Increase in median price drives rents up or vise versa?

Discussion in 'Property Market Economics' started by Terry2020, 1st Mar, 2020.

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  1. Terry2020

    Terry2020 Well-Known Member

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    I am keen to hear opinions on this. Is there a causal link between median price and median rent?

    Statement 1: Median prices increase due to property market demand outstripping supply. As more investors purchase property in the area (chasing capital growth), they are forced to set higher rents to make their investment justifiable.

    Statement 2: Median rent increases due to rental market demand outstripping supply. This draws more investors into the area chasing higher rental yields which pushes the median price up.

    Is statement 1 or 2 correct? Are they both correct? Why? Why not?
     
  2. Trainee

    Trainee Well-Known Member

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    Investors can do what now?
     
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  3. Terry2020

    Terry2020 Well-Known Member

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    I'll interpret that as a 'No' to Statement 1? What about Statement 2?
     
  4. Terry2020

    Terry2020 Well-Known Member

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    P.s. Trainee- "When you ignore owner occupiers who are the majority of the market, especially in a booming one, your statement is meaningless." What do you mean by this? Owner occupiers are only in the market when they decide to sell. At all other times they play no role?
     
  5. nth brisbanite

    nth brisbanite Well-Known Member

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    'they are forced to set higher rents to make their investment justifiable'. Investors can't 'set' higher rents; it's the market that sets rents. You can set rent as high as you like but you won't get them if they don't meet the market.
     
  6. Terry2020

    Terry2020 Well-Known Member

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    Thanks, that's a second 'No' to Statement 1. What are your thoughts about Statement 2?
     
  7. Andrewjh

    Andrewjh Well-Known Member

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    Answer is neither

    When demand to live in an area grows relative to supply, this applies to both rental and sale markets (unless a specific market reason makes rental and sale markets different). Prices rise in both markets.
     
  8. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    Both are mostly nonsense imo. Once you start applying hard-and-fast rules to real estate analysis, you'll be led far astray.
     
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  9. Terry2020

    Terry2020 Well-Known Member

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    Great answer! Looking at the data, median price and median rent go hand in hand. I am trying to establish whether one leads the other.
    Can you give me an example/scenario where rental and sales markets are different?
     
  10. Terry2020

    Terry2020 Well-Known Member

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    Agree that it's a complex interaction of multiple factors at play, one feeding the other. If both statements are nonsense, then what's your view on median price and median rent? Is there a causal link or are they independent, but both driven by the same market forces (as per Andrew's answer)?
     
  11. Scott No Mates

    Scott No Mates Well-Known Member

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    @17373 - neither statement is correct nor totally incorrect.

    Consider the inner-city suburbs of Sydney - very high capital values but yields are absolute crap and staying that way. Supply is not increasing (for freestanding houses) - they aren't reclaiming the Parramatta River to make more land available yet house prices continue to increase but rents are relatively stable or growing at a rate well below capital growth, effectively yields are going backwards. Net yields are worse again when you take into consideration land tax which increases at the rate the capital increases/decreases yet rent does not move in the same direction. Other outgoings such as rates, being pegged to inflation, water rates tied to IPART approvals, Insurances subject to wind direction and natural disasters all impact negatively on net rentals which are continuously being eroded.

    On the plus side we have experienced a decrease in interest rates in the current approx 8-10 year post-GFC and the danger signs are there for investors who haven't paid down capital will be severely impacted once interest rates return to long term averages.
     
  12. Terry2020

    Terry2020 Well-Known Member

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    To summarise, an example of a market where median price grows but rent remains relatively steady is:
    • Limited supply (i.e. the area is fully built up)
    • Owner-occupier dominated market i.e. houses in Inner Sydney
    • Yields are low, so no interest from investors
    • Reduced interest from tenants, so rent remains steady...
    I got to point 4 and this is where the reasoning starts to break apart. Aren't tenants attracted to owner-occupier dominated markets? So these markets should naturally attract tenants and then push the rents up along with the median price? Or is there a rental ceiling that makes buying a property to live in more attractive than renting? I.e. once an area reaches a certain threshold in terms of owner occupiers, the rental market there seizes to exist? If it seizes to exist then where are the rentals coming from? I haven't yet seen a market (with a few exceptions in regional areas) where there are property sales, but no rentals.
     
    Last edited: 2nd Mar, 2020
  13. Scott No Mates

    Scott No Mates Well-Known Member

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    No, quite the opposite. Investors are often attracted to areas with low vacancies and high owner occupier status, renters couldn't care to research. Why would they want to mix it with owners?

    There are two diverse issues to address:

    1. Affordability/portability, that is can I live in suburb X which is across the main road for the same/slightly less amenity without the indignity of moving out of an area?
    2. Positive gearing/cashflow break-even point - if it is cheaper to buy than rent it would be an inducement to purchase however this is often not the case but can be in the case of unusually high demand eg. infrastructure projects/mines/government expenditure etc dragging demand for accommodation etc with it. However long term goals (ie sustained capital growth) aren't acheivable as you get boom/bust cycles. There is also the desireability of living in these areas which makes short term decisions like FIFO/rentals etc more likely and is more destructive on the long-term residents.
     
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  14. sumterrence

    sumterrence Well-Known Member

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    With my short years of property investing circa 10 yrs, there are no correlations between the two. You are better off to use your energy to analysis more micro stuffs such as council future planning and migration numbers etc. The charts and line graph you get from property reports mean nothing besides to tell a story of the past.
     
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  15. Marg4000

    Marg4000 Well-Known Member

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    The only factor impacting on rental return is supply and demand.

    Tenants don’t give a toss how much you paid for a place, they are only interested in the rent being asked, and will compare it to other available properties, not necessarily in the same area.

    A high rental return can blind an investor to other factors. Mining towns are a classic example.
     
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  16. Terry2020

    Terry2020 Well-Known Member

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    Thanks for the detailed response, Scott. On this point, aren't the 2 one and the same? Investors are attracted to the area because they know that there is demand from the tenants due to low vacancy rate? I.e. supply is low, demand is high. Tenant is the end consumer and not the investor in a rental market.

    The reason why tenant would want to mix in with owner-occupier is the intrinsic attractiveness of the area. I.e. infrastructure, amenities, social status play the same role in both rental and sales markets. In the scenario I am exploring, owner-occupiers dominate the market and have bought up the all the stock so there are limited opportunities for entry for investors and therefore tenants/renters.
     
    Last edited: 2nd Mar, 2020
  17. Sackie

    Sackie Well-known cafe bum of the East Premium Member

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    Investors are attracted to areas for all sorts of reasons. Rental yield is one, but certainly not the only one, and in many cases, not the most important factor. I've never bought because I was attracted to the yeilds.

    If you try to conclude a hard-and-fast rule or x + y = z to the whole property game, you will never have the true picture of how it operates.
     
  18. Terry2020

    Terry2020 Well-Known Member

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    The charts show that median price and rent evolve together, except in some market conditions that I am attempting to establish in this discussion.
     
  19. Terry2020

    Terry2020 Well-Known Member

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    Certainly not looking for a complex equation here that would describe how property market operates. Just need to prove or disprove causal link between median price and rent.
    • Fact: median price and median rent are correlated.
    • Question: Does one influence the other?
      • If yes, change in which metric causes the other one to change and why?
      • If, no why do you think there is no causality between the 2?
     
  20. Trainee

    Trainee Well-Known Member

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    Generally decreasing yields in the last 10 years in sydney would suggest your fact is wrong.
     

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