rent, housing, population pressure
Family Home — suburban exterior 1993, by Howard Arkley.
An interesting thread about Rudd’s approach to culture and idealism on larvyprod led to some remarks about rent and price control.
Rather than derail the post, I am going to take up the discussion here.
“.. as a Socialist I just wish Rudd would bring in strong price control forcing the price of rent, food and petrol way down”, said Paul Burns.
I am on both sides of this rent question, as an inadvertent landlord for family reasons of a joint deep in the bush, and a tenant hanging on by the skin of my teeth in inner city Melbourne.
I am about to sell the house, because I can’t cover the difference between the mortgage and the rent, and I understand the pressure to put it up. But I am just as constrained by competition as I would be by government rent control.
Competition is provided by other places, in which the equation is changing because petrol prices have gone up. Potential tenants are under pressure as the price of household necessities climbs. Other owners who have lower or no mortgages can undercut me. Of course, when I sell, the next owner won’t find it financially sensible as a rental proposition, so it will go to an own-occupier. And we lose another house in the rental stock.
Here in St Kilda, rents have climbed savagely. Tenants here are close to a poverty trap – exit disposable income, enter a desperate hunt for the rent. As I understand the situation, moving doesn’t help much because it costs money, there is a shortage of rental housing, and prices have risen pretty evenly in areas served by public transport. Outside them, tenants are faced with other costs, which is the dilemma about my joint in the bush.
I am sure anyone with a modern mortgage would say they are in trouble too, because prices are outclimbing wages in a major way.
The rental stock is provided by people who have owned for a long time, like my landlord here, for whom the climbing price is a simple windfall created by a rising market. And by people who have invested in housing recently, who are under pressure as my bush situation, who need the price to be set against their cost of mortgage. And by investors who come into the market, buying out people like me, and owner-occupiers defaulting on their mortgages.
Why would you invest in the market now? Capital gains are probably leaving the equation, at least for a while. You need the rent to be high, and you may simply not have enough available tenants to keep the price up there.
So, either we don’t have the housing stock, or it costs so much that a huge number of people simply can’t afford it. Where are they going to go? St Kilda is a desirable suburb, so high rent housing will attract tenants, and we can see their social background changing steadily. But in other places, which are not fashionable, the system doesn’t add up to enough affordable stock.
Falling interest rates will help, and I guess they must come down as their effect becomes too destructive. But then, the banks are telling us that their rates are set ultimately by the price of money, and that won’t fall as a result of domestic issues.
It feels gruesome to me. I guess this will become a social as well as an economic issue, as people increase the population density of their homes. That has already become a long term change – as children grow up and don’t leave home, the demographers will be documenting the rise of a new shape to the family. I can see a rise in the number of lodgers, that weird relationship we had largely thought was gone, except in that strange, eclectic arrangement of shared households.
We value domestic privacy very highly in our society. There is going to be less of it. And we are lucky the laptop has become cheap, because I can see the home office going the way of the chookshed.
Any economist will know by now that I don’t really know what I am talking about. But we are all living with the consequences, and I would love to understand it better.
April 27th, 2008 at 11:25 am
David, I’d suggest you know precisely what you’re talking about having lived it and trying to understand it any better will only result in the gloomy and already suspected conclusion that to make money one firstly needs money and these days an awful lot of it.
One million dollars used to be a lot of money. But when I read of a property in Sydney selling for thirty million, I realised how out of touch I am with what I consider a lot of money.. How to get a lot of money in the first place is getting progressively beyond the reach of the vast majority of us unless we get extremely lucky.
The only point you make that I’d disagree with is the home office going the way of the chook shed. On the contrary I think chook sheds might be going to make a come-back.
April 27th, 2008 at 11:02 pm
Unless your home office is in the chook shed. Which, again, might be on the cards the way things are going.
Excuse me, I just heard a squawk. I’ll just see if there’s an egg there…
April 28th, 2008 at 11:28 am
Oddly enough, my partner and I occasionally use our tiny garage (attached to our tiny 2-bedroom unit), which we’ve transformed into a storage shed, when we need to do quiet study and writing away from the kids. We have an old desk in there… Of course, we have to take turns.
If you think of all those ugly double garages that squat like cane toads in front of all those ugly MacMansions, I won’t be surprised if people start retro-fitting garages with insulation and cladding to house a couple of borders, or teenage kids.
I heard recently that many years ago that laws were passed, either here in Australia or in England, to stop people from living in bathrooms (I wonder how true that is). Speculating on why that may be the case, my partner and I realised it would be to prevent unscrupulous landlords from charging some poor sucker rent to use it as a room and sleep in the bathtub – and thus ensure all other boarders also had access to a bathroom.
If you think of the many rental houses over-crowded with poor South-Asia international students – in suburban Melbourne – I wonder if we are not long from that situation again.
April 28th, 2008 at 12:44 pm
I think people are increasing population density in their homes in the first instance by converting backyards to dual occupancies, aren’t they?
I find it rather hard to beleive the banks when they say their own borrowing costs are forcing them to up the interest rates, since our co-op lender has not felt the need – and there are those enormous profits to be explained, also.
April 28th, 2008 at 3:52 pm
Laura;
Very briefly, the difference is that a co-op financial institute mostly finances the loans it makes from the money it has on deposit. The price of this money is whatever interest rate they are paying depositors.
Banks on the other hand also go and borrow from the international money markets to expand their loans portfolio. The price of this money is whatever the upstream lender is charging currently, which tends to be variable. So when the international price of money goes up (as it has done so recently), so do their mortgage rates.
The upshot is that a bank is exposed to two sources of mortgage pricing: the RBA’s cash rate and the international cash rates. Whereas the co-op is only exposed to the RBA. That’s why you see the gap.
May 8th, 2008 at 10:33 am
Hmm, so the lesson, apparently, is not only borrow from a co-op, but also save with a co-op, however tempting it is to save money else where to get higher returns. It helps keep the cost of borrowing down.
And here I was thinking that I could finally find a good interest rate on savings that aren’t some a lowly term deposit, now the RBA rate is going up.
July 22nd, 2008 at 5:28 am
[...] Rotwang is on both sides of the housing price issue. [...]