Housing
28 Jul 2008
Why Are Rents Going Through the Roof?
Ben Eltham explains how the great Australian dream went so very wrong
Last Thursday, Wayne Swan and Tanya Plibersek launched the National Rental Affordability Scheme. The $623 million scheme aims to increase the supply of affordable rental dwellings by 50,000 by 2012.One of Labor's lesser known election promises, it is also one of the most important, addressing an issue that has reached crisis point for hundreds of thousands of Australian families: paying the rent.
As anyone trying to find a place to rent right now will tell you, rents are rising rapidly. Recent data from Property Monitors found rents have risen 17 per cent in the past year in Perth and Melbourne and 15 per cent in the past year in Sydney. In Sydney, rents have spiked 8 per cent in the past quarter. No wonder the Reserve Bank is keeping a close eye on inflation, with rising rents contributing to the 1.5 per cent increase in the CPI for the June quarter.
Why are rents going through the roof? The answer is either simple or complex, depending on how closely you look at it.
The simple answer is supply and demand. With Australian immigration running at record levels and many Australians simply unable to afford to buy property, demand for rental accommodation is very strong. Meanwhile, supply is anaemic. Despite a massive asset price bubble in housing, Australia hasn't actually built many houses in the past decade. The rise in house prices has meant huge mortgages for many homeowners and landlords. With vacancies at record lows, landlords now have the pricing power to push up rents as they struggle to afford their inflated mortgages.
The deeper reasons for Australia's housing affordability crisis are more complex, as Fiona Allon's important new book Renovation Nation (profiled here in newmatilda.com) describes.
"For both younger people and low-income households," Allon writes, "it is now increasingly difficult to step onto the property ladder and enjoy the benefits that homeowners take for granted. What they're discovering is that while there may still be a property ladder, the lower rungs have been removed."
Part of the problem is the received wisdom of Australian politics that home ownership is the be-all and end-all of housing policy. The result, as I wrote recently, has been a conspiracy between governments, landlords and homeowners to increase house prices. Since 1999, cheap money, rising wages, high levels of immigration and massive tax concessions have helped create an asset price bubble in housing. Housing is now very over-valued, in terms of both average wages and the yields on rental properties.
While the housing industry likes nothing better than to complain about fees and taxes - like land tax and stamp duty - the property sector is in truth the favoured child of the Australian tax system. The Federal Government in particular gives massive tax concessions to owner-occupiers and landlords in the form of capital gains tax as well as providing land tax exemptions, negative gearing and generous write-offs for owners of empty buildings. As the recent Senate Committee on Housing Affordability reported, "the combined total of capital gains tax arrangements, land tax exemption and negative gearing arrangements is estimated to be in the order of $50 billion per year." Compared to this vast sum, the $623 million earmarked for the National Rental Affordability Scheme is a drop in the ocean.
Another primary cause is the shape and structure of Australian cities. Australian urban planning is a mess: our cities are among the least dense in the world, meaning new developments are often at the suburban fringe of our sprawling cities.
The property lobby's preferred "solution" to housing shortages is the release of more land on the urban fringe. It won't work, because people don't want to live that far out. Increasingly, they can't afford to commute either. The reason is described by a well-known and much discussed theory of cultural geography known as the Marchetti Constant.
Cesare Marchetti is a Venetian physicist and geographer who has examined the structure of cities through history. Observing a simple correlation between city size and availability and location of transport, he argues that in "societies spanning the full range of economic development, people average about one hour per day travelling. This is the travel time budget."
This Marchetti Constant - which should perhaps be named after Yacov Zahavi, the World Bank transport researcher whose data Marchetti built on - determines the approximate structure of our cities. Seventeenth Century cities were small and walkable. Nineteenth Century cities added the railroad, expanding their city limits accordingly. The post-World War II city still provides for approximately similar commuting times but with a car - meaning our cities can be as large as 50 kilometres in diameter.
We're now running up against the limits of this suburban expansion, as the era of cheap oil draws to a close. The rapid depreciation of house prices in the exurbs of American cities is one consequence of this; a similar plunge can be observed in Australia.
The relatively small number of houses that have been built is another strange quirk of the Australian housing boom. As Fiona Allon points out, this is probably because the ocean of cheap mortgage credit fleetingly available in the early 2000s was "simply capitalised into soaring house prices rather than leading to a wider and fairer spread of owner-occupation".
While housing supply cannot meet current buyer demand, that demand will likely slacken over the next few years as mortgage credit tightens or even dries up altogether. New supply, however, is likely to become available as investors eventually return to the market and demographic changes like baby boomer retirements take effect.
It's well worth remembering, also, that by any fundamental measure, housing is massively over-valued in Australia. In every other rich nation that experienced a property bubble in the 2000s, the result has been a damaging slump as the bubble deflated - for example, in Spain, in Ireland, in the UK and of course in the United States. As economic forecaster Marc Faber noted last week on Lateline, Australia will be lucky to escape the same fate.
In these circumstances, housing will remain relatively unaffordable for some time, especially for low-income earners. The depressing reality is that Labor's worthy but manifestly inadequate rental affordability scheme will make a difference only at the margins.
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It might be time to dust off the new cities plan from the late seventies. The idea was to create some small cities from scratch in areas that are on good road transport and have plenty of space. If cities are limited by travel time then we need new cities with their own economies, not just new housing in existing ones.
I know there was a city development slated for the area between Bathurst and Orange, and the process of decentralisation was started in government departments to provide employment for these expanded regional centres. Unfortuneately for families that were moved, like ours, the process stalled somewhere.
Newcastle needs to have an injection of infrastructure capital spending, and it could become a centre of clean industry, sort of a Silicon Valley for NSW.
A city somewhere between Jervis Bay and Narooma could be an immediate winner, with great climate and access to shipping.
We’ve done it once before, in Canberra. Why can’t we do it again?
I agree Dr Dog, there is a serious need for new investment in regional centres. 80% of Australians live in just five cities, while regional centres in many cases languish. By moving government departments out of the capital, we would help alleviate some of the pressures on affordability and also revitalise regional towns
Is the federal government thinking much about this Ben? It seems to me they are still stuck in the election cycle and therefore pretty committed to the populations of existing cities. I would love to hear a test case might be on the agenda.
It would seem an excellent opportunity to experiment with all sorts of sustainability, not just in house prices but also in regard to building materials, carbon emissions, flexible working arrangements and water. What better way to develop new technology and social compacts we could then offer the exsisting cities and the rest of the world?
Wendell Cox states in " How Smart Growth Exacerbated the International Financial Crisis" that " There is no question that more liberal loan policies were the proximate cause. But the strict land use regulations forced prices up much more than would have been the case if the previous more traditional yet environmentally sound regulation had been retained " and "Liberal economist Paul Krugman of The New York Times put most of his conservative colleagues to shame in noting that the house price bubble has been limited to metropolitan areas with strong land use regulation" check it out at www.heritage.org/Research/Economy/wm1906.cfm. if you can Ben?
Dallas -
Conservative US think tanks like the Heritage Foundation have been viscerally antagonistic to Smart Growth since the movement emerged. Here’s another example of an ideologically informed, but poorly researched, opinion piece.
Cox presents no actual data on planning laws - he merely asserts that "what the 20 markets that have lost the most affordability have in common is excessive land use regulation." Well there you have it then.
There’s no doubt that the regulatory environment is an important factor in framing the housing market. However, a far more important factor was the availability of cheap credit to people who couldn’t afford it. It’s ironic that Wendell Cox wants to blame over-regulation in urban planning while ignoring one of the greatest regulatory failures in US financial history.
Now that housing demand can’t be propped up by sub-prime mortgages and liar loans, the US is facing a crisis of over-supply. There are vast numbers of empty houses across the very regions Cox claims are the ones which suffered from restrictive planning regulations.
If Smart Growth regulations really had acted to limit supply in the way Cox claims, how come so many new houses got built in these regions? It seems more likely that the US’ liberal planning regulations, by allowing unplanned, sprawling residential growth in poorly serviced exurbs, are now actually enhancing the slump on the way down in places like Florida, Arizona and California.
Building new cities is an excellent idea. One of the greatest drains of rapidly diminishing resources is the sad -and ludicrous- fact that virtually all our major cities and towns have covered our most productive and well watered farm lands in tar and cement.
This time of Government surplus could well be the last chance we have of seeing visionary public works schemes that guarantee a decent future for our children and grandchildren, instead of selling them into slavery to pay for our excesses, through the mechanisms of compound interest and fractional banking.
Instead of puny deposits to first home buyers just to qualify for bank depredations, why not a 2.5% government loan to first home buyers who actually live in their homes?
www.thecomensalist.com
This is a pitch for so called "supply side" relief.
But is there a shortage of supply? Not really.
The idea that the lack of rental affordability has anything to do with a lack of supply of rental properties is a furphy. The real vacancy rate in Sydney is 3.6% (This figure comes from the actual "counting" done by the ABS, rather than the somewhat dubious method of "extrapolation from surveys" adopted by the Real Estate Institute of Australia - look it up!)
Now, I hate referring to The Australian as much as the next guy but, below is a link to a lucid summary of the methodological issues involved in the calculation of vacancy rates:
http://www.theaustralian.news.com.au/story/0,,24079562-25658,00.html?fro…
Understanding HOW the vacancy rates can be distorted is crucial. There is no smoke here, let alone any kind of fire. There is no shortage of rental properties. There is a shortage of "affordable" rental properties. The "affordability" of rental properties in our major cities cannot, by definition, have anything to do with real supply side constraints. There is plenty to go around, but for some reason people aren’t sharing. The lack of affordability in the rental market has to do with the distorted expectations of landlords, and a legislative framework that encourages them to retain these distorted expectations.
Yes, the government must intervene. But it must do so with a view to unwinding the unrealistic expectations of landlords. It must dispel the notion held by owners and encouraged under the Howard government that providing rental property is somehow noble and that it should therefore be a zero risk investment.
Of course, the REAL question is who benefits from the argument that "more rental properties are needed"? Ben, on behalf of the property developers of this country I thank you for your contribution to the cause. In particular, thanks for the "Marchetti Constant." PR firms always struggle to find a "truth" on which to base the spin.
Ben, you’re pushing near exactly the same line as Henderson’s IPA did a year or so ago. The effect is the same in deflecting attention away from rather more serious dynamics that have contributed directly to the ridiculous situation we face now. Consider, for example:
1. Removal of Capital Gains Tax (in 1996 if I’m not mistaken)
2. Other generous provisions for property speculators to write off non-rented properties as losses for tax purposes.
3. First homebuyers’ grants.
4. Immigration policies weighted increasingly in favour of applicants with large disposable savings and/or income (proper numbers of actual workers have been allowed only more recently in a reactive catch-up, if not panic).
5. The big whammy i.e., the spread of toxic sub-prime lending worldwide. Oz journalism’s repeated phrase "US sub-prime crisis" is not only a euphemism for the US disaster, but implies that there are no such problems in Oz with "sub-prime" or "crises". Rents rise, along with much everything else, in an effort to cover the black intravenous holes of debt pocked all around the emaciated body of that neo-liberalist ICE junkie we call "the economy".
6. The encouragement of property speculation meant that actually vacant properties typically stayed out of the rental market, thus creating a fictitious "vacancy rate" i.e., a rate based only on vacancy applicable to that minority of properties put out for lease. Such statistical free market trickery resembles changes in reducing unemployment rates where people work only small hours, or inflation rates when factoring in IT hardware and trade under the NASDAQ.
7. The credit binge has had direct effects on real estate, but it has a much broader context of debt spills polluting the entire economic ocean, especially after 2000 with the increasing dependency upon the Yen carry trade. This underlying dynamic continues to cause banks to collapse from within, as the sludge of debt eventually destroys banks’ foundations.
8. The strategic picture is more disastrous still, as the OECD’s federal reserves keep pumping bail-outs of taxpayers’ money into their banking system - and thereby into the share market - thus causing obviously large jumps in inflation. I have read some accounts recording that such bail-outs have already gone well over the trillion figure in USD.
That point 8. is the real scandal for our attention, because it indicates just who our irresponsible and cowardly politicians are working for (apart from themselves). The situation may not be Weimar Republic just yet, but that is where we could be headed if these spineless clowns do not shake themselves out of their happy-clappy euphoria brought on by their neo-liberalist, free trade revivalist meetings in places like Davos, Edinburgh, and Sydney.
Ben, your focus on local land release and associated regulation relies on a loose corollary between the incidence of property sector inflation and areas around where such land controls apply. On the one hand, that seems a shallow analysis a la "areas of anti-narcotic enforcement suggest prohibition as a major cause of addiction". Your perspective misses the typical long-term relationship - as applicable now - between the speculative-driven inflation in fuel, for example, and real estate. Think of how futile liberalized land release would have been in outer Sydney or Melbourne if the IPA had been given even more influence; people in such areas cannot afford the fuel to get to work, and the state’s avoidance of proper, centralized infrastructure projects is all part of the liberalist dogma for such folk as the IPA anyway!
On another level, such analysis misses the global phenomenon; I understand that other countries (Spain perhaps the best example now) reveal the same basic dynamics, but without coincidental and superficial phenomena like Australia’s processes with land release, building regulation, etc.
The reigning oligarchs have made it clear that they want an increasingly subordinate command economy, but one based on mythologies of free trade and individualism, while devoid of any principle of collective responsibility and the common good. Old laws of "supply and demand" have only minor, incidental relevance to such an economy; pundits and politicians will usually avoid saying that, however, for fear of being branded heretics.
Mil-observer,
I admire your dedication to tautology.
I thought that "reigning oligarchs" wanted a "subordinate command economy" by definition? Or were you making a distinction between the current oligarchs and some previous, more benevolent, aristocratic regime?
I thought that the attempt by the "spineless clowns" in government to retain their power by any means possible (particularly by "pumping bail-outs of taxpayers’ money into their banking system") was also a truism. Or were you making a distinction between the aversion of current governments to the political kryptonite that is the "credit crises" and the more honorable brand of political suicide that has (presumably) existed in some bygone era?
How, exactly, does assigning responsibility for the credit crises to individual "clowns" and "oligarchs" (who presumably meet in some smoke filled back room to coordinate their activities) overcome the mythology of individualism again?
Mil-observer,
I think you’re perhaps not understanding my position. I actually agree with you on most of your points raised above.
I’m not focussed on local land release at all, I argue we need more investment in regional cities, in fact new regional cities, plus denser capital cities, better public transport and more transport-oriented development, and yes more investment in affordable rental accomodation.
Bob Karmen - rental vacancies are fairly slack above the $600/wk range. But for those looking for affordable housing reasonably close to amenities and public transport infrastructure, the market is extremely tight.
It’s interesting you think developers will benefit from the provision of more rental accomodation. The reality is that rental yields are still quite low, in the order of 5% and even lower for low-rent housing. The reason is the asset price bubble that has blown out the price side of the equation, with rental earnings only now starting to catch up.
Ben Eltham (and, less directly, Bob Karmin),
My apologies for mis-reading and misrepresentation: I should have stated "increased supply" for "land release" - I would add that your suggestion for meeting the transport challenge falls into just the same (revised) definition for "increased supply".
On the bigger picture, however, I need to put my position differently; indeed we have both identified most of the same chess pieces here, but we would seem to be referring to different boards or even rules. My main concern is that your assessment merely surrenders to the market with a resigned sigh of acceptance about a "depressing reality". Also, I perceive that you have not identified as more causally important the international or strategic challenge presented in this situation.
I meant my numbered points to explain a situation that is not mere coincidence, but a deliberate and concerted push with a common direction across the OECD. My main difference with your position is that I regard the local Australian variations - from many EU countries, for example - as largely irrelevant to identifying the problem’s main cause and most effective solutions. Those local variations, however, demonstrate our state leadership’s active collusion and complicity with such international forces.
With very few exceptions, OECD states’ political leaders have offered no resistance to the onslaught of the destructive and unsustainable credit binge. Whatever the local conditions compatible with and anticipating such higher-level manipulations in international finance, the net effect seems to be a further weakening of states’ sovereignty. Thus we have absurd band-aid policies as a faint semblance of responsible government: Rudd’s auditing of constituencies’ homeless shelters; token projects for constructing rental dwellings, etc.
I claim that the real enemies are the predatory funds or finance consortiums hovering around this global crash. The 1997 Southeast Asian crash seems an instructive precursor in this regard, but those most-affected nations learned a hard lesson. It appears to me that we should look outside the OECD for good examples of effective resistance via responsible government.
Bob Karmin: you omitted my qualifier "increasingly" and selected only "subordinate command economy", so I made no tautology there. I believe the NSW situation with electricity is one such demonstration of effort towards "increased subordination".
Being a landlord is a business, the cost of the rent being the interest repayment + taxes etc + profit. Why would anyone expect them to make a loss on this? Indeed, if you expect there to be more houses/units available from the same landlord, he cannot make a loss. (assumption that you can only negatively gear a small number of units at a time, positively gear, and there isn’t a practical limit)
Ben,
Are you implying that private investment in rental accommodation (that means, on the whole, property development) will continue to slow because the "rental yields are still quite low, in the order of 5% and even lower for low-rent housing"? If so, how long do you figure rental yields can remain on or below the level of inflation in a nearly unregulated market?
Asset bubbles are built on expectations, that’s why they are called bubbles. The housing bubble in Australia took the form of an over-capitalized housing market. We seem to agree on this point.
I reiterate my point that there has been no under-supply of rental property. There are, however, plenty of rental properties that have been overcapitalized. This mistake needs to be corrected. And it will be. Again, we seem to agree.
I say, that it is better that the landlords take the hit, than the tax-payer or the renter. On the other hand you seem to be making a case to spread the misery based on what seems to me to be a completely irrelevant argument about the layout of western cities. To my mind, the only perspective that can benefit from this kind of hyperbole is one which is intent on making a case for additional subsidies to property development.
Dr. Dog
Interesting that you mention Canberra, where a new site with no geographic impediments has been given to the motor car like an Aztec sacrifice. Yes, there are buses, but the service is not good. The city sprawls further and further out but there is no railway and no trams. Why? When space was no problem, when railway lines could have been run along the surface or cut-and-covered, why did they ignore those options and why do they continue to ignore them? One day, when the cost has risen to giddy heights, I suppose they’ll suddenly start tunnelling. I hope I’m not still around to blow a fuse.
Ben
One of the problems with rental costs is that estate agents take a larger and larger slice of the pie when they put a property on their books. A friend of mine has found that to rent out his small flat in the city the agent wants - wait for it - 25% of the total returns. Others are less greedy but only slightly so. They want to get 25% of the returns without putting up a cent of the cash. My friend pays for the ads that produce a tenant and for any work that needs doing on the property so the agent’s only expenses come from taking a few phone calls and accounting to him. No wonder rents are high!
Ben
Living in Mackay has turned into a nightmare for anyone Not employed at the nearby mines. Living on a pension of around $650 a fortnight is hell when you pay $460 of it in rent. Four years ago I paid $280. I was actually in a Real Estate office checking out a cheaper unit when a group who had been shown thru a rental property came in. The rent asked for that property was $350 a week, and to my horror a man went to the R/E rep and offered $450 to get it. The group were told they would be notified when the decision was made as to who got the house. While still there, the man who made that offer came back in and was told he had the house. I have been told this is not a rare happening. Seems those with the big bucks are prepared to jump over the ones less well off, and landlords are happy to oblige them. Thanks to the huge incomes generated by the mining boom, rents and house prices are over the top and out of reach of many residents. One day the boom will go BANG, and it will be interesting to see what the then out of work mine folk do with their overpriced homes and rental investments. Greed rules in this area and the " I’m alright Jack " attitude is rife unfortunately.
Peter and Jenny,
thanks for your comments. I share your concerns. Jenny, anecdotal evidence I’ve heard from the Tenants Union in Victoria suggests that informal offers for higher-than-list rents are common. So are the controversial "tenancy auctions" in which desperate prospective tenants bid to try and gain a lease. A distressing corollary of this is the unconcern with which real estate agents view tenants complaints in the current market.
Unfortunately, if the property boom does go bang, the result will not necessarily be rental relief. A considerable adjustment will likely bring on considerable financial market pain (in addition of what we’re already seeing), and foreclosed lenders will be just as keen to recoup their losses in rents.
Ultimately, the only thing that can solve the issue is slackening demand and increased supply. Because housing is not easy to build quickly, and housing is a "sticky" market where equilibrium can take years to re-balance, we will not see a rapid improvement. This is why, in reference to what Bob writes, mere changes in planning regulations will not make a big difference.
It’s also why the researchers at AHURI call housing affordabiity a generational issue that will take years to address.
Ben,
it isn’t the housing market that will go bang first I don’t think. The future of coal both here and in the countries we are supplying, is not as bright as so many imagine. China, South Africa and a couple of South American countries have large deposits. China, thanks to us training the managers and technicians and then selling them the equipment, have enabled them to begin opening up enormous deposits in the areas in the north that up to now have been near impossible to mine. When they get going it could get unpleasant for those who believe that the good times will keep on rolling for them. Should more mines here close, those folk will no doubt be forced to sell up and go elsewhere for work. I know of 2 senior mine management men who have already sold their rental properties as they see the end coming not long after the Olympics are over. I might add I also know of some landlords who refuse to accept rent amounts urged on them by R/E reps, because they believe it is against their code of life. They are happy with a fair rent return and like sleeping at night.
The state can declare the system bankrupt (which it is), then process the mess for reorganization as done with errant, bankrupt manufacturing companies. That way measures can enable people to pay off their properties at sensible rates set for practical investment purposes - not for speculation. Renters would benefit accordingly.
If the state did take such responsible remedial action, would this country then face sanctions, covert dirty tricks, direct terrorist attacks? Probably, but that’s why the challenge is strategic, needing reorientation towards international unity in combating the nasty imperialist debt plague that has beset us.
There’s little point picking on banks and landlords for this problem: whatever the opportunistic mania apparent among their ranks, they’ve merely responded to conditions usually not of their own choosing. The real culprits are to be found at higher levels among the fund predators and unelected arbiters of states’ fiscal policy.
No arguments about Canberra’s car obsession peterbest, after all it is the home of Summernats, but I am assuming, probably wrongly, that any new cities would have better public transport infrastructure.
I was really referring the national inability to take on major projects like new cities. There just doesn’t seem to be the vision or motivation to start projects of this size anymore.
I guess I am tired of all the micro management, adjust a tax here, the odd bit of affordable housing there. Like our responses to all the problems that afflict us it will be insufficient.
Mil-observer I have enjoyed and agreed with much of your posting. I can’t let landlords and bankers off the hook as readily as you do though. To simply say it is the nature of the beast that they respond to the situation is to make light of their active role in driving rents up. Recognising a shark’s nature does not make it OK to have my leg bitten off.
Dr Dog, you misunderstand my point. If the state declares its banking system bankrupt then reorganizes via receivership, there will be no need to "let bankers and landlords off the hook" (or the opposite), because they will simply have protection against the mad, rapacious compulsions we see from this sick ICE-junkie economy. If the state exerted controls on lending, that would mean stable interest rates for normal borrowing, and lower rates for certain development necessary for the economy (esp. infrastructure). Landlords and bankers would themselves be freed from the nonsensical, extortionate and destructive debt binge which so far has only compelled higher and higher payments into what is just an economic black hole, though much bigger than Weimar Germany’s, and unforgivingly international to boot.
Your focus on landlords and bankers seems to me to be like trying to blame common soldiers for the invasion of Poland. Their "active role in driving rents up" is not a causal one, as you seem to perceive it. Landlords and bankers are merely compelled to extract higher rents, debts, fees, etc., because of the hypertension inflicted on the economy from neo-liberalist policies. Many bankers have not survived this long period of futile competition chasing figures of debt in "exotic/collateralized", etc. packages i.e., "money" that does not exist, nor will it ever exist. Many have quit; some have suicided precisely because of such nasty and futile practices compelled on their normally necessary and important work.
Of course, landlords and bankers have at least their share of psychopaths among them, but it is still policy and ideology that has encouraged such people into those enterprises (as elsewhere). We now see how such neo-liberalist policies - and their cowardly writers and stewards - have delivered their rotten and poisonous fruits - a harvest that was only a question of time. Time for politicians with guts and genuine care for humanity.
Well done, Ben, on a thoughtful article.
A quibble: those figures to which you refer (from Australian Property Monitors) relate only to landlords’ asking rents for vacant properties, not the rents paid by tenants generally. Rents generally are measured by the ABS in its CPI surveys, and while they have increased strongly - 7.7 per cent for the year to June, and 2.2 per cent for the quarter - they have not increased as much as asking rents.
The higher rate of increase for asking rents reflects the desperation of people on the outside trying to get into rental housing - often, as you say, bidding up rents in ‘rental auctions’.
I’ll declare an interest here - I work for the Tenants’ Union of NSW. We’re the first to say that rising rents are a problem, but we also like to try to get the message out that tenants should not expect - or accept - increases that are excessive to the real state of the market.
Hi Chris
thanks for drawing my attention to those figures. It’s certainly to be hoped that tenants can exercise their rights in the current market.
Please don’t hesitate to drop me an email if you have any further data you’d like to share - ben.eltham@gmail.com
Thanks Ben for yet another interesting article from "dark side economic theory".
Here is an article which goes a little way to explaining what the underlying cause of the problem with the rental market is all about:-
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/07/30/cnoz13…
Expressed in terms of "real purchasing power" the housing market is not in a "bubble" at all, but rather, the purchasing power of our "currency" which is used to "price" and "value" these properties has declined significantly.
You will find that the real value of rental properties has actually declined despite price increases expressed in our debased debt based paper currency which is rapidly losing it’s purchasing power - this is where the illusion of a bubble is created.
The indisputable reality of the declining purchasing power of our currency is perfectly obvious from the tremendous rise in the prices of REAL economic goods such as the commodities like oil and precious metals. These prices track the decline in purchasing power of our currency, not the concocted CPI rubbish shoved down our collective throats.
Expressed in terms of real economic goods, such as precious metals (or even just iron, copper and steel), Australian housing prices have actually declined, in some cases they have declined significantly - Bubble? Is it bollocks a bubble!
Work it out, expressed in ounces of gold or silver, what was the average cost of an Australian home during 2000 as opposed to the average cost for the same house expressed in bullion today?
There is no point crowing on about a 5% rental return for property owners when the real economic value of their rental properties experience real economic decline at a rate in excess of 10%-15% per annum.
Look at Australia’s M3 money supply growth for a real understanding of how inaccurate the reported CPI actually is and notice how M3 growth appears to more accurately track the real rate of price increases in Australia.
PS I hope you bought that bullion back in August 2007!
I guess the interventionists will all say "if it works, tax it to death, if it still shows signs of life, regulate it, and if it dies completely, well then subsidise it"
What a crock!
$623 million divided by 50,000 dwellings equals $12,460.00 per dwelling! What an ambitious scheme Ben! Who is going to pay the balance of the bill? The developers?
Rents are not rising rapidly as you assert Ben, and the supply of rental properties is not a problem. There is in fact a surplus of rental properties on the market as Bob Karmin points out above.
The problem, as Rockjaw attempts to point out, is that real disposable incomes are actually in decline placing most living costs, including rental costs, beyond the reach of Australian fixed income earners.
The credit binge of the past decade or so certainly contributed to increased demand for housing but how does Ben Altham reckon that this increased demand resulted in a shortage of rental properties? Especially if you consider that the demand was the very cause of the increased supply!
The RBA monetary policies associated with the resultant excessive credit and money creation caused during the Howard years did not only result in increased demand for housing, but this increased credit and money supply also resulted in a depreciation of the monetary value of savings and fixed incomes.
For the Federal Government to attack the pockets of property owners to resolve a problem essentially caused by the RBA’s irresponsible monetary policies is both disgraceful and completely ineffective.
Attampts to destroy reasonable returns on property ownership through regulation against reasonable rentals will simply have no other effect than to reduce the demand for and hence the supply of new housing. Price capping simply does not work, when are economists going to learn this simple lesson?
And then they talk about a $623 million "bail out package"? You could not build 5000 units for that sum Ben, much less 50,000.
If rising rental costs do indeed become a crisis it will be the cause of the very people whom Ben Altham now proposes should further regulate and interfere with the the market.
Lastly, it is curious that Ben should mention Prof Marc Faber in this piece because Marc Faber’s message these days is much the same as those of Rockjaw above, namely that irresponsible money and credit creation, coupled with interference in the market mechanism by central governments has brought about the current credit crisis and "property bubble" which we will probably only worsen over the coming months and even years as we attempt to monetise the mess we have created in the past.
Irresponsible credit creation Ben, coupled with irresponsible Government expenditure, the promotion of debt based consumer spending/demand to prop up an irresponsible monetary and fiscal policy, these are the causes of the problems and not insufficient regulation, or insufficient supply of housing, or "greedy landlords".
Left to it’s own devices the rental market will sort itself out, and if the fixed income earners cannot afford the rentals, the problem and the solution rests with the monetary and fiscal authorities, just like Professor Marc Faber says.
You move too quickly Rogerio.
"Attampts to destroy reasonable returns on property ownership through regulation against reasonable rentals will simply have no other effect than to reduce the demand for and hence the supply of new housing."
I don’t see why this is a problem in a market suffering from over-supply.
More to the point price capping is not the only way to unwind the expectations of landlords. I don’t see anyone contemplating rent controls. I do see alot of people calling for an end to negative gearing though.
The assumption that rental returns must be positive is reinforced by the policy of negative gearing. Why? Property, like any investment must be allowed to have a dowside risk. Demand must be allowed to ‘drive’ at least some of the time.
Negative gearing is effectively margin lending for the housing sector. Just as margin lending is a central causal factor in the speculative bubble of financial markets so too the policy of negative gearing has had a disproportionatley large effect on the housing bubble. Negative gearing is one of the sources of the "irresponsible credit creation" you correctly deem so central to the difficulties with a more general crisis in affordability. It is directly related to debt driven consumption and directly related to the selective intervention of the Howard government (first home owners grant, tax reform etc).
Negative gearing should be eliminated. This should be done away in the standard ‘politcally acceptable’ manner. Abolish negative gearing for all new investment properties. Use the increased income tax revenue to restart public housing initiatives.
Finally, negative gearing IS an "insufficient regulation" of the housing market precicely because it makes all "landlords greedy" and results in the "insufficient supply" of ‘affordable’ housing.
Define "affordable housing" Bob.
Between you and me Rockjaw, I must admit, I hesitated there too. But that last sentence really works well.
Anyway, to your point-
‘Affordable’ housing would be house prices and rental rates that do not bare the burden of unrealistic rates of return (dare I say ‘greedy expectations’ fanned by ponzi finance), given the level of supply in the market.
So many additional concepts left to define Bob. "Unrealistic rates"? - what are they?
"Ponzi scheme"? - I assume you mean the practice of using a paper debt based currency like the Australian dollar and then inflating the supply of that currency at rates as high as 16% per annum whilst lying to the Australian taxpayer that the inflation rate is equal to the cooked CPI figures which they shove down our throats.
That’s the "ponzi" scheme which places "affordable" housing beyond the reach of fixed income earners in Australia, engineered by greedy politicians and central bankers, not "greedy landlords" Bob - and that is what Prof Marc Faber has been trying to warn people about for almost a decade now.
Tax the producer and the investor any more than we already do Bob and you will soon have the dubious honour of declaring yourself a citizen of the biggest banana republic in the Asia Pacific region.