Rent - why we all need to start raising it.

Every day at the moment there is bad news on the property investment lending front. Seems like everyone is trying to squeeze us humble property investors. Government and the RBA blaming us for house prices in Sydney, APRA is targeting us as a lending risk, putting pressure on the banks who are responding by making it harder and harder to access finance. If they will give us a loan it is at inflated rates, skimming another billion in profits off the top under the guise of being responsible lenders. Now IO is on the chopping block too, a product with very specific tax benefits to investors.

Sadly there are limited levers we can pull in retaliation. You can't change the rules of the game (don't fight the Fed as they say), you can take a more active approach in the form of development or more innovative products, thought not everyone wants to go down this path. For the humble buy and hold investor there is little joy at the moment in the direction things are heading.

This has got me thinking that the eventual flow on effect has to be a tightening rental market. The one way to claw back some $ from these impacts is to pass these increased costs onto the end user (Tennant's). Like any business, the banks have no problems passing on increased costs direct to their customers. I think it is time we do the same. Sure it wont work in high vacancy areas, but In five years time I would like to see house price crisis headlines changes to unaffordable rental crisis, and see regulatory and bank back flipping to boost investment lending to address a national rental shortage. So go on, do your bit, next time you have a lease come up for renewal whack another few % on the top, citing increased cost of funding!

 

Except you can't cite increased cost of funding as a valid reason to increase rent.

Rental value itself is a supply and demand item just like any other market item.

Rent increases are justified by comparative market analysis and driven by demand, size of property, uniqueness, features and the condition of the property.

 

Took the words out of my mouth Simon

 

Blueskies,come to Perth and try to increase the rent here,houses on higher rent are not moving at all
good luck with that

 

Sorry this is a load of puffery. How does your interest rate change the value of an abode for somebody to rent. And what changes the dynamic to support higher rents? Are you saying rent could be presently higher but out of kindness landlords are kind to tenants because they've had dirt cheap money for years?

 

Like the others have said, it's all about supply & demand. I'm all for increasing rents whenever I can.....but you can't always do that. You can go for years with stagnant (sometimes even negative growth), and then WHAMMO! Rents skyrocket & you can increase each 6 months.

 

I wouldn't go for this approach (even if you could). Rent is not really a sound means of 'retaliation'.

The rental market in many areas is doing the opposite of tightening as it responds to supply and demand i.e. as oversupply rises - certainly in the apartment and townhouse sectors, because there are too many landlords competing for a dwindling supply of tenants in the face of historically high supply, record housing starts, falling population growth, stalling incomes, rising unemployment and - perhaps most significantly - tightening credit rising mortgage interest conditions. All of these factors could potentially push less experienced or highly leveraged investors out, which would worsen oversupply.

Raising rents is not going to prevent bodies like APRA from further tightening, and the single biggest risk to the sound, sensible investor right now is not regulators anyway - it is the inexperienced investor. These are ones who get in over their heads, have silly expectations, panic and potentially crash markets.

"Retaliate" if you must by being a great landlord so you keep your tenants paying even if the market temporarily corrects (as bubbles burst, rents usually begin to rise well before house prices, often very rapidly as banks become reluctant to lend for a while).

"Retaliate" by being a good investor, choosing quality family homes in occupier-dominated middle-income tightly-held suburbs, and shunning crappy assets like CBD one-bedders that are a dime a dozen right now - this might discourage developers for making yet more of the damn things.

"Retaliate" by biding your time, by making a correction plan ahead of time and deciding what to hold and what to fold, guided by market fundamentals and the wealth of experience on this forum.

"Retaliate" by not being a panicker if negative sentiment builds. If investors did or could suddenly raise rents en masse, it wouldn't help at this point anyway, because it would likely lead to a drastic fall in consumer confidence in a low wage growth environment, which could cause a drop in spending, layoffs, and eventually spark a market correction of its own from a different angle.

As you say, you can't really change the rules of the game. You can continue to benefit from sound investing long into the future even if rates rise, tightening occurs and even if the worst-case scenario of any significant correction happens - you might need to think about a strategy shift, or you might be perfectly placed to weather any storm now - but never forget, after a correction (assuming one will occur at some stage in the next few years, we're really overdue) comes the recovery, and with recovery comes oodles of opportunity.

 

I get the whole supply and demand thing, my post was part tongue in cheek, part venting my frustration at the increasing barriers to growing my portfolio.

Having said that, the regulatory and lending environment will starting to (slowly) swing the supply pendulum. More and more barriers are coming in property investment finance which will start to reduce the number of investors in the market. The demand side won't change, if anything it will grow. If there is a sustained period of time in which it is harder and harder to finance investment properties, this has to reduce the pool of available properties and start to put upward pressure on rents...

 

Melbourne too. I bought an IP there in 2007. Rent was $270 pw. Market rent in 2017 is $300 pw, a $30 pw increase in 10 years. This equates to an approximately 11% increase in 10 years. Pretty poor. But try raising rents in the area and your property will sit. People in the area have tried it and then had to drop back to market.

 

Upward pressure on rents is part of the cycle so it will happen eventually.

 

Yes but what if all owners conspired to jack up rates. In theory this would mean that all of the available supply would be more expensive.

 

Yeah I see what you mean - it is incredibly frustrating that decent investors have been caught up with the tide (and the blame) of silly investors, or bandwagon jumpers who've bought in the last couple of years without any idea of what they're doing. A bit of regulation wouldn't have gone astray years ago, and we could have prevented growth getting too out of hand. Much like what happened in Ireland, the government is now scrambling around trying to put in knee jerk policy reactions to pretend it's "doing something about affordability" which will probably end up punishing the good investors who didn't cause this problem. Investors will always be a vital part of a healthy market.

Even if we see a correction, I think Australia will swing into a very fast recovery. We have a strong economy here. If we lose some of the shoddier investors in some off-the-plans it will probably be a blessing in disguise. That sort of supply can sort of write itself off, so to speak - drop in value then become unpopular as people see it for what it is. Basically I think we'll end up with a lot of small one bedders losing and never regaining value, but other areas of the market (even if they do correct) rebounding very quickly and maintaining good future growth.

 

Let us know how you go orchestrating this.

 

Great post and fully agree.

 

Should start a landlord union or representative body.

 

Good luck in Perth, rents are going DOWN baby.....

As OP stated supply vs demand, if you want your property vacant raise the rents, hell even try for an extra $100 per week, let me know how long it will stay vacant.

Sorry, to be silly, but it is very naïve to think we personally can dictate the prices.

MTR

 

Supply and Demand - basic economics 101. Instead of increasing rents, what'll get you high rental yields is 'Short-term rentals' my friend.

At the same time you can also influence rents for long term rentals.

1. Putting your property up for short-term rental will reduce the number of properties in long-term rentals (supply reduction).
2. Supply reduced for long-term rentals = rents go up without your direct influence.

 

Or present a rental increase as a preferred option to end a long term tenancy simply because short term letting is more lucrative. I wouldn't bother chasing $120/day if my long term rent moved up from say $90/day.

 

Cartel.