Renter generation could be here to stay

It’s a sad realisation that the gap between the haves (commonly known as investors) and have-nots (aspiring home buyers) is widening, and analysts aren’t tipping that this will change any time soon.

Renters, especially those saving to buy, have been dealt several cruel blows this year. Agents say that in more than 85 per cent of cases, rents have increased in the past 12 months, and are likely to continue to increase until 2009, when a new wave of apartments is expected to come onto the market, easing the undersupply.

At the same time, interest rates have gone up – three times since the start of last year and eight times since 2002. This has eaten into the borrowing capacity of would-be buyers and convinced many that the Australian dream of home ownership is indeed just a dream.

And, finally, median house and apartment prices have increased and are continuing to increase, particularly in the inner city where tenant demand is strong.

This, of course, has brought a smile to the face of investors.

Furthermore, the value of their property portfolios has increased in recent years, often providing tens of thousands of dollars in equity, which in turn is used to buy more property.

Renters, by comparison, have had to make serious adjustments in their lifestyle to counter the three Rs of rising rents, rates and real estate values.

"Renters have an important decision to make at the moment, if they ever plan on owning a house," says Adrian Jones, president of the Real Estate Institute of Victoria and director of Noel Jones Real Estate. "It’s the tightest rental market in about 20 years."

"However, I believe the phenomenon of rising rents has only been going on for 12 months at most, and it won’t be going on for much longer than another 12 months when new properties come on the market," he says. "I urge renters aspiring to buy a home not to give up because the situation will improve."

"What’s happening in the market is making up for an incredibly slow five years of rental growth," says Mr Jones. "It wasn’t long ago landlords had to offer things like washing machines and white goods to entice tenants to lease their places."

This sentiment is shared, in part, by Angie Zigomanis, an analyst with consultancy BIS Shrapnel.

"The burly rises in rents over the last 12 months were an adjustment to five years of low rental increases," says Mr Zigomanis. "In real terms (taking into account inflation), rents are only up about 5 to 6 per cent on where they were in 2000."

"However, we anticipate rents, particularly in the inner city, to increase for the next three years, until the next wave of new apartment towers are available for occupation."

In the meantime, renters wanting to buy should assess what they can borrow, what that will buy them – and whether they can do so while continuing to rent.

Mr Jones says a smart saving plan is the solution for renters who want to stay in the market. "Prospective buyers should use this time to get into healthier savings habits which will help them get, and better manage, a mortgage."

"I tell current renters who want to buy to save any money they can, rather than save nothing," he says. "Even if they put away $20 per week, they develop a savings habit and when the time comes to borrow money banks look very carefully at banking records."

"Unlike other places around the world, home ownership in Australia has always been linked to forced savings. People know every month they need to find say $1700, and they find it at the expense of the other treats.

"If you’re renting and paying $900 a month, it’s awfully easy not to save, and spend the balance on a meal out, new clothes etc. There is some inherent benefit of being a mortgagor and having to pay the money back and this is a habit aspiring home buyers should get into."

That is what many people are doing. Agents say that, in most cases, aspiring owners who rent have chosen to absorb higher rents and stay where they are, while continuing to save for a house.

"Most tenants have heard or read through the media how tight the rental market is at the moment, and are prepared to pay the difference until they decide what they want to do," says Danielle Cargill, manager of residential property with Cantwells Property in Hawthorn. "In many cases, the rent rises are encouraging them to get into the market sooner."

Agents overwhelmingly tip that the inner city and middle suburban areas are safer investments than the outer suburbs, a fact supported by REIV findings.

In its latest analysis of the market, it highlighted that each of the top 10 suburbs to report strongest increase in median house price for the year were within a 15-kilometre ring of the city. By comparison, all 10 suburbs to report the lowest increases in median house price were in the outer suburbs and areas not well serviced by public transport.

The rental situation has reopened the debate about whether buying somewhere to live is a better investment than renting or other options, such as the sharemarket.

"The argument for investing in shares over property has been around for years," says Toby Primrose, director with Australian Property Investor. "In the end it’s complicated and comes down to risk, returns, and how the debt is serviced."

"No bank will give you a 100 per cent loan to buy shares, they might give you 60 per cent," he says. "With real estate, you can get loans covering 100 per cent of the loan. You will get slugged a mortgage insurance charge, but with property prices continually increasing, this is quickly absorbed as equity builds."

"Provided you don’t sell the property, you’re not required to pay capital gains tax either. If you use the stockmarket to turn a quick buck to save a deposit, the government will take out CGT leaving you with less money than you may have thought to use.

"You also really have to be involved when you manage a share portfolio or have a broker you really trust to do the right thing by you." Tenants looking to stay in rented accommodation instead of buying, should familiarise themselves with the risks.

It’s a close call when you look at the statistics. According to a new report released by Australian Stock Exchange and the Russell Investment Group, investors in residential property 10 years ago would have enjoyed an average 11.7 per cent a year increase on their investment (including rent and capital value growth).

The return is lower than the 12.8 per cent a year increase recorded for Australian shares in the same period. However, it is higher than the 6.5 per cent a year increase recorded for fixed interest loans such as term deposits.

"A benefit of shares is that there is an opportunity for strong short-term gains, which you won’t find in property," says Mr Primrose. "But there is also a larger risk that you could lose everything."

Analysts agree there is a generation of renters, particularly those aged under 28, who accept and are happy with the fact they may never buy real estate.

"Simply, there’s a demographic surge in the market segment that does not want to buy property, and prefers to rent in locations they otherwise couldn’t afford to live," says Bernard Salt, partner with consultancy KPMG and author of the book The Big Shift.

"It’s a consumerist generation that is very confident about the future. These people have only ever known prosperity and don’t get the idea of investing for a rainy day."

"Renting fulfills their needs; it allows them not to address the reality of buying real estate, and demonstrates a ‘live for the moment’ strategy that suits the times of the generation," says Mr Salt. "Hence we have boom conditions."

He says the demographic shift of Generation Xs and young Generation Ys is serving to make the inner city even more attractive to property investors.

"Renting reflects the values of these people who don’t particularly want to tie themselves down to a loan," says Mr Salt. "So you have a larger number of people staying in the rental market."

 

The renter

Inner-city renter Will Morgan (pictured) realises he might have missed his chance to buy his dream house, an unrenovated Californian bungalow in the inner western suburbs.

Since he started saving a deposit two years ago, interest rates have risen four times, his rent has gone up twice, and median prices in the suburbs he wants to buy in have surged.

"The market was a little pricey two years ago when I wanted to buy, and I was still saving my deposit," Mr Morgan says. "My plan was to buy an old house with a yard in Footscray, Seddon or Yarraville to fully renovate."

He concedes the added pressure on his cost of living means he has to adjust his dream. "I’ve had to reconsider my lifestyle in order to counterbalance the rent rise and save an even bigger deposit to buy into the suburbs I want," Mr Morgan says. "I’m accepting now that I might only be able to afford a unit or apartment, and this is not as motivating to me.

"I’m hoping there’s a slowdown in the market, otherwise I’m going to have to consider suburbs a little further out."

Like most tenants, Mr Morgan plans to continue renting in the area while he saves – for the short term at least.

"I like the convenience of Yarraville, and it’s too hard to find a similar property in the area for the same money as what I pay," he says. "If I can’t make the cuts I need to my other living expenses, I’ll consider moving to a more affordable area, because I ultimately still want to buy into the market."

The investor

PROPERTY investor Ian Koochew believes there’s never a bad time to buy real estate. He started his property portfolio in 1972 aged 25, buying a terrace house in North Fitzroy. He now owns five inner-city rental properties and will use the proceeds from a recent sale to buy another.

"I own shares but most of my money is tied up in real estate because it’s something I know and understand," says Mr Koochew. "One of the truisms of real estate is that today’s high is tomorrow’s low, and while Victoria remains a vibrant city popular with interstate and international migrants, I’d be very confident to invest in Melbourne’s property market again."

Mr Koochew says rents on his properties have increased more in the past 12 months than in any of the five years before that.

"Until this year, rents were a little underdone," says Mr Koochew, referring to a real estate paradigm that has existed since 2001, where property prices were high despite the rents from these properties being relatively low – certainly not enough to cover bank interest rates.

Mr Koochew subscribes to several rules when investing in real estate, but none is more important than respecting good tenants. "Tenants are enormous value for me, and when you get a good one, you want to look after them.

"In my 35 years in real estate, I’ve had, on average, less than one day per year where a property I own has not been earning rent."

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Marc Pallisco

A freelance property analyst and journalist, Marc is a co-founder of realestatesource.com.au.

Marc Pallisco

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