Today I’d like to take a detailed look at rental growth in Australia over the long term, much of this information is embedded within the ABS inflation data that was recently released.
Here I’ve run a chart of rolling 12 monthly rent increases over more than 40 years:
This kind of chart is a property spruiker’s dream, since it shows that annualised rents have never fallen in Australia across a time-span of more than four decades.
In fact, rents have never even fallen in nominal terms in any individual quarter let alone over a 12 month period.
One suspects that this is as much an example of behavioural finance in action as it is a role of pure supply versus demand.
That is to say, even in times of recession or weakened rental demand, landlords appear to have been more inclined to freeze rents rather than actually cut them.It’s a cognitive or psychological bias that consumers don’t expect prices to fall.
After high inflation in the 1980s which saw the cost of almost everything rise dramatically, rental growth was far more subdued in the 1990s before a dwelling supply shortage saw rents beginning to really ramp up again towards an 8% annualised pace from around 2007.
Slowing rental growth
The above chart shows that rental growth has been slowing again of late to 2.9% in the year to March 2014 despite relatively tight property markets in some regions.
The reasons are arguable.
At least part of the reason, in my experience, is that landlords essentially have no pressing need to demand rental increases since the overwhelming majority of investors will at the very least be neutrally geared in the current low interest rate environment.
Another argument might be that in many areas, the rental property markets simply aren’t that tight and therefore landlords are unable to command higher rents than they are already are.
Apartment rents have risen strongly in Sydney over the past five years, but growth has been more subdued elsewhere and in other sectors of the market.It’s actually very tough to generalise on a national basis.
The long run
On the flip side, while housing bears might be keen to run such a chart to show how rental growth has eased of late, it’s doubtful they’d be so keen on running the full 40 year chart since it raises a couple of awkward questions.
Firstly, the rent versus buy equation looks to be very much skewed towards those who decide to buy property as a place of residence since rents have continued to grow relentlessly come hell or high water for more than 40 years.
Rent versus buy?
Don’t get me wrong, by the way, I’m not against renting. Far from it, in fact.
I’ve been a renter for most of my adult life, and in cities like Sydney it’s undoubtedly the case that one can generally afford to rent a far, far superior property to live in than one can afford to buy.
This is particularly so for dual income and higher earning households due to the low yields on higher-end property.
In any case, the taxation dice in Australia are loaded very much in favour of the renter-investor due to the prevailing negative gearing tax laws and the dividend imputation system through which the Hawke/Keating government addressed the previously iniquitous double taxation of dividend income in 1987.
Naturally, from a personal finance perspective the trickiest trap to avoid is renting your place of residence and spending everything else that you earn.
One saving grace in Australia is that we have compulsory superannuation contributions.Other countries sometimes don’t even have that, leaving many in the unenviable position of having no house, no investments and no pension.
I don’t know if there’s an existing acronym for that – perhaps there should be.
A second awkward question posed by the above chart is what happened when negative gearing was quarantined during a calamitous experiment which lasted only from June 1985 to September 1987.
Rents began to increase at a furious double digit pace of more than 10% per annum before the quarantining decision was reversed by Keating and the rental increases eventually eased (click chart).
Clearly, just as there is a lag effect with monetary policy, so it is with housing market policies since real estate is a highly illiquid asset class and the process of making a decision to buy, finance a deal and complete upon a purchase can easily take up to six months.
By Q1 1988 rents were increasing even more rapidly at an eye-watering annualised pace of above 11%.
I note that some would choose to re-present this chart adjusted for inflation (CPI), but since rent is itself a component of inflation, then this is perhaps something of a curiously circular approach.
In any event, renters don’t readily adjust their rental increases for a notional CPI figure – rather they tend to just look disdainfully at the nominal annual increases.
More notably, since this chart is a national average it doesn’t paint the true picture, which is that rents skyrocketed in the two capital cities with tight rental markets – being Perth and Sydney – where rental increases comfortably outpaced inflation by a wide margin.[sam id=43 codes=’true’]
According to the HIA, in nominal terms “rents rose by 37% across Australia and by 57% in Sydney” during the period in question.
More worryingly, and more significantly still, in New South Wales waiting lists for public housing jumped alarmingly “from under 110,000 to above 140,000” before the negative gearing laws were hastily reinstated.
Elsewhere, in cities such as Darwin, Hobart and Brisbane, rental markets were less tight and the effects of quarantining of the laws on rents were totally muted, with rents actually declining in real terms.
This is all pretty interesting (to me at any rate) for it raises a number of key questions around what might happen if another attempt was made to quarantine the prevailing tax benefits specifically in relation to residential property.
Recently, data provider SQM Research shows that Australia has several tight rental markets which variously include Darwin, Adelaide and Sydney.
If a “market in equilibrium” is said to have a vacancy rate of around 3%, then this chart suggests that Australia must have some exceptionally tight rental markets (click below chart).
Sydney’s problem child inner west region immediately springs to mind as just one such troublesome example.
But since there are many thousands more landlords today than there were in decades gone by it would certainly make for a fascinating case study.
One can only imagine the hysteria if the many thousand of landlords in Sydney attempted to jack up rents from already high levels.
Of course, I don’t really know if another attempt will be made to alter the negative gearing laws, but presumably the rulings could be amended prospectively so that future investors can only claim on new builds.
We should be wary of trying to rewrite history with regards to the quarantining of negative gearing.
If you read books which touch on the subject written in the first half of the 1990s, the increase in Sydney and Perth rents is only cited as a secondary reason for the reinstatement of the negative gearing rules.
The principal reason cited was the jump in housing waiting lists – in New South Wales the numbers increased “from under 110,000 to above 140,000” during the period for which the rules were changed, an alarming “trend which was immediately reversed” upon their reinstatement.It’s also an obvious over-simplification to state that governments will save billions of dollars by simply scrapping the existing rules.
The most damning evidence of all against the quarantining of negative gearing laws is that the previous attempt was a fiasco which lasted all of two years, which presumably has led the pollies of today to be more inclined towards to the status quo.
This whole negative gearing debate is a classic example of participants starting with their conclusions and finding the supporting evidence to back up their pre-conceived case.
I myself would be more inclined to leaving things as they are but then, like thousands of others investors, I’ve positioned myself rationally to benefit from the existing state of affairs in terms of dividend imputation and franking credits, negative gearing and depreciation laws, and deferred capital gains taxes through employing buy-and-hold strategies.
Kerry Packer once said:
“I am not evading tax in any way, shape or form. Now of course I am minimising my tax and if anybody in this country doesn’t minimise their tax they want their heads read because as a government I can tell you you’re not spending it that well that we should be donating extra.”
In any case, my personality is that I tend to have a cognitive bias towards the status quo on many of today’s political issues outside of animal rights and live exports.