will seek the highest possible return for their investment (subject to other variables, including obtaining a higher quality tenant or length of lease). When more than 20 people are attending rental open-for-inspections and multiple parties submit applications, that will be a clear signal to property managers (who often manage a portfolio of upwards of 200 residences and should have a reasonably accurate understanding of market rates) that they are able to increase rentals. This was very much the case in the Melbourne and Sydney markets between 2007 and early 2009 where rental skyrocketed, in some cases, by upwards of 20% annually.
However, as unemployment crept up and additional supply came online, rentals remarkably stabilised. Instead of 30 interested parties attending rental inspections, some would have only one or two. This curbed the ability for owners to increase rental levels. Most landlords are intelligent enough to know that two weeks of vacancy will usurp a $20 per week increase in weekly rent.
Last year, APM reported that median rentals for Melbourne houses did not increase at all (in real terms, rentals actually fell). In Sydney, they rose by a meager 2.2%, Brisbane 2.9% while Adelaide recorded a 6.7% increase.
Funnily enough, those lacklustre rental rises occurred despite interest rates increasing by 75 basis points late in the year.
While it is poorly understood, the rental market has a substantial bearing on property prices, which are highly relevant to many Australians. Ultimately, the price of property bears a relationship to the rental yield that can be achieved (even if the property is being occupied by its owner). Despite there being substantial tax, lifestyle (and status) benefits to owning a property (rather than renting), eventually, if the costs to own a property are double or triple that of renting, it is a clear signal that property prices are too high. Fortune noted that in the United States, the traditional rental multiple is 18 — that is, a property should sell for 18 times its annual rental. In Melbourne, that ratio is about 24 (or 28 based on the REIV median price), and in Sydney, that ratio is approximately 20x.
The poorly understood rental market is critical to residential property prices — many of those who claim that property prices never fall should be looking closely at the rental sector before believing real estate propaganda over facts.
Correct!…it’s nothing more than a tried and tested “ploy” on behalf of the Realestate Industry to cajole would-be tennants to either expect to pay more in rent, or to make a purchase instead of renting because renting is “dead money”..ha ha ha …what bullshit!!!
Tell all this to a colleage of mine who has invested fairly heavily in the commercial office sector in Sydney.
Let me tell you, at the moment, he has instructed the managing agents to discount by up to 40%….and to drop the “dress restrictions”…ie…at the moment he will take anyone or anything… I warned him.
It is not surprising that rents keep climbing, because landlords are getting taken for a ride at every opportunity by both the government and the industry.
Real Estate agents collect around 8%-10% of rent for managing properties (+ other fees such as $70 per annum to check smoke detectors etc). They also charge up to two weeks rent to find a tenant – which is lot when all they do is to look at the computerised black list for tenants who have done a moonlite flit and then fill out a condition reports- landlords get very little for this sum. Rent monies come in via direct debit so they don’t even have to worry too much about rent collection and they rarely do inspections. They even suggest you take out expensive insurance to cover the cost of rogue tenants (more costs).
Apparently, they can sell their rents roles at $3000 per propertythey manage so it is a lucrative business for them.
Maintenance costs are also very high -a tap that needs a new washer costs around $100 for the plumber.
Landlords also pay landtax (which is a so-called ‘rich mans tax’ – because it does not return any benefit to them).
Landlords get very little say in rents, because as Adam points out, these are determined by vacancy rates and not about the value of the home and prospective investors, who are not fools, are clearly looking at return on investment (which can vary considerably) when they choose to invest in realestate.
First rule of assessing rental demand. Never take at face value any rental data published by any of the various State Real Estate Institutes and/or their parent body, the Real Estate Institute of Australia.
You may have noticed that in NSW there is no coverage of the Real Estate Institute of New South Wales rental property data, since it was revealed in the SMH a couple of years ago that their data is suspect, to say the least.
Real estate agents have the same public image as car salesmen, and dictators.
Its not landlords that are being taken for a ride, its the idea that one can make serious money out of accruing rent from residential property. Its not a realistic financial proposition for a significant number of Australians to decide that they can borrow themselves into some kind of minor baronacy and live of the tithe of the workers. Nor, I think, is it a healthy ethical position for national character. What people usually say, of course, is that “if it weren’t for the investors, renters would have no where to live.” To which I say, renters would be able to purchase the rental properties themselves if people hadn’t bid up prices buying more shelters than they actually need to live in. But its all good – no financial insanity lasts forever and renters will be the last solvent purchasers standing. Where will I live when all the investors go broke? Their house, obviously.
There is a view you can use on Google Maps to display all rental properties in an area at a particular rent level. Very useful for tennants. When combined with the ability to view housing prices, that figure of 18 times seems way off (in some outer Melbourne suburbs you have average rent of $400/week (which by the 18 times rule comes to ~375K value) when the average property price in the same suburb is 650K+.
The other day someone suggested to me that the average unit of by which you measure a property bubble should be called an “REIV”.