Stag-Rental – Property’s Answer to Stagflation

by Karl Fitzgerald on July 31, 2008

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Photo: Colin Cheesman

Photo: Colin Cheesman

Residential rent crisis set to worsen

RENTS are expected to jump another 10% this year after building approvals fell to their lowest since the end of 2006.

Home-building approvals have dropped nearly 8% in a year, after falling another 0.7% in June, in seasonally adjusted terms. Apartment approvals have dropped 22% in a year, down 1.4% in June after a 19.5% slump in May.

Rents to increase a further 10% this year on top of the 12.7% increase over the last 12 months? Have our wages increased by 22%? No. They never will. Not from the waged sector. But those earning speculative income regularly have such growth.

But why the lack of new homes? Most likely is that land prices have reached such a zenith that it is no longer economical for builders to undertake risky ventures. The supply of cheap credit over the last decade has been filliped by tax carrots magnetising entrepreneurs into the land banking market. Thus the bubble in land prices.

Stag-Rental?

Now the fall in land prices in the US infers that banks can no longer securitise against land prices with certainty. Thus the credit squeeze and from that the lack of building.

Wary builders understand that when all these factors are added together and divided by the comparatively low earning capacity of workers, the likelihood of defaults outweighs the opportunity for profit.

This situation is in effect the housing market’s equivalent to stagflation (low growth, high inflation). What we are seeing here is low building growth and high rents. Dare it be called Stag-Rental? In stagflation no one wins. In Stag-Rental, landlords win hands down/ tools down.

Sure the term sounds like a male brothel, so taking the analogy a step further, who can argue that we aren’t the players on the street and the landlords are the pimps cruising past in their new Bentleys? Monopoly power delivers certain privileges.

1 Comment

  1. dan31-07-2008

    I’m not sure this can happen for long. Landlords are as organised a rabble as tenants (ie. they are not organised). Who wants to hold onto an empty house earning no rent and losing capital? Tenants will outbid each other IF necessary, but landlords may well be forced to undercut each other.

    As the bubble deflates, speculative demand for property (vacant or not) will dissipate. Rents may well fall as well as prices.

    Here are the overbuilding numbers for many areas of Aus between the last two censuses:
    http://bubblepedia.net.au/tiki-index.php?page=OverbuildingByLocation
    and here’s what has happened to the proportion of houses that are empty in Aus over time: http://bubblepedia.net.au/tiki-index.php?page=EmptyHousesOverTime
    Maybe this second one implies ever rising numbers of empties as a natural law, but maybe not.

    These numbers imply to me that there will be downward pressure on rents as well as prices no matter what the construction industry does in the short term.

    all the best

    dan

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