RENTS, YIELDS & PRICES

A financial planner's forecast.

Opinion by PETER THORNHILL

Surprise, surprise: Rental yields on investment property have been falling. What was alarming (and not surprising) was the commentary associated with this phenomenon.

In one newspaper, the Reserve Bank's commentary was seen as a warning that rents are too low and this is fuelling the 'rental crisis'.

The cause of falling yields is obvious: since the mid-90s, house prices have increased by 175 per cent whilst rents have only increased by 35 per cent. Thus the yield on rental properties has fallen sharply. With this arithmetic I have no argument.

These sharp price rises, combined with the efforts of property spruikers, have been the bait sucking more amateurs into property speculation, not the rental income.

What concerns me is that much commentary suggests that the 'solution' appears to be that rents must rise to stabilise this supply/demand situation. I think the solution is more mundane.

First, much of the rental stock is not offered by investors but by speculators for whom yield is not an issue. In fact, the lower the income the better as the more it enhances the ludicrous tax benefits associated with negatively geared property.

The primary reason for negative gearing was the capital gain which would compensate the 'investor' for the income lost over the period of ownership.

Secondly, on the supply side, what has happened to the glut of inner city apartments?

I offer the following forecasts.

Rents will not rise as three interest rate increases, rising petrol prices and mindless consumption have squeezed the incomes of most 'wannabees'. There will be more mortgagee sales as speculators bail out (involuntarily), property prices will fall (shock horror) and yields will rise: Voila!

The taxation distortions, allied to the irrational love affair with property in this country, have created a false rental market exacerbated by the lack of long term residential leaseholds which, in other countries, provide security of tenure.

The government and the Reserve Bank should be looking at providing incentives for industry to enter this arena to provide stable, well serviced, long term rental property rather than the unattractive, tax driven speculators that dominate at present.

And by the way, don't grace these amateurs with the term 'landlord' as I do not believe most have any idea what the responsibilities of being a landlord really are.

Peter Thornhill
MOTIVATED MONEY PTY LTD