Economists have long argued that ‘perfect information’ is a prerequisite for an efficient market, but there seems to be precious little of that at present in the rental market.
Landlords and renters have been told there is a housing shortage one minute and a surplus of dwellings the next. Not very helpful if you’re trying to work out if rents should rise or fall.
Rents respond to supply-demand dynamics much more closely than house prices, which are bounced around by things such as interest rates and lending regulations.
But what are those dynamics?
New research from the Australian National University provides part of the answer. After years of ‘housing shortage’, researchers now argue Australia has too many dwellings.
ANU researchers Ben Phillips and Cukkoo Joseph have published a study that compares data on the composition of Australian households with construction data on the number and type of dwellings built over the past 16 years.
They conclude: “Between 2001 and 2017, we estimate the Australian housing market experienced an oversupply of 164,000 dwellings. However, there are significant regional differences with some regions experiencing significant undersupply while others have significant housing surpluses.
“Nationally, we do find periods of significant undersupply, particularly between 2007 and 2014 but for other periods beyond 2001 we find oversupply more than compensated.”
Mr Phillips is at pains to point out that having more dwellings doesn’t mean they’re available for sale or rent.
Many have been kept empty by overseas investors using them as store of value rather than as cash-flow generators – a risky strategy, as already the Victorian government plans to impose a ‘vacant property tax’ to bring those dwellings onto the market.
The agent effect
The difficulty for landlords and renters is they tend to rely on their real estate agent to tell them whether an area is in over- or under-supply.
Real estate firms are struggling at present, due to lower volumes of homes being listed for sale, so they may be more tempted than ever to massage the figures in the rental space.
For instance, a landlord contacted me last week to point this out in relation to two dwellings he owned within a few hundred metres of each other – one tenanted, and one vacant.
His agent first wrote to him saying the rent on the tenanted unit was too low and he agreed to increase it – only to receive notice the following week that his tenants were moving on.
That takes a chunk out of his cash-flow, but allows the agent to re-let the property and collect a letting fee.
He was then advised to cut the asking rent on the second, already vacant property.
The landlord in question told me: “The agent makes these decisions without consulting either tenant or landlord, so it could be a situation where both would be happy with things are they are. In retrospect I think my agent was trying to maximise their letting fees and commission rather than keep the properties tenanted.”
He suggested that when those kinds of doubts exist, both renter and landlords should do their own research and push back on their agent if they’re not happy. And that means considering local, not national data.
Law of averages
SQM Research reports that in the year to October, rental prices rose across most of the country, with vacancy rates falling from 2.3 to 2.1 per cent.
But national averages should be handled with care. Brisbane vacancy rates, at 3.0 per cent, did not budge over the same 12 months and in Sydney the vacancy rate increased from 1.7 to 1.9 per cent.
Renters in particular may find such numbers useful. Agents have been become expert during the property-boom years at creating a sense of urgency and competition between home hunters.
But if they tell you there’s a ‘shortage of properties’ and ‘rents are rising’ they could be using national or city-based averages to talk up an oversupplied area.
“If you’re talking about renting an apartment in the Melbourne, Sydney or Brisbane CBDs, those would be ridiculous statements,” Mr Phillips told me on Monday. “But if you’re talking about further out, on decent sized blocks in the middle suburbs, that could be true.”
There have been a lot of half-truths told during Australia’s extraordinary two-decades-long housing boom.
But as the market swings to oversupply, it’s more important than ever for renters – and landlords – to get the deal that they want, rather than letting the price be set by a stressed, commission-starved agent.