Chat with us, powered by LiveChatRents underpin property values

Rents underpin property values

Isn’t the direction of house prices getting a bit confusing? Let’s try using some common sense to clear a path through the mixed data and conflicting commentary.

Recent House Data Points Downwards

The ABS housing price index released last week showed a slide in house prices across the country. Melbourne and Sydney show growth over the year but also significant falls for the March quarter (2.5 and1.8 per cent falls respectively).

Advertisement: Story continues below At this stage, the indices show that home owners have simply given back the capital gains they have achieved over the preceding 3 quarters. In short, over the year, national house prices have recorded no meaningful change.

Is this the beginning of a sustained slide or just a blip on the radar?

Interest rates spooking the market

The prevailing expectation of higher inflation will not help. We all know what the RBA’s response to higher inflation is. So, when headline inflation for the quarter printed at 1.6 per cent (way above target) it was a great relief that the RBA decided to look past what they saw as the volatility surrounding food prices and chose to leave the cash rate unchanged.

The problem here is, as we observed prior to November last year, sometimes the uncertainty is actually worse than the hikes themselves.

Where are the buyers?

Staying on theme, finance approvals (which is considered as a forward indicator of buyer confidence) is on the wane and simultaneously stock levels (properties on the market) have begun to swell.

According to Australian Property Monitors, the number of properties advertised in Sydney (comparing March year on year) have risen from 42k to 46K, or about 9 per cent.

When you have supply increasing and demand going in the opposite direction something will have to give.

What does it all mean?

Putting the bad news aside, nominal GDP is running strongly, investors are more active than they have been for quite some time and gross rental yields in most state capitals are around 5 per cent.

This, of course, against a background of almost full employment and a worsening shortage of rental accommodation. So what does this mean?

Well, Governor Stevens said in an address in London last month that he wasn’t going to lose any sleep over house prices. I have to agree. Whilst I acknowledge that the property market points to further softening, I can’t see any real severity in it.

The Forgotten Importance of the Rental Market

Gross rental yields are a most important factor in moderating any falls here. For investors it is obvious, there is more desirability in the asset class when investors can see that they are getting a solid rolling return.

Compounding this, falling prices will only strengthen already robust yields. For would-be home owners, high rents mean the gap between paying rent and servicing a mortgage narrows and encourages them to make the jump into home ownership. Either way, high rents facilitates value growth.

Landlords are rubbing their hands together, over the last five years results, according to SQM research, rental values, in Sydney for example, have climbed at a compound rate of 8.5 per cent per annum, clearly exacerbated by vacancy rates below 1.5%.

Owners of commercial property would give their back teeth for such increases. No wonder interest in the property sector from investors is building.

So, you would think that with rising rents and low mortgage rates, first-home buyers would be more active. However, given the mixed messages in the market, more and more potential buyers are waiting on the sidelines.

Presumably they are still nervous about interest rate rises or perhaps even living in false hope of massive price falls.

I say false hope, because in the meantime, this environment creates an intensified demand for rental dwellings and in doing so, further strengthens the negotiation platform for landlords. This tough rental market is just about to get tougher.

Rents Place a Floor Under Values

Why is this important? In the 2004 downturn record low rental yields across Sydney (3.5 per cent) were crucial in property becoming on-the-nose with investors and first-home buyers alike.

Today, yields in Sydney are at 5.4 per cent and rising. There is no glut of accommodation, no rising unemployment. Quite the opposite.

In the short term, I fully expect numbers to jump around a little due to seasonality and sentiment, with a few soft numbers bound to surface over the next 6 months or so. Generally however, the housing market is characterised by resilience and stability given that high yields underpin prices.

After the dust settles won’t these circumstances provide opportunities? How far can house prices really fall?

Source: The Age Domain