Historical Rental Increase

Hi guys,

Would anyone have information on average rental growth in capital cities over the past 20-30 years?

I can only assume they follow CPI and hence they would have increased on average by around 2.5-3% p.a.

Thanks.

 

Doubt it will be growing with inflation.

You posted stats showing average of 8% compounded growth over the past 20 years for all 4 major CBDs
If we assume 5% yield at the start and 2.5% inflation, rent will end up at 1.75% yield. Nobody would be purchasing investment properties and nobody that wants to rent will have anywhere to live, so for that reason I can not understand how it would be economically possible for rent to increase at the rate of inflation.

Would be good to see some stats though.

 

In Canberra rents have gone no where compared to its peak around 2010 albeit gone backwards a little.

 

Thanks guys. The attached document is the best I could fine. It only contains the graph, basically showing rental inflation moved between 1-9% from 1993-2013.

 

I tend to find they increase proportionally with the international big mac index.

If it was inflation driven there'd be some crappy yields around.

 

Yeah that is the only good document I found a month or so ago when I was looking for the same thing.

Here is what I said about it when talking to someone else about rental yield and how it changes over time and after finding only that document.

3rd graph, lower line - seems it is entirely a function of the interest rates. Higher rates means rent gets pushed up and vice versa, which makes sense.

Which also means all those people saying "you should do what I did and get a property with a 8% yield" have no idea that the only reason they got an 8% yield was because the got lucky and the time of purchase dictated that.

The 5th graph shows that rent is tied to income, which I suspect would be tied to inflation (?)

The 6th graph shows a long term slight decline vs property price, which makes sense since property growth is a long term slight incline above inflation.


I guess if I go with the idea of it tied to rates and inflation, then if rates and inflation looks to stay low for the next few years, then that would indicate the next 5 years it will not change much, but beyond that no one knows what will happen.

Ehh .. I am none-the-wiser on answering the question​

I put up a thread about this and a few people gave some remarks but nothing really concrete came back.

The question was that for a property that grows an average of say 7% -

1. If the rent increases along with the growth of the property, then it is growing faster than average wage increases, so that seems unsustainable since then everyone would be paying a higher percent of their salary over time and that would not be possible. They still gotta have money for food and clothes.

2. If rent increases along with inflation, then the yield decreases indefinite over time, at which time no one would want to invest and then no one that wanted to rent would have a place to stay.

So ... what can you expect to happen to your rent over time?



From what I can see, I would say consider there to be kind of a "law of yield" which is that it can not decrease over time proportionately to property value because there will be nobody to own properties to rent out but people still need to have rental properties available.
So if this a truth - yield must (in the long term) always come back to a similar amount (which turns out to be close to whatever the current interest rates are, for obvious reasons).

Yes more expensive properties have a lower yield. But it is not so much lower that it disappears into nothing. Yield is much more closely aligned to interest rates.


So that leaves the question - how can rent increase above inflation? As time goes on, people will not be able to afford it.
I have not found any information on this, but I have a theory, which is...

Say you draw a line around a CBD that house say 60% of the population around that CBD and say that price is 500k. Call this line1.
Over time the population expands, and then after say 15 years, you draw another line around the CBD that houses 60% of the new population. Call this line2.
I would expect the price of a property on line 2 to be roughly equal in purchasing power / rental cost for the average wage that line 1 was in purchasing power 15 years earlier. So in dollar terms it would go up but only because inflation/wages have gone up, but in real terms would be the same as line 1 was 15 years earlier.
What happens to your house that you bought on line1 15 year ago? It now has a higher demand. Maybe only 50% of the population can afford to live that close to the CBD now where as 15 years ago 60% of people could afford it. It has increased in demand. This means not only has the value risen beyond inflation, but the higher demand means a higher earning group of people would be wanting to live there due to the higher demand.

If this theory is correct, then it would explain how rent can increase faster than inflation and wage growth. People proportionally on the same wage would be forced to move further out as population grows, and a particular property, although did not move, moves closer to the CBD in terms of the total space used to house the population.


Just one caveat to all of this .. it looks like the higher the cost of a property the lower the yield (eg a 1mil property will often be quoted at 3%, but 450k properties are closer to 5% yield), so maybe it does decrease a little, but definitely will be much closer to rate of growth than the rate of inflation. Also this might be wrong since a lot of 500k properties in Melbourne now are at 3% yield also, so maybe this last paragraph is just wrong - not sure.


Would love to get some data that is more concrete than just my own thoughts though, but I searched around and could not find anything. Maybe we will be lucky and someone who actually knows will clue us in.

 

From my calcs in Sydney, on average its around 4-5%. However, the last few years have been pretty scant...and there's a drought ahead whilst excess supply gets soaked up.

 

Average rental price increase for Australia over 30 years was 3.7pc.

However, it was much higher 1985-1988 after negative gearing was quarantined, especially in Sydney and Perth.

The annual 2-3pc inflation target wasn't introduced in Australia until 1993.

Since that time the average annual increase has been lower at 3.1pc.

There was another spike after 2007 when investors were spooked out of the market by the financial crisis and dwelling starts dropped, but more recently rental increases have been historically very low following a surge in investors and record dwelling construction.



Trends are different at the capital city level. If you go back over 45 years rental increase has been strongest in Sydney. Perth and Darwin rents have been falling recently, and Brisbane has been flat due to apartment oversupply.



Notably, Sydney suffered from a massive dwelling undersupply from 2008, and rental price inflation has outpaced the CPI basked in Sydney since that time.



Hope that helps a bit, but you really need to drill in further to get the useful stuff.

Cheers,

PW

 

Nothing like real analysis to debunk the armchair lazy analyst in all of us!

PW, based upon your research thus far and the recent APRA clampdowns, do you think Sydney is on the cusp of a rental boom of sorts (within the next 2 years), or will it be more of the same as far as the vacancy rate goes in your opinion?

 

Ah, hard to say - some of the popular suburbs yes, arguably seems to be starting to happen already - but as per one of the other threads there seems to be a lot of rental stock in Oran Park etc.

That's where you need to be on the ground - I literally never go down there - macro stats are only useful up to a point.

 

Great analysis, thanks @petewargent !

It would be great to see your contributions on the LIC thread. I understand your LIC holdings are somewhat similar to Peter Thornill's, but it would be interesting to hear more about how and when you started being more serious about this vehicle.

 

If you haven't already definitely read Peter's book Motivated Money, it's a ripper.