15 January 2013
MELBOURNE – The REIV yesterday forecast stable or declining nominal rents if current trends continue. This means rents are falling in real (after inflation) terms.
“Shrinking residential rents are a profound set-back for negatively geared property investors,” Prosper Australia Campaign Manager David Collyer said today. “Their strategy is to sacrifice current income for future gains in both rising rents and higher property prices. Prices have not moved for two and a half years, so both measures are now in reverse in Melbourne.
In the 2010 tax year, more than 1.7 million Australian taxpayers claimed $4.8 billion in rental losses.
“They shouldered big risks, paid out cold hard cash to balance the books, maintained their properties and have very little to show for all this sacrifice.
“This is also bad news for anyone who used a large mortgage to buy a house in recent years. Imputed rents – the enduring base of the value of their property – are set in the same rental market. This widens the gap between rents and mortgage repayments and undermines the interest rate cuts last year.
“These lower rents are being welcomed by all excluded from home ownership by high prices. They will learn to demand rent reductions at review – an unheard of development for many investors who have never experienced retreating rents.
“These rent falls had not been foreseen by Prosper’s research team of economists, land valuers and econometricians. We expected rents to closely track wage growth. This further widens the yawning gap between rents and current prices.
“Nominally stable or falling real rents are caused by Melbourne’s housing over-supply. Compounding this, young adults show little interest in buying. The ABS’ owner-occupier finance commitments have now been very weak for 3 years.
Real Estate Institute of Victoria CEO Enzo Raimondo’s remarks were reported on the Property Observer website.
“Victoria is already in a technical recession (two negative quarters of Gross State Product). The state relies heavily on conveyancing Stamp Duty revenues, which have fallen sharply with transaction volumes and threaten prudent government financing.
“We repeat our call for governments to abandon Stamp Duty as a revenue source and instead remove the principal place of residence exemption from State Land Tax,” Collyer concluded.
Media comment: David Collyer 0413 248 193
About Prosper: Prosper Australia is a tax reform lobby group and think tank that is now 120 years old. It seeks to move the base of government revenues from taxing individuals and enterprise and capture the economic rents of the natural endowment, notably through Land Value Tax and Mining Tax.
“We expected rents to closely track wage growth. This further widens the yawning gap between rents and current prices.
…
“Nominally stable or falling real rents are caused by Melbourne’s housing over-supply. Compounding this, young adults show little interest in buying. The ABS’ owner-occupier finance commitments have now been very weak for 3 years.”
What wage growth? In addition to oversupply and a ‘buyer’s strike’ in effect, perhaps the real decline in national incomes as shown by the ABS (see below) is being strongly felt in Victoria?
Exhibit 1: Real Net National Disposable Income has flatlined nationally
https://lh3.ggpht.com/-oUfSiB0dYOM/UMEwSFJmqqI/AAAAAAAAGP4/7WbIP6b1joI/s640/!headline-dollar-st-7-National-Accounts-Real-Net-National-Disposable-Income-line-from2007.png
Exhibit 2: Real GDI and GNI is falling nationally
https://lh3.ggpht.com/-8DfNCgi2nNE/UL6bxZC7aOI/AAAAAAAAGLk/-eEWIQ0WsIs/s640/!headline-dollar-!g-!summary-SeasAdj-ponp.png
https://lh3.ggpht.com/-xQYkWOigtPU/UL6bySz4Z6I/AAAAAAAAGLs/iNeuIBIMk6M/s640/!headline-dollar-!g-!summary-SeasAdj-tty.png
If economic theory holds true to form and the rental market can only bear what is happening in ‘Wage World’, then perhaps this is another reason contributing to the down turn. If so, this may portend falls in nominal rents for other capital that do not already have tight rental markets.
It is also notable that the number of companies entering administration per month is also on a long up term trend in Victoria. Doesn’t look like things are going to turn around any time soon, particularly with state government revenues getting slammed in response to the imploding property bubble.
https://lh3.ggpht.com/-TpFJzxmo7DA/UAFTcvQP9YI/AAAAAAAAB1A/6An8IP7cYv4/s640/ASIC-SeasTrnd-2-Companies-Entering-External-Administration-per-Month-for-Vic-from1950.png
As you know David, rents have deflated significantly in previous depressions/severe recessions when measured against retail indices, so I’m not sure why this time would be a special case, particularly if they are already in technical recession.
Do you not recommend purchasing investment property in the current market