Tuesday, February 13, 2007

Reserve Bank to landlords: push up your rents.

Landlords contemplating pushing up their rents have received support from an impressive quarter.

Australia’s Reserve Bank says in its latest Quarterly Economic Statement that while house prices have climbed by around 175 per cent over the last decade, housing rents have climbed by only 35 to 60 per cent.

“The result has been an approximate doubling in price-rent ratios or a halving in rental yields”.

With rents unusually low compared with the cost of buying a home there has been a surge in the proportion of householders wanting to rent. At the same investors have become understandably less keen to buy houses for renting out, particularly so as there now appear to be only limited opportunities making a capital gains when properties are sold.

Across all Australian cities vacancy rates have fallen to their lowest levels in more than 20 years...

The Bank says that as a result nationwide rents climbed 3.7 per cent in December, the strongest rise since 1991.

But it says rents are increasing much faster for new rental contracts, meaning that nationwide rents have some distance to climb.

When rents climb high enough the Bank expects Australia’s rental squeeze to ease. It doesn’t say how high it expects rents to climb.

The Tenants Union in the ACT said last night it was concerned by the Reserve Bank’s statement.

Executive officer Deborah Pippen said the Bank’s apparent endorsement of rent increases would make things more difficult for Canberra tenants who even now can barely afford to stay in their homes.

“It is quite easy to believe you are objective when you are not the person paying the rent,” she said.

“The Bank is talking as if housing rents are just another financial instrument. But people live in homes. You are not looking at something that people can choose whether or not to purchase. If the Reserve Bank won’t address housing affordability and why it matters as a social issue, other arms of government will have to.”

In Parliament yesterday the Treasurer Peter Costello welcomed the Reserve Bank’s prediction that Australia’s underlying rate of inflation would fall but was silent about its views on rents.

The Chairman of Raine & Horne, Max Raine endorsed the Bank’s view saying he believed the “worst was yet to come” for rents.

He said near the centre of Sydney tenants were facing rent hikes of up to $150 per week.

“Vacancy rates of about 2.5% traditionally indicate full occupancy as there is always a degree of movement of tenants between properties. But with vacancy rates currently at around 1.5%, there is clearly a pool of people who simply cannot get accommodation,” he said.

The Canberra-wide the vacancy rate is at present 1.1 per cent. But many agents say they have nothing whatsoever to rent. Canberra’s rents are the nation’s second-highest after Perth. In the September quarter the median rent for a three-bedroom home Canberra home was $320 a week, around 20 per cent higher than in Sydney and one-third higher than in Melbourne.

Related: Rate rise off the agenda

Australia's three million mortgage holders can rest easy. The Reserve Bank
says inflation will soon be back under control. It in its latest Quarterly
the Bank says it expects Australia's underlying rate of inflation
to fall from its present peak of 3 per cent to around 2.75 per cent by

That fall would push inflation back down below the Bank's danger zone and
toward the centre of its 2 to 3 per cent target band. The Bank says it
expects Australia's underlying inflation rate to remain between 2.5 and 3
per cent throughout 2007 and 2008.

In previous statements it had said that it expected the rate to remain at
around 3 per cent and had warned of the need for vigilance.

Following the release of the Statement the Macquarie Bank's interest rate
strategist Rory Robertson said that what was now in prospect was ``a plateau in
rates at 6.25 per cent, following earlier plateaus at 5.25 per cent and 5.5
per cent''. He said it was too early to predict whether and when interest
rates would actually fall.

The standard bank variable mortgage rate is at present 8.07 per cent after
three hikes of 0.25 per cent over the last year. But the Reserve Bank says
in its statement that very few new borrowers actually pay that much. It
says the typical discount is 0.6 per cent, meaning that most new borrower
pay around 7.45 per cent.

In Parliament yesterday the Treasurer welcomed the Bank's more relaxed
inflation forecast but said: ``We are not out of the woods yet, because
with an exceptionally cold northern winter it is possible that more pressure
will come back on oil prices.''

He said that there was also a chance of a wages breakout given Australia's
historically low unemployment rate, but that his government's WorkChoices
legislation had lessened the risk.

``If we had a system of centralised wage fixation, that took wage
settlements from profitable areas from the Australian economy and bought
them back and spread them uniformly across the whole economy, then we would
have the kind of inflationary breakouts that we've seen in previous mining
booms,'' he said.

``The good thing is that we have changed the industrial relations system and
it wouldn't be possible if we hadn't of done that.''

The Bank noted that wage growth ``remained reasonably stable in the face of
sustained strength in the labour market.'' It noted as well that union
officials had lowered their expectations of future inflation.

Completing the Bank's rosy view of the Australian economy it said it
expected non-farm GDP to grow faster over the year ahead at 3.25 per cent.
Importantly, the forecast appears to imply that there will b be no rate
rises in the year ahead.

The only downside in the Reserve Bank's statement is the forecast of a
further side in rural GDP of around another 20 per cent in the year. The
Bank expects this to trim Australia's overall rate of economic growth by
around one half of one per cent.