CoreLogic’s Quarterly Review of the residential property market released yesterday brings sobering news for land holders – particularly Australia’s 1.2 million strong Negatively Geared investor class.

Rents are falling.

Source: CoreLogic

CoreLogic’s Tim Lawless observes:

“Rental incomes are falling across the combined capital cities in the midst of the weakest rental market on record. A lack of income growth coupled with a record level of new housing supply is conspiring to supress rents. At the same time, investor activity in the housing market has been at record high levels lately which ultimately leads to more stock available for rent.
“… however, renters have less ability to pay more for rental accommodation. The combination of these factors is likely to supress rents further over the coming year.

Lawless also says:

“The annual fall in rental rates is the largest on record and has slowed significantly compared to a year ago when rents increased by 0.6% over the year.

“Rental rates have fallen over the past 12 months in Brisbane (-1.1%), Adelaide (-0.1%), Perth (-9.8%) and Darwin (-12.1%).

“Melbourne is the only capital city in which rents are at their historic highs, across the remaining cities the change in rents from their peak are recorded at: -1.4% in Sydney, -2.4% in Brisbane, -2.0% in Adelaide, -19.0% in Perth, -0.1% in Hobart, -24.0% in Darwin and -5.1% in Canberra.

“Gross rental yields across the combined capital cities shifted to a new historic low of 3.2% in October 2015, with house yields recorded at 3.1% and unit yields at 4.1%

This is contrary to the stories savers and strivers are fed by the mainstream media and the vendors of overvalued properties. They are told rents are on a ratchet and can only go up. Further, if they pay more for a property, rents are somehow obliged to rise in sync.

For their troubles, they are receiving a basic economic lesson from Mr Market, delivered with the subtlety of a baseball bat to the side of the head: over-paying for property at a market high with negative cashflows and big debt will likely be a very poor investment.

Rents are a function of wages, not the price investors are willing to pay for the asset.

Tenants have more alternatives than landholders. They can flex to a share house, live in a caravan or go back to mum and dad. The landowner must stay and defend their plot.

Falling rents show energetic pulling of the housing supply levers by all levels of government is finally working.

In 1889-91, Australia had a land price boom that ended in widespread unemployment, bank failures and ruined anyone owing money – the little blip there on the left.

In real terms, prices recovered by 1950.

Can residential property investors hold their negatively geared property through two world wars and a global depression so as to break even in 70 years like last time? I suspect not, and think it foolish to try.

The capital accumulated by hard working citizens would be better invested in the business enterprises of Australia, not deflected to ticket-clipping by a very bad tax system designed to confer advantage on the privilege of landholding. We are all harmed by this economic stupidity. We are all diminished.