Thursday, October 15, 2009

Property/Rental Market

Article from Adam Schwab from Crikey about rents Experts Get it Very Wrong on Rentals.
Schwab is pretty good on this sector of the market and points out the way to get through the bullsh-t on rents.
[R]ental prices are almost solely determined by the number of vacant rental properties -- although business journalists are commonly thinking of other excuses or reasons as to why rents go up or down.
One of the ways state govts, especially the South Australian govt, used to achieve this was through public housing. The Housing Trust in SA provided low cost housing (and commercial property), which kept a lid on rents.
The problem with the first-home-owner argument is that those first-home buyers who are leaving the rental market are reasonably likely to be buying a property that is currently being rented anyway (unless they are purchasing a newly constructed property). What that often means is that they will often buy from an investor a property that is currently tenanted to a first-home buyer (alternatively, they are buying from another owner-occupier who has to then find another property themselves). When the investor evicts their current tenants so the first-home buyer can move in, those tenants are put back in the rental pool, so the supply-and-demand equation remains unaltered. (If anything, the movement is actually likely to lead to an increase in rentals as landlords often take the opportunity to increase rentals to current market rates when tenants depart).
While the first-home-owner's boost wouldn’t have a real effect on rental prices, there is a government policy that is having an effect -- that is, the recent changes to foreign investment rules.

Until March this year, property developers were only able to sell half off a new development off-the-plan to overseas (often South-East Asian) buyers. Selling to overseas buyers was perfected by large developments, with those buyers appearing less cynical than locals. The new changes allow developers to sell 100% of a new project off-the-plan to overseas-based investors so long as the project is marketed in Australia as well. The rule change will make it easier for developers to start new projects and increase margins. It is also a good thing for the rental market because overseas investors will almost always rent the property rather than move in themselves.
The effect of the law change is already occurring. Melbourne’s largest apartment builder, Central Equity, recently successfully applied to expand its proposed apartment development on current Age site on Spencer Street to more than 800 apartments.
The law change may not have been intended as a means of keeping rents down (it more likely came about following lobbying by politically savvy and high-donating developers) but it will most likely have that (positive) effect. Well, until overseas buyers finally realise they are over-paying for properties.
It's always interesting to note the unintended consequences of policy decisions.

While people get excited about rising house prices, they are a negative for the economy as a whole. Buying and selling houses has been a generally unproductive development for the Australian economy and has left us heavily exposed to debt. While it's good that people feel richer when house prices go up the benefits are largely illusory.

And of course rising house prices and rents have very negative distributional consequences.

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