If you received 30 rental applications, you priced the house wrong
I am still shocked the with the utterly incompetent lack of understanding of basic economics or even coherent business sense from the real estate sector here in Mandurah. Day in day out, they meet with property owners, advise them what their home will fetch on the rental market, list it, then receive 30 to 50 applications, and try and help the owner pick one.
They then have to deal with dozens of upset and rejected individuals who missed out on the home.
It never occurs to the property manager that they have completely mispriced the home.
But even a cursory understanding of high school supply and demand economics will remind you that if there’s lots of demand and little supply, the price should go up.
If you are selling your home, and after the first home open you are given 30 offers at your asking price, you will quickly realise you asked too little, and put the price up, or tell the buyers to increase their bids. But for some reason, people don’t use that same logic when it comes to rentals.
There’s a few reasons for this phenomenon.
One is that property managers are humans. They are emotionally hammered all day long from desperate tenants who give them their sad stories. These are real stories, and I am not trivialising them.
What the PMs don’t realise is, is that by creating false hope in the minds of 29 people who will NOT get the property, they are stopping them from making arrangements that will actually sort out their housing issue.
The other thing they’re not realising, is that by keeping landlords from increasing rents too much, they are STOPPING investors from realising that they could be building new supply to rent out and making a profit, thereby increasing actual supply of housing. If potential landlords stay out of the market because they don’t really want to spend $600 per week on a mortgage only to receive $450 in rent, this is just making more people homeless. If rents actually went up to what people were willing to pay, more investors would see that and do their sums, and realise building some units or a few houses would be a wonderful decision.
I have a good friend who just sold a house that could have been making him a profit, but he just couldn't grasp the fact he was under charging the current tenant, and thought the mortgage was costing him too much. It was bizarre to watch. Many others are selling and doing the same, ultimately taking rental stock OFF the market when they could have finally been making money.
Another reason rental prices haven’t gone up high enough is because people simply never realised that for the last 20 years of renting, they have essentially been having their rents subsidised by idiot landlords who read Rich Dad Poor Dad or some other investment book and then thought negative gearing was going to help them retire early. Well, those landlords didn’t make a single cent profit, and simply payed $250 per week out of their wage to help someone else get a cheap home. If all those moron investors had never been duped into getting into real estate in the first place, renters would realise that it’s not actually reasonable to be able to live in a $600,000 double brick 4x2 with lock up garage and air conditioning for $350 per week. And now that the landlords who made the mistake of subsidising someone’s rent for the last decade or two are getting the hell out of the market and trying to break even, there’s necessarily a return to a pricing structure that will attract sensible investment in real estate.
Frankly, the nonsense you’ve been reading in the media about landlords being evil for the last 10 years was completely misguided. But hot tip: journalists rarely invest and know virtually nothing about any subject they cover. Landlords are just Aussie battlers like everyone else, they’re having a go, and taking immense risk, and the laws are skewed against them.
Another reason rents haven’t gone up enough is because property managers look at the wrong data when setting prices. There’s two prices that matter in rentals. One is what the average existing renters are paying. The other is what price do you need to pay to get a listed rental currently. They are drastically different prices right now, and the “average rent people are paying” should be irrelevant when setting prices.
But here’s why the numbers are so different. Say Ms Smith been in a house for the last 3 years. She’s been paying $295 per week, is an amazing tenant, always on time, rent inspections are perfect, the gardens are even better than when she moved in, and she has no plans to leave. By all accounts, she’s a landlord’s DREAM tenant. But there’s a massive rental crisis and the property manager tells the landlord as much. They know if they listed the place she’s in today they could get at least $500 per week, but they’re human, and Ms Smith has been good to them, so they feel really really bad just hiking her rent that much. Many people simply can’t do it, even though their mortgage has gone through the roof lately. So they put her rent up to $350. Ms Smith complains, because as she’s just a renter and not a property investor she doesn’t keep an eye on property markets. But she looks around and quickly realises she will never be able to find a property like hers for $350 again. So she pays the money.
Now, in the property manager’s mind, some property’s like hers rent for $350. A new landlord comes along and asks what they can get for their property for rent. PM tells them Ms Smith pays $350 but they might be able to get even more. It gets listed at $380 per week, and then receives 50 applications after one viewing?
Why?
Because a fair market price for that rental was probably $500 per week, not $380. And if the property manager thought about it for a second, and wasn’t in such a rush, they could have listed it at $600 per week, and seen what the market response was. This is what happens when you go to sell a home. Many times you ask MORE than you think you can get, then you lower your price to what you are willing to accept. It is bizarre that this doesn’t get done more with rentals today. It was certainly done this way 6 years ago when rent prices were falling.
Another point I will make is this. Property prices, including rent prices, are never intrinsically high or low. They are only higher or lower than what people expect to pay. The reason people are unwilling to go and pay $600 per week rent right now for a property is because that FEELS high to them. I know someone who left a $365 per week property in 2020 because they wanted somewhere affordable to live. They are currently paying $480+ per week rent for a way worse house. Ironically, if they had stayed in the original home they’d probably be paying the same amount because of the “don’t hike the rate on existing good tenants” effect.
All of this explanation about numbers and putting up rents makes me seem like a heartless bastard. I get it. Nobody wants to harden their hearts to the poor.
But we cannot rely on the government to solve this problem. It will just keep getting worse. As we know, Labor has INCREASED immigration, turning this existing rental crisis into a rental catastrophe. Rental vacancy rates are currently 0.3% in Perth. 1% is a crisis. But that doesn’t tell the full story. There’s far fewer properties being used as rentals because of nobody wanting to be a landlord. The ONLY solution on the horizon is for rents to go up substantially from here, which then attracts investors, who come along and finally build a heap of infill townhouses in all those oversized abandoned blocks in the middle of town. People will have to adjust their expectations of what they can afford in rent, but this will incentivise some to save and buy asap. Besides, most renters do NOT want massive gardens to care for, so it’s absurd that 85% of available cheap rentals are huge blocks that are hard to maintain unless you’re a 65 year old retiree who loves gardening and ignores allotted his watering days.
Cheap rent for everyone is the ideal scenario. We have failed in that goal.
The next two options are
cheap rent for some, and lots of homeless people,
or rents go up a lot and we attract investors to build more dwellings so everyone can have a roof over their head.
