Those who believe that property prices never fall probably don’t own an apartment in the world’s tallest free standing structure, Dubai’s Burj Khaflia. Bloomberg reported last week that rental prices have fallen for apartments in the building by up to 40%, less than a year after the structure opened amidst a vast water and fireworks display.
The slump in rental prices has come as 825 of the building’s 900 apartments remain unoccupied (the Burj also houses a hotel and 37 floors of offices). Not only are owners of properties in the complex not receiving rental income, they also need to pay substantial management (more commonly known in Australia as body corporate) fees. The rental slump has led to a similar drop in dwelling prices as well, with Bloomberg claiming apartment prices in the tower have dropped by as much 50% since the properties were sold off the plan prior to opening in January.
While Dubai’s collapsed luxury property market seems a world away from Australia’s burgeoning real estate sector, as recently as 2008 many experts were predicting Dubai’s property sector would continue to boom. A bit like most ‘experts’ (including the nation’s largest home lender, the CBA) who continue to claim the Australian residential property sector is not in the midst of a price bubble.
Such is the breathless enthusiasm for property price appreciation that The Age reported last Saturday “Melbourne’s property slump has continued”. The paper’s property editor, Simon Johanson, then noted houses actually increased by 0.9% during the September quarter. That was the same rate as recorded GDP growth during June.
While property prices far outstripped growth rates since 1997, property writers claim the sector is ‘slumping’ when it managed to match income growth and exceed the general level of consumer price inflation (which the ABS claims was 0.6% during the June quarter).
More perversely, The Age also reported that “rents for houses and units in Melbourne declined 1.4% to $360 and $345 a week respectively according to Australian Property Monitors”. Rapidly appreciating prices have meant that net yields on property have slumped to around 2% — that situation was worsened in the September quarter (in Melbourne), with prices continuing to rise and rents actually falling.
It’s reminiscent of the tail end of the dot.com boom — where the dreams of exploding earnings evaporated and the intrinsic values of many companies were shown to be far removed from their market price.
Why have rents started dropping? Most likely because there is actually a surplus of rental stock rather than a shortage as alleged by the likes of the HIA. Brisbane-based property expert Michael Matusik told the Financial Review today that “rents aren’t rising and I don’t think they will do for some time … if you drive around and take a look you will find there is lots of property for rent, a lot more than the real estate industry and unfortunately the press advocate”.
Part of the reason for the sudden excess supply of dwellings in Australia has been due to the recent sharp drop in immigration levels. A rapid fall-off in the number of students (especially from India) has seen migration to Australia fall by 37% this year. The recent rise in the Australian dollar is likely to further exacerbate the downturn in new residents. It is students and recent arrivals who soak up a large proportion of rental stock.
The problem is likely to be exacerbated due to the substantial apartment construction taking place, as developers seek to profit from rising property prices.
Falling rental prices will spell disaster for the Australian property market. Already investors are required to settle for a net yield which is about a third of what they can receive in a bank savings account. However, falling rents may convince many Australian property purchasers that the hope of a future capital gain is unlikely and, like any other asset, the value of property is dependant on the cash returns it is able to generate, not forecast gains from potential income growth.
It becomes a lot harder to convince someone that their returns will increase in years to come when rental yields are dropping.
Thanks Adam for the coverage…see below what i forwarded to the financial review yesterday
So the RBA think that renters will have to pay more. So too do the most of the talking heads. Some of us, however, don’t think that will happen.
Why?
Well firstly many tenants are already stretched and have little capacity to pay more. Some are already moving into shared accommodation rather than renting out a dwelling as a single person, individual couple and even as a related-family group.
Secondly the argument that rents will rise in concert with rising costs – i.e. interest rates and council charges – does not ring true. Historical analysis shows little connection between the two. Holding investment costs have risen substantially over recent years, yet rents have shown little or now growth. They are even falling in some cities. As a result net rental yields are declining and in many cases now offer investors about a third of what they can receive in a bank savings account.
What lifts rents is supply. And it is here that the RBA and others have got it wrong. The statistical methodology widely used to tabulate vacancy rates is flawed.
The amount of vacant stock available is not only greater than most realise, but it is also getting larger. Total rental listings are growing by around 25% per annum. This trend is evident across most of the country. According to RPdata there are currently just over 80,000 residential properties available for lease across Australia.
We estimate that there are over 2.2 million private residential investment properties across Australia, of which two thirds are held within the capital cities. When looking at the total amount of stock available to rent, the vacancy rate averages 3.6% across the country. The current vacancy rate in Sydney is close to 3%, around 4.5% in Melbourne and across south east Queensland as well. They are not between 1% and 2% as reported by the Real Estate Institute of Australia, among others.
Being based in Brisbane it might be apt to include some Queensland flavour as well. Today there are 433,000 total bonds held by the Queensland Residential Tenancies Authority, which is up 33,000 on this time last year, an increase of 8%. Assuming that 2.6 people (the state’s current official average household size) live in a Queensland rental property, this 33,000 increase should hold 85,000-odd new residents. Whilst Queensland’s total population increased by 97,100 over the same period, the last census tells us that around a third rent, so the last year there was a need to house about 35,000 new residents in rental accommodation which in turn required about 13,500 new rental properties. Yet 33,000 new rental digs become available or over twice (closer to 60% actually) as many as what is needed. This is not how I would define “undersupply”.
In addition only one in six real estate agencies are reporting an increase in the demand for rental property this spring, which is down on previous years. Typically, well over half of the agencies with a rent roll report strong demand for rental accommodation during the spring months, as supply is usually quite tight. But this is not the case this year.
So what does this mean? For landlords, now is maybe not the best time to lift rents. This is especially the case if you are happy with your current tenants. It often pays to keep a good tenant at the same rent, rather than risk losing them for a few dollars more a week.
As a result, rents are unlikely to rise. As we noted earlier this year, rents are likely to remain flat in nominal terms for some time. This in turn is likely to subdue investor demand, as many investors believe that end prices will remain flat for the foreseeable future. Given rising costs, residential investment returns are likely to get skinnier before they improve. When exactly things will get better is hard to know.
Thanks again for your coverage and recent writtings. Keep up the good work.
I’d like to think that tax reviews will, sooner rather than later, make rental property ownership even less desirable, through one or more of capital gains or tax deductability, perhaps combined with death duty on larger estates to restore a smidgin of intergenerational fairness.
That may not specifically assist renters, because fewer rental properties will be available. It will, however, have immense social equity and tax equity advantages and thus well worth detailed consideration in Canberra, leading up to Budget 2011. It may also assist renters by making housing more affordable to those who seek to become owners not renters.
John
See below something that i wrote in late april this year, in reply to the delayed release of the henry tax review – i too hope that there will be some changes on the property-tax front, but i won’t hold my breathe…
With the Henry tax review will come the best chance in decades to reform the tax treatment of the two most important assets held by Australian households – superannuation and housing.
Housing is more expensive here than almost anywhere else in the western world, yet its tax treatment is among the most generous. This begs the question, why?
Our principal place of residence is tax free and deductions can be made on rental properties. Both owner-residents and investors are winners under our current tax regime. The better off, financially, benefit the most.
Too many blame investors for pushing up prices and creating a shortage of supply. Yet the statistics show a different picture. Both owner-residents and investors in Brisbane, for example, hold their assets for about the same time period – around seven years – and have made around 10% per annum on resale (in the past, that is), and also about $250,000 in total gains. Both, so to speak, are to blame.
Likewise, investors don’t reduce housing supply, unless they lock it up for occasional use, which the vast majority don’t – they rent it out.
Now, new housing developments that would otherwise improve affordability face their own tax in the form of the GST (which is not levied on existing stock); infrastructure levies and the increasing time (and expense) to get approvals. Consider that all property owners (and not just those who buy new property) benefit from gains in the value of their property, that accrue from public investments in roads, sewerage and other facilities, yet new buyers are paying the lion’s share for this new infrastructure. As a result, new housing is too expensive, resulting in new home sales falling from a 30% of market share ten years ago to under 10% today.
Let me put it another way: mining creates wealth in Australia and especially in Queensland/Western Australia; new housing construction distributes it (and keeps much of this wealth in the state), but the distribution mechanism is not working.
So, what should have the Henry tax review done when it comes to housing?
1. Implement tax incentives that increase the construction of affordable housing – increase land tax on all property and remove (or substantially reduce/fade in) infrastructure charges. Importantly, remove the GST from new property, or place it on all residential transactions.
2. Have a capital gains tax on the principal place of residence, but with a sliding time scale – the longer you hold it, the less you pay – plus, make your interest payments tax deductible.
3. Reduce capital gains tax on investment housing, again on a sliding time scale. If you did such, then you could remove negative gearing, as most investors buy for capital growth; their net rental yield is of secondary importance.
4. Dramatically reduce stamp duties on the sale and transfer of property – what is stamp duty anyway, other than a blatant tax grab?
These ideas may not make me popular with some punters (and let me tell you they didn’t – i still, six months later, get hate emails), nor some of our clients, but something radical needs to happen.
It is time to think outside of the square, break some paradigms, but sadly, I don’t think the Henry review, or any Australian government initiative, regardless of which party is in power, will do such.
Another opportunity wasted.
So let’s just go over this again; the Reserve Bank is dead wrong when it comes to property. Dead wrong on the strength of prices and dead wrong on rents and dead wrong on housing shortages. OK and that’s because Crikey’s resident doom merchant says so and Mr Matusik backs him up. Hmm. dunno really. Not sure that Adam’s pronouncements on the state of the property market have been all that accurate over the past 18 months or so. Doesn’t the Reserve Bank have access to all the data available Australia wide? Even discounting the HIA, isn’t the RBA in-step with the major banks and organisations such as BIS Sharapnel? Isn’t RPData now a close advisor to the RBA board?
I know who I trust with the state of play in property just now and it isn’t Dr Doom of Crikey.
Just a question for you Adam, where do you get your data?