Market Update 27 FEB 2023 - Does it make sense to invest in property yet?
Mandurah Real Estate Update from the weekly Mandurah Real Estate email:
There’s currently 493 dwellings available to purchase in Mandurah, essentially heading sideways from last week.
Being a landlord
Potential landlords seem to be starting to gather the courage to dip their toes back in the market, whether it’s finding property that might be suitable for a short term rental, or just your regular long term rentals. There’s still a lot of stock on the market imo that would make a suitable AirBNB property, but it’s still a challenge to make the numbers work for long term rentals, especially with interest rates potentially going up from here still.
If you look at most cookie cutter homes, the kind of thing tenants just swoon over, you’re looking around $500k for a half decent suburb. If you’re financing that, you are looking at repayments around $670 per week, plus water rates and council rates of around another $50 / week. Add maintenance onto that, and you can easily expect it to cost you $800 per week. Despite the rental crisis, nobody is paying $800/week for a $500k 4x2. At best you’re going to pull $650 / week, minus agent fees of approx 10% as well as inspection and lease signing fees. If you walked away with $560 per week I’d be surprised. So you’re essentially subsidising someone’s rent to the tune of $240 / week. The only people who would be wanting to do that are morons who still think burning $100 to reduce your tax bill by $48 makes sense. With this example, you’re burning $12,480 / year. In a decade, that’s (obvs) $120,480. If a decade ago you thought your $500,000 WA home was going to definitely increase in value more than $120,000, you wouldn’t have been alone. You would have been very very wrong, however.
It’s worth keeping in mind that a home for most people is the same as groceries. It’s a necessity, and it SUCKS when it goes up in price. I honestly can’t understand the media, real estate agents, and investors celebrating when the cost of putting a roof over your kids’ heads increases for everyone. It’s akin to celebrating the fact that oranges are sold out at Woolworths or cost $18 / kg at Coles, simply because you own an orange tree. Real estate investors need to take a leaf out of the farming industry’s book. They just STFU when wheat is trading at $725, and quietly go about buying their yearly Landcruiser 300 series, canal home in Halls Head, and hobby farm outside Donnybrook. They know if the masses ever found out farmers were printing money while groceries were becoming too expensive to feed your family, there would be riots, new taxes, price fixing, and farm nationalisation. For some reason, real estate speculators are too dumb to realise nobody actually likes being unable to afford a roof over their heads.
Governments have started to figure it out though, and the tide turned a little while ago, where the governments’ best vote winning strategy was no longer to prop up the wealth of property owners, but to consistently dilute them so the real cost of owning a home decreased over time. The goal is something like this: target average wage growth at around 2% per year, allow property prices to increase at 1% per year, the idiot landlord thinks he made some money after 10 years because the nominal number he sells for is slightly higher than what he paid, but the cost to buy a home relative to the average wage has in fact declined. What’s even funnier (sad funny) is that governments can also tax the landlord on his nominal wealth increase, despite his real purchasing power having decreased over time.
The issue those same governments are now facing, however, is that those idiot landlords were the only thing keeping many low income earners off the streets, operating a quasi “World Vision Sponsor a Family” for renters right here in WA. The over supply of rental properties meant every unemployed single parent could afford to live in a home our grandparents would have only dreamed of, with double lock up garage, 4 bedrooms, a kitchen fit for a Michelin 3-Star restaurant, a room literally dedicated to staring at your television, air conditioning, and built so solidly using double brick that it is likely to remain standing for 200 years. In addition to the subsidy the landlord has been unwittingly handing out, that same tenant also qualified for rent assistance, also funded via the taxes of the hard working landlord.
It’s definitely time for the wider public to stop portraying landlords as some kind of sophisticated wealth extractors who have been laughing all the way to the bank. It’s been horrible to be a landlord for some time, many people regret trying it, and we need to start being extremely thankful to them for all the risk they have taken and homes they have been supplying to the market.
Is it time to invest in real estate?
So after scaring many of these landlords away, the numbers are slowly starting to make sense again for some landlords to dip their toes back in the markets, but only in select property segments. Homes that make attractive short term rentals for holiday makers seem viable, and very low end properties that are super cheap also seem fiscally viable. But that middle of the pack stuff still makes little sense to me as something to invest in. If the average home was $100k cheaper and rent was $150/wk higher, then maaaaaybe they’d be appealing again. As a tenant, if you can rent a 2x1 unit for $450 per week, or a 4x2 free standing home for $650 per week, it doesn’t matter that technically the $650 place is better bang for your buck, it’s simply out of your price range.
My prediction is this: People who were used to renting a 4x2 with room for a Great Dane in the back yard will begin to settle for a 3x1 and have a pet cat instead, landlords will prefer to buy/build units and townhouses rather than free standing family homes, and in 30 years, other technical advancements will make condensed living more pleasant than we currently think of it as; e.g. we’ll have enough driverless electric cars on the road that hailing a driverless Uber will be cheaper than owning a car and we won’t miss garages and driveways, and those suicidal ebike things will have their own paths so they don’t have so many interactions with cars.
Jason Smith
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