Rate Rise = Rent Rise?

Discussion in 'Property Management' started by Till Kingdom Come, 29th Jul, 2015.

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  1. Bargain Hunter

    Bargain Hunter Well-Known Member

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    When the rates were falling there was some bad publicity about landlords not passing on the savings and lowering their rents. Many investors felt the same way towards the banks not passing on the full reduction from the RBA.

    This is a very simplistic view and implies that all investors are subject to the exact same set of circumstances.

    If we follow this same flawed logic than an investor who owns their IP outright should be offering their accommodation for free.

    Apart from stimulating investment which may increase supply and subsequently reduce demand for certain types of accommodation and/or geographical areas, the link between interest rates and rents is purely coincidental.
     
    Last edited: 29th Jul, 2015
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  2. wylie

    wylie Moderator Staff Member

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    I believe this is a big factor. The house we were renting for $615 per week was (I now believe) higher than market rent, but I'd not looked at rents in this area for about two years.

    When we rented it for $590 it was not too high and rather than move for the sake of a $15 increase early this year, the family stayed on. They knew we would allow them to break their lease without penalty and probably preferred to stay at the higher rent than move twice.

    So, two years ago we had no trouble getting $590 per week. Just now, the house is valued at $700K and repayments on that (interest only) are about $600 per week. We have now accepted a tenant at $500 per week after dropping from $580 to $560 and then just bit the bullet to get someone in.

    It makes financial sense to many that when the cost to rent is not much different to the cost of a mortgage, they jump into a mortgage. I believe this is the case right now.
     
  3. Tim86

    Tim86 Well-Known Member

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    I won't be raising my rents any time soon. Market doesn't support it. Too many places to compete with.
     
  4. Simon Hampel

    Simon Hampel Founder Staff Member

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    Actually, it's the opposite.

    As interest rates increase, the number of people buying property for investment purposes is expected to decrease.

    Assuming the population does not also decrease, then demand for rental properties will continue to increase.

    If supply decreases and demand increases, then rents will rise as people are forced to compete with each other.

    Conversely, during a property boom, you would actually expect rents to ease because of the same factors operating in reverse.

    As property booms, you get the double-whammy of more people buying investment properties and thus increasing the supply, in addition to fewer people demanding rental accommodation because they are buying PPORs instead.

    Now you might not notice this in the short term if population growth is also strong, because the increased supply is soaked up by latent demand. It depends on how long the boom lasts and the other underlying factors influencing the economy.

    This happened back in the early noughties (can't remember which year it was exactly), when vacancy rates for apartments in our area were so high that landlords were offering 6 weeks of free rent when tenants signed up and some were even prepared to throw in a free holiday!

    That being said, I've also seen rental markets so tight that property managers will only take the first five applications for a property - people come to an open inspection with their application pre-completed, and I've even seen some people ambush the property manager as they get out of their car so that they can hand their application to them before they've even seen the property (this was a situation where the PM wouldn't take applications until prospective tenants had viewed the property, so they had to be at the open, not at the office).
     
  5. Pistonbroke

    Pistonbroke Well-Known Member

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    Ponder this: a handful of investors each own units in a block in NSW. All units are identical and have a val. of $500k and each is getting $500/wk & outgoings of $80/wk

    Each party used the same bank at 6% IO fixed for another 3 years. They live in a one bank country with no choice of lender.

    Unemployment @ 6%
    House ownership @ 75%
    Wind direction NNE
    Sunrise 06:15
    1. Has 105% mortgage
    2. Has 80% mortgage
    3. Has 50% outstanding
    4. Owned outright
    5. Owned outright by superfund in pension mode
    6. Owned by a trust with 80% gearing (land tax applies)
    7. Owned by a pensioner couple with 20% reverse mortgage
    Each investor has their own particular circumstances - why should a rate rise be applied across the board when it is not interest rates which drives rent but demand.
     
    Last edited: 29th Jul, 2015
  6. Francesco

    Francesco Well-Known Member

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    Pondering - what is your point?

    The interest rate rise is managed by APRA via banks to target investors because of apparent price bubble in Sydney/Melbourne and sidelining of whinging FHB. Other reasons cited being financial stability and implicitly making room for RBA to reduce rate for the other sectors of the economy. The target mooted is to cut down lending to investors and limit its growth to less than 10%.

    Consideration for tenants and rental rates take a back seat in the circumstances. There is a plus in there as rental rates will have some room to go up.
     
  7. 2FAST4U

    2FAST4U Well-Known Member

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    Going by that logic Rate drop= Rent drop, which certainly isn't the case. Rents are more reliant upon demand and vacancy rates than interest rates.
     
  8. Francesco

    Francesco Well-Known Member

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    I suppose you have issue with my 'logic' that there is 'some room' for rental rates to go up when investors for rental properties are discouraged? I am not disagreeing with you about rents having to do with demand and vacancy rates. But, widening the consideration for new immigration numbers demand for housing and if investors are discouraged to provide new rental properties, then in the circumstances it should be reasonable to be cautiously optimistic for rental rates to go up.
     
  9. 2FAST4U

    2FAST4U Well-Known Member

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    Depends on the market I suppose. In my latest purchase this year I picked up the property for 230k and I'm self managing it for $290 a week so I'm not in the position to ask for a rent rise.
     
  10. Pistonbroke

    Pistonbroke Well-Known Member

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    Tenants don't care who owns the property, management, interest rates etc demand drives rent. There is no wriggle room.

    Investors will invest until it becomes prohibitive to do so. APRA has only popped up its head recently, the reserve bank's interest rate tool is blunt & indiscriminate