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CEO AllenWargent Property Buyers, & WargentAdvisory (institutional). 6 x finance author.

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Tuesday, 11 April 2017

Rents spike during investor loan shocks

Investors & rents

Track back across the rental price data for the past 45 years, and you will find that there were four periods when rents spiked significantly.

In each case, these were periods when investors had been 'shocked' out of the market for some reason or other. 

In the run-up to 1975 Australia experienced a punishing surge in inflation, and home loan rates leapt into the double digits, sending the economy into a nasty recession. 

According to the Canberra Times the pool of rental dwellings shrunk as few investors could afford to buy, while the construction of flats for rental had also "almost ceased". 

Annual rental price growth peaked at more than 17 per cent, leading to calls for rent controls and other drastic measures. 


Source: Canberra Times

In 1982, there was another enormous, double-digit spike in rents, this time largely experienced in Sydney, with a key driver again being very high interest rates and a recession. 

A lack of investors was again part of the problem with variable home loan rates rising to an excruciating 13.50 per cent, while the Canberra Times noted that at the same time the unaffordability of housing had simultaneously greatly increased the demand for rentals.  


Source: Canberra Times

Margin calls

Somewhat more recently rental price growth tracked at double digit levels for three years from 1986 after investors were knocked out of the market by a combination of high interest rates and a surprise change in tax laws surrounding the deductibility of net rental losses.

Interestingly, leveraged investment wasn't removed from the markets, rather it was partly transferred elsewhere.

The use of margin loans ran very high in 1986 through until October 1987, whereupon margin loans experienced a quarterly drop not matched until the global financial crisis of 2008, according to statistics compiled by the Reserve Bank of Australia.

The trigger for the 1987 drop in margin lending, of course, was the "Black Monday" crash (actually at market open on Tuesday in Australia, thanks to the time difference) and the Aussie stock market losing a quarter of its value at the open (ironically the increased use of lending for stocks may itself have contributed to the sheer magnitude of the crash).

Finally, the most recent spike in rents was experienced during the financial crisis from 2007 to 2009, with the value of investor lending dropping by more than 20 per cent year-on-year.

Australia dodged a technical recession at that time, but realistically confidence and investment was low.

The chart below suggests that while there is some link between investor lending and rental price growth, it's far from clear cut, so there are obviously other factors at play.


Rents now easing

More recently still there has been a great surge in investor lending as the cash rate has been cut, pushing rental price growth to its lowest level in decades.

There is more to the equation than just these factors, of course. 

Research from Cameron Kusher of CoreLogic shows that there is also an inverse relationship between the level of new supply and rental price growth, which is indelibly linked in to the figures above. 

Overall, though, it's clear that the market needs a balance of owner-occupiers and investors, and policy should reflect that. 

If it's deemed that there are too many investors in some markets, then the best option is likely to be to tweak policies to bring the market back into balance. 

Unfortunately the ALP has announced its intentions to change tax laws aeons in advance, and this has inevitably contributed to more investors rushing in to the market to lock in benefits under today's legilsation.