Saturday, 5 July 2008

Rents to rise 10%?

While browsing through an investment magazine at the local library I came across an interesting chart of seasonally adjusted vacancy rates vs. the real (above CPI) rent change. As one would expect, rents tend to rise most when vacancy rates are low, but the relationship was quite precise. As shown in the table below, real rents increase by an additional 2%pa for every 1% drop in rental property vacancy rates:

Real Rent Change......Vacancy Rate
6%....................0%
4%....................1%
2%....................2%
0%....................3%
-2%...................4%
-4%...................5%

Rents tend to just keep pace with inflation if there is an adequate supply of available rental properties (3% vacancy rate), and rents outpace inflation if there is a shortage of properties to rent.

With inflation in Australia currently running above 4% pa and the vacancy rate for rental properties in Sydney dropping below 1% this year, rents should (according to this relationship) rise by around 8% pa.

At some point housing affordability will limit the growth in house prices in Australia - some estimates suggest that Australian houses are currently 30%-50% overpriced. But, with new dwelling construction rates currently well below the rate of increased demand caused by immigration, and the potential for rapid rises in rental yields over the next couple of years, there could be at least one more 'boom' left in the Sydney property market before I retire. When the fixed rate mortgage on our rental property is due for renegotiation in about three years time we may think about selling it and investing the proceeds in our SMSF.

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2 comments:

traineeinvestor said...

That's actually very interesting data. Thanks for posting.

I'm actually very sceptical about data showing housing is over or under priced as it is often a comparison that relies on historical comparisons that are selective and often have low predictive value of future trends.

Gerard said...

Hmm... I doubt demand will continue to rise though. At some price point it no longer makes sense to buy and you would price out a whole portion of the market...

Either way, here's an interesting perspective on the rental market: . It's based in the US but interesting nonetheless.