What happens when rents are as high as buying a home?

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Expert Advice: by Sam Saggers

What happens when rents are as high as buying a home?

I've mentioned before that interest rates can sometimes trigger some sort of growth in rental yields or some sort of growth in property values. For example, in the GFC, when interest rates went up to 8 ½ to 9 percent, our rents went up, especially in larger areas such as Sydney, where we experienced some fantastic growth.

Rents went up because the owners of those properties, in an effort to keep up with the cost of owning their investment, raised their rents.

In most cases - When interest rates go up - rents go up, however when interest rates go down - most of the time the rents stay the same or continue to go up a little bit. Despite the fact that interest rates have come down this year (and remain at a pretty good rate), our rents are still high and may even go up because of other factors in the marketplace such as supply and demand, demographics and other market drivers.

What Parity Means for Property Investors
The reduction in interest rates has resulted in a market condition known as parity. In Sydney and especially in Western Sydney and some other places in Australia, the rental yields are the same or on parity to loan repayments, which means that renters start to crunch numbers and think they are better off buying than renting property in these areas.

This change will result in renters asking themselves, “Why would I rent when it's the same or cheaper to buy?” and you'll start to see a bunch of buyers come back into the market and buy properties.

In August 2012 RP Data put out a Buy vs. Rent Report - (you can download from their website), which clarifies one thing to me – that if RP Data has collated an actual report revealing where you can find up to 1,759 suburbs across Australia that are currently cheaper to buy than rent, then this parity situation is potentially going to start occurring – meaning buyers are heading back into the market and it’s time to start doing some due diligence in key areas before buyers start to drive prices up.

Tim Lawless, RP Data National Research Director stated, "With capital city dwelling values almost 6% lower than when they peaked back in October 2010, discounted variable mortgage rates 100 basis points lower from their 2011 peak and fixed mortgage rates 160 basis points lower, many renters and prospective home buyers are likely to be doing their sums to work out whether it is better for them to pay a mortgage or pay a landlord,"

The report also states that lower interest rates will not only further improve home loan affordability but also potentially attract more buyers into the housing market.

"For those that are renting, any further cuts to mortgage rates will make the cost of a mortgage more affordable and will further improve the relative comparison between the cost of buying and the cost of renting," Lawless explains.

I can foresee that right now if people have got access to some equity, or maybe the first home owner’s grant, the NSW New Home Grant Scheme which offers a $5000 rebate subject to Government approval etc. (meaning on some occasions for house and land packages their is no stamp duty payable on the land and your getting money back in the form of a rebate so you potentially end up paying no stamp duty and THEN you get cheque back from the OSR) which is a great strategy for those with little cash upfront, or even a little loan from mum and dad, you will absolutely see people incentivised to buy.

However remember be careful with your house and land package choices and be very scrupulous when choosing and structuring your house and land deal - you can find out more about that topic in this video - The BEST ways to make money from house and land packages and what to avoid!

The high rental prices and lower interest rates will certainly bring this change about. I believe that this trend will really take off in Sydney and various parts of NSW and Brisbane in the next 12, 18 months, 2 years, and we'll see some growth in our values, which is driven by new buyers coming back into the market.

Markets To Watch

Parts of Sydney right now have moved off the bottom of the market and are trending upwards, which is great. Properties we purchased in Sydney after the GFC, when it fell to the bottom of the market, have started and will continue to see good growth, as we believe Sydney has moved well off the bottom and is trending upwards. This is great news for many of our Positive Real Estate clients who bought into certain areas of Sydney a few years ago – who are finding their capital growth investments are moving from negatively geared to neutral or even positively geared investments – a great position to be in!

Brisbane right now is another great place to find a good bargain. It hasn't done anything for about 6 years – we believe it's pretty well at the bottom and recently South Brisbane for example ranked #1 on prestigious lists like YIP Magazine's annual Top 100 where some of Australia's leading economists and commentators culminated their research to identify the nation’s most promising hotspots for profits in the next few years. Positive Real Estate expect that over the next 12 to 18 months you'll see Brisbane moving away from the bottom of the market and start to move towards a good recovery; so now is a good time to start looking around for some good deals.

This deal in New Farm is a great example of this.

It’s prime because you can buy a stunning brand-new waterfront property just 1.2kms to Brisbane’s CBD - from only $360K. This property is in a walk-to-everywhere location i.e. CBD, James Street, Fortitude valley and CityCat Ferry and has appraised rents of around $480 - $580pw (furnished) making it a massive 6.7% gross yield (furnished). Where else can you buy a waterfront investment just 1.2kms to a cosmopolitan city location for this price? For me this is an example of Brisbane and its prices, which are just not sustainable – particularly with a parity situation occurring.

In summary, timing is everything, and right now with a parity situation occurring in various parts of Australia – namely parts of Sydney, Newcastle and the Hunter is playing out this scenario and Brisbane's absolutely seeing parity; where rents are matching home loan repayments – meaning you will see people wanting to buy – meaning prices will be driven up in certain areas.

If interest rates go down a little bit and lending institutions remain competitive which is happening, these markets and others will be even more exciting as the increased sales drive our property values up. For homeowners also - right now - my suggestion with the state of interest rates is get out there and negotiate a better deal if you’re in a position to do so. Take for instance a couple of our clients - who recently shared their good news on our Positive Real Estate Facebook Page.

 

Comments from some clients of Tabitha Bright Head Coach of VIC just posted: -
            “Loan 1, interest rate dropped from 6.96 to 6.61, just by asking,
             not a refinance, savings $1400 pa, thanks Tab.”

Another client stated,
              “Proud of myself, rang my house lenders to ask for lower interest rates,
              they will contact me in next couple of days, and lowered interest rate
             on credit card, 20 to 13%, just have to ask the question”

Tabitha Bright herself stated, “Don't forget to negotiate with your own banks for interest rate discount. Just saved myself $400 per month by asking :) “

Even if interest rates go up a little bit I'm not concerned as an investor because I make sure to invest in places, which have good rental returns and accommodation drivers.

My tip - keep a sharp eye out when the market heats up and research markets where rents are on parity to owning, as this type of research can make the difference between a smart and a poor investment decision. Let us show you what to look out for at our Property Investor Nights. For example, Melbourne was a hot market about 18 months; 2 years ago and people were buying at the top of the market. Now they're disappointed about Melbourne's growth in the last 12 to 18 months. You've got to be sure of your timing and do immense research before jumping into the market.

Sam Saggers is CEO of Positive Real Estate and Head of the buyers agency which annually negotiates $250 million-plus in property. Sam's advice is sought-after by thousands of investors including many on BRW’s Rich 200 list. Additionally Sam is a published author and has completed over 2000 property deals in the past 15 years plus helped mentor over 2200 Australian investors to real estate success!
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Disclaimer: while due care is taken, the viewpoints expressed by contributors do not necessarily reflect the opinions of Your Investment Property.

Top Suburbs : balga , lockridge , freshwater , mt lawley , woolloongabba

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Comments
  • Carol says on 27/09/2012 12:47:58 AM

    We bought a nice little property in Sydney when it hit bottom...so looking forward to the market pushing its value upwards!

  • Positive Real Estate says on 31/10/2013 12:49:26 PM

    Sam Saggers will be happy to answer your questions through this forum thread!

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