Hi,
I was after some statistics on whether if in the long term rent increases faster than inflation,
Can anyone point me in the direction of where I could find such statistics,..
thanks,
Sorry, I hadn't read this question before answering it on another thread!
https://www.propertyinvesting.com/forums/property-investing/help-needed/4322828Above figures are CPI inflation adjusted rent in 2007 dollars. The answer is "no it doesn't". Because of the close correlation of wages and inflation, and because rent is limited to wage growth, inflation in rent prices simply tracks inflation over the longer term. House prices are much more flexible because they are driven primarily by the amount of credit banks are prepared to lend. This is why there is no correlation over the short to medium term between the cost of buying a house and the cost of renting it. You can borrow your mortgage but you can't borrow your rent. Hope this helps.
If you're prepared to step into the bear cage for a little while, there's been some discussion of this topic here:
http://forum.globalhousepricecrash.com/index.php?showtopic=24555&st=0&start=0F. [cowboy2]
the charts show interest vs rent, the question was rent vs inflation. The rent line if its adjusted for inflation indicates flatline, this has not been my experience over short term in Melbourne with two properties in different areas. Over 2 years rent moved 170 >215 and 240 > 300 . Long haul you would think that rents can only outstrip inflation for short periods of time e.g. gentry-fication of areas driving up rents, and driving out low income earners. Sooner or later affordability kicks in and balance has to be restored which would get back to the flat line. Long term it doesnt seen wise to base a strategy on ever escalating rents above CPI.
rent is determined by supply and demand for rental properties. If investors were to suddenly buy a lot of investment properties and flood the market with available rental properties then the rental vacancy figure would increase which in turn would cause rent to decrease.
This site may have the statistic for rental vacancy
http://www.reinsw.com.au/Rental-situation-at-crisis-point/default.aspx
Maybe the reiv OR reiq (real estate institute of your state) may have stats on rental vacanciesyarpos wrote:the charts show interest vs rent, the question was rent vs inflation.That's real (inflation adjusted) rent. A flat line indicates rents equalling inflation, rising indicates rents increasing faster than inflation, a falling line indicates rents increasing more slowly than inflation.
I included the cost of mortgage interest to illustrate the point that ‘you can borrow your mortgage but you can’t borrow your rent’.
Here’s a simpler, more direct look at inflation and rent, using Melbourne as an example:
Quote:The rent line if its adjusted for inflation indicates flatline, this has not been my experience over short term in Melbourne with two properties in different areas. Over 2 years rent moved 170 >215 and 240 > 300 .That’s right, Melbourne rents are currently growing faster than inflation (as seen in the uptick at the end of the chart), but this comes after several years when they were declining in real terms. And remember that your examples of 25% increases over 2 years equates to 12%pa compound rate and a real increase of 8% to 9%. That’s still a hefty increase averaged over the last 2 years, but if you add in the previous 5 years of declining real rents the annual average falls further.
No doubt rents have been rising faster than inflation recently. But over the longer term they can’t.
Quote:Long haul you would think that rents can only outstrip inflation for short periods of time e.g. gentry-fication of areas driving up rents, and driving out low income earners. Sooner or later affordability kicks in and balance has to be restored which would get back to the flat line. Long term it doesnt seen wise to base a strategy on ever escalating rents above CPI.I agree.
Cheers, F. [cowboy2]
duckster wrote:rent is determined by supply and demand for rental properties. If investors were to suddenly buy a lot of investment properties and flood the market with available rental properties then the rental vacancy figure would increase which in turn would cause rent to decrease.I think wages are pretty important too, plus there is plenty of elasticity in rental demand. Renters can react to rising real rents (as a proportion of income) by sharing more or having fewer spare rooms, and to falling real rents by going solo. Here's another chart I whupped up similar to the first but using rent as a proportion of average income by capital city.
Investors may be heartened to note that rents have been declining as a proportion of income. This might indicate room for further significant moves to the upside. But I think the tie is far greater to inflation than incomes.
Have I missed some basic prinicple here? Rent tracks wages. What happened to the arguments of ROI & yield ie rent reflected as a % of the property price – whose growth far outstrips CPI or wages growth.
Sure there are dips in yield when property prices take off and rents are lagging however in times of a tight rental market, yield plays catchup at a pace far greater than cpi.
Whereas, in the commercial market place there are many other options for rent increases including fixed %, %+cpi, % of turnover etc as the leases are of a much greater duration and you play with commercially parties.
Scott No Mates wrote:Have I missed some basic prinicple here? Rent tracks wages. What happened to the arguments of ROI & yield ie rent reflected as a % of the property price – whose growth far outstrips CPI or wages growth.Sure there are dips in yield when property prices take off and rents are lagging however in times of a tight rental market, yield plays catchup at a pace far greater than cpi.
Do you have any evidence that this has ever occurred in the past? I don't.
Yield can 'catch up' in one of two ways…Check the first set of 8 charts I provided above. This illustrates yields and cost of buying. Notice that when the cost of buying gets too high, it falls to narrow the gap with yield, not the other way around.
After the 1980s peak in costs, falling interest rates and falling real house prices were the two main contributors to this (in that order). I can’t see any basis for expecting rents to be the main contributors in future given that they are tied to wages and therefore inflation.
F. [cowboy2]
Foundation, which graph? Rent v Interest or Rent v CPI – neither of these equate house prices to yield. If rents tracked wages (and were linked to cpi) then property prices would grow at the same rate ie at cpi and yields would remain constant.
What you fail to take into account is that land (in the major centres) is a finite resource, demand for well located property will increase due to population growth, desireablity, access to services etc (locational factors). The price of these properties will accordingly increase due to demand for scarce resources (outer lying areas will increase but not at the same pace). A person on average income, a number of years ago, could afford to be located closer to the centre of cities as these areas were 'less desireable' than other options available to them. These inner city locations have now been gentrified and are out of reach for a large proportion of buyers and renters – however this has not reduced overall demand for these properties nor their price.
I do agree in part, prices do fall in markets when they have reached unsustainable levels ie property bubble/stockmarket bubble/tech crash etc.
All of the recent research available (housing industry assoc, abs etc) indicates that housing affordability has decreased that is, the proportion of household income going towards either rent or mortgage repayment has increased. This is symptomatic of 2 issues – firstly the cost of rent/property has increased more quickly than any increase in wages (if this is cpi, then house prices have increased faster than cpi), secondly that interest rates (hence repayments) have risen faster than cpi [an increase of 0.25% on a loan rate of 7.0% to 7.25% is actually a 3.57% hike in repayments].
Scott No Mates wrote:Have I missed some basic prinicple here? Rent tracks wages. What happened to the arguments of ROI & yield ie rent reflected as a % of the property price – whose growth far outstrips CPI or wages growth.Are you saying that movement in rent is a direct function of movement in the property price?
It may not be a direct correlation however it is closer than any relationship between wages, cpi and rent. That is, as an investor would you be happy that ROI is dropping? (regardless of whether you consider rent in isolation or as part of the combined capital & rental returns)
Scott No Mates wrote:It may not be a direct correlation however it is closer than any relationship between wages, cpi and rent. That is, as an investor would you be happy that ROI is dropping? (regardless of whether you consider rent in isolation or as part of the combined capital & rental returns)
You can't be serious…
Are you?
Please point to the bits on the chart where house prices go up and rents go up the same amount?
How on earth (with all the evidence available to all your senses) could you possibly think that was a closer relationship than this (which I provided earlier):
Are you an investor? Which lender do you use (I really feel like I need to ensure my deposits are safe).
F. [cowboy2]
And just in case I haven't really bagged on about this whole thing too much already, here's some more charts:
Scott No Mates wrote:It may not be a direct correlation however it is closer than any relationship between wages, cpi and rent. That is, as an investor would you be happy that ROI is dropping? (regardless of whether you consider rent in isolation or as part of the combined capital & rental returns)
I might have the wrong end of the stick here, but it seems an implication of your hypothesis that should all the investment properties in Australia change hands tomorrow for, say, a 20% premium on their sale price/value 12 months ago, that this would have a greater impact on the ability to charge more rent than the renters' capacity to pay.
Put another way, if the investment community's capacity to pay (i.e. borrow) increased by 30% and the renters' capacity to pay (i.e earn) didn't, that the former would have a greater impact than the latter and that rents would still go up.
Regrettably, the fact that it would be desirable for a proposition to be true is not support for the proposition that it is.
With regards to the first point, if all investment properties changed hands simultaneously at a premium, it does not hold that rents would increase to reflect increased prices – firstly properties may have transferred on vacant possession leading to increased competition for vacant premises prior to the settlement date, then after settlement there may be a glut of vacant property lending downward pressure on rents. If they are not sold with VP then either expired leases have a 60 day notification period for rent increases (then to the tribunal etc for disputes) or longer periods if the properties are still under a lease without review provisions. If rents were to increase uniformly, there would be a mass exodus of renters to areas which they could afford.
As an investor, if your capacity to invest increased by 30% you would not necessarily be buying the same property, you would have considerably more options available to consider eg: 2 properties, lower level of gearing, better/more expensive property, divest & seek alternative strategies or do nothing. Just because the bank will lend you $1.3M doesn't mean you are obliged to take them up on the offer cf: I don't max out my credit card every month, why would I do it with my loans?
Taking your example (sounds like the economy with falling interest rates) – borrowers capacity increases ie interest rates fall (this affects all borrowers & potential borrowers as the banks won't selectively change their lending criteria for a small part of their market/client base) then more people – including those 'renters' may enter the market without any change to their income. Conversely, if rates rise a borrower's capacity & ability to repay decreases (renter's ability to pay rent remains unchanged until their rent is reviewed – not always possible in the short term).
So do you still believe in regards to the relationship between house prices and rents, that "it may not be a direct correlation however it is closer than any relationship between wages, cpi and rent"?
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