A discussion on the housing market isn’t complete without evaluating its two components. Those components are of course the owner occupier and rental markets.
I’ve previously described the merits of entering into each of these sub-markets. However, the following post analyses the interplay between these components, and how they offset each other to remain in balance.
Understanding the basic interplay
An individual that is new to the housing market has two realistically available options. They can either purchase a home or rent one from another homeowner. Whichever decision that individual makes will not only impact that sub-market, but the other one as well.
For example, say the majority of the interested population wish to purchase a home. Demand for owner-occupier established and new construction housing will increase overnight. Conversely, rental demand and yields fall as the population majority become disinterested with this sub-market.
The number of people interested in the housing market at any given time is finite. Therefore, a shift in demand into one sub-market will have a correlative effect on the other.
Factors which amplify this interplay
Immigration
In the previous section, I noted that the population size remains stable. However, there have been instances where the housing population can dramatically increase or decrease.
For example, Australia’s annual migrant population increased by 58 percent between 2001 and 2010. This was during a period when Australia expanded its immigration policies in favour of skilled workers and international students. This migrant influx saw sharp increases to both Australia’s median home prices and rental demand.
Population demographics
Individual means and circumstances can also play a role with these sub-markets.
A survey conducted in 2017 identified nearly half of all renters surveyed have personal income less than $35,000. Furthermore, 37% of this surveyed group were under the age of 35.
Over the past two decades, average wage growth has not increased in proportion to house median prices. Therefore, it is unsurprising that a large portion of individuals remain in the rental market due to affordability constraints.
Government influence
Finally, the Australian government also influences the interplay between these sub-markets. Take the First Home Owners Grant (FHOG) or the ad hoc stimulus incentives. These are instances where people are lured away from renting and towards being an owner occupier.
Cost of borrowing also remains a very attractive factor for owning a home. The cash rate is currently at historical lows. Further, the Big 4 banks pass on the majority of these cuts. Therefore, not only does this entice individuals to borrow for home ownership, but it seduces them into borrowing larger amounts, given the serviceability cost is lower than budgeted.
The transition between these two sub-markets is not perfect
The two sub-markets are not in perfect equilibrium at all times. There is constant movement between these two sub-markets. However, the data may not paint this picture.
One reason for this is that the data is imperfect. Firstly, there is a lag in the presentation of housing data, and therefore it doesn’t represent current trends. Furthermore, it is difficult to collect housing data at the national level. While the ABS and RBA collect and present national housing data, the granular detail is collected at the state level. This information is not standardised, nor is it made available in real time.
Therefore, a sub-market shifts may not be noticed until a few months after they’ve occurred.
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The content outlined above was written, edited and published by the Lost Realtor. The author has over 20 years or real estate sales and investing experience in the Australian property market. He has held senior positions in Australian building companies, including being the General Manager of the residential sales division of Collier Homes. His qualifications include a Bachelor of Commerce degree and a Graduate Diploma in Building and Construction Law.