Sydney, Australia : Rents to “Jump” for Years or Rents to “Catch Up” for Years ?
Execerpts from news.com.au’s report "Rents to Jump for Years" (Feb. 19, 2007) written by Angela Saurine
"Rents will jump due to a dramatic fall in the number of apartments built this financial year, the report by industry analysts BIS Shrapnel says."
"Weak growth in the cost of rent in recent years would lead to sharp rises as a shortage of rental stock emerged this year. Rents would rise 7.3 per cent each year, or 42 per cent over the next five years."
"In June last year, Sydney rents were 6 per cent lower than the June 2000 peak, adjusted for inflation, after showing increases below long-term trends."
"Mr Zigomanis said a peak in vacancy rates in 2003 and lower rental returns had deterred investors."
"He said two to three years of rental growth was necessary before yields improved to a level which would draw investors back to the apartment market."
"In many instances the value of investment apartments in Sydney has declined in the past two to three years,” Mr Zigomanis said."
I was reading the comments on the above news article. I can see three types of commentaries, those coming from: a) renters b) investors c) those who understand that it is normal due to the law of supply and demand
The renters are very emotional about the report because they are feeling the squeeze and difficulty in the rent rises. Some of them look at it from a subjective point of view, they think that investors are being greedy for increasing the rent.
I can feel the burden of renters, because I was also renting once. However, I do understand the need for the investors to increase their rent. They deserve an increase in their rental income if you will consider; all the interest rate rises, some bought during the peak period, all the increases in other related costs in maintaining an investment property such as strata, insurance and the rest.
Negative gearing was the popular marketing tool used here in Australia to lure investors into buying investment properties. Here is a more detailed overview of negative gearing from the Australian Securities and Investment Commission (ASIC).
The idea of negative gearing is to claim your losses as a deduction to your income, with the hope to lower your tax rate and eventually get a refund from the tax man. I attended a seminar once, to simplify how they encourage the use of negative gearing is:
your rent income + tax refund + your contribution = will pay for the property
During a bullish real estate market, negative gearing is ideal because you can recover your losses from the capital gowth of the property when you sell it. But what happens when the value of your investment declines as what happened in most investment properties in Sydney? Your tax losses in the end is still a loss. It does not benefit you to enter into negative gearing, specially since the income tax thresholds were recently increased. The tax refund could be less than the previous years’ further magnifying the investor’s losses.
With this scenario, do you think the investors are being greedy to increase their rent?
As a former renter, I had choices as to where I want to rent. In the same district, there are old and new developments. The older apartments definitely demands a lower rent while newer developments have a steeper rent. When the rents were at its lowest, me and my husband had the advantage to choose where we want to live irregardless of our income. There was an oversupply of apartments that we can even request our landlord to give us 1 month free rent (because our contract for our previous apartment is due to expire for another month). We negotiated for the rent to decrease by $30 a week since there are several empty apartments in the complex. After a year and a half, the rent went up by $10 a week. After the increase in interest rates, our landlord notified us for another rent increase of $10 a week. It was less than 6 months since the last increase so we were able to hold it off for a few more months. When we received another increase notification, it was not $10 a week anymore but $15 a week already. We were thinking, our landlord wanted to add up the lost rent increase on the months we were able to hold it off by increasing it to $15 a week. However, I did not argue anymore. Even with all the rent increases, the rent we were paying is still lower than the original asking rent. To add, with several interest rate increases, I feel compassion for our landlord that they do need that extra rent to make up for the increase in their repayments.
Thus, if you will analyze the real estate market for the past years, I could re-phrase the title to "Rent to Catch-Up" for the next years. I have always advocated to embrace reality, be more logical when understanding the factors affecting real estate. These are not marketing ploys to increase the rent, but as one commentary indicated, it is the "law of supply and demand". Government intervention won’t have a quick solution, the effects will be long term. To add, everything is part of the real estate cycle. From the investor’s point of view, you just have to know when to buy, when to hold and when to sell.
As for the renters, I think it is a reality that you have to face and learn to adapt. I know how it feels to have a rent increased too. But your landlord needs to earn money as well. It is the reason they bought that investment in the first place. When me and my husband were still renting, we used to think that for just this amount of money, we can live in a place worth almost half a million. We used to think that the owner is paying for part of our housing, instead of us paying for his property. If we get down to the numbers, our rent was not even enough to pay for his interest payments. Renting in a way helped us save for our house deposit.
If you find the rents steep, you have a choice of moving to a cheaper location…somewhere you can afford. Save as much as you can, so you can get yourself out of the rental market and buy yourself a property in the future as we did, "Moving on from Renting to Buying a Property".
Afterall, in analyzing all the factors…the rent is not really jumping for the next few years, but is only catching up from the previous years that it was at its lowest; as indicated by the given historical data.
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