Rising rents will be followed by higher prices.

The lesser discussed problem of rising rents will be the rising prices of the next few years, we see it as a foregone conclusion that price pressure will be upwards as long as rents are rising.

This occurs for several reasons, first is that higher rents compel renters into the purchasing space, those that can move must have sufficient savings and earnings to do so, but equally, those that can afford high rents – and to escape them via a purchase, are exactly the ones who will make that choice.

There is a tricky relationship between rents and prices, but as can be seen from the chart showing the last 25yrs there is some correlation.

2016-03 Prices and rents 01What we can see is that often when rents are rising that prices then catch up, at times rents can even be falling and prices still go up – this is perhaps due to the delayed nature of the commitment to a property contract which can be long drawn out.

What you don’t see for long in that chart is rents rising and prices not following them up.

This is because there will always be investors who see price as a function of cash flows, or where the next best alternative isn’t as attractive.

Currently half of the market is still cash and all of those purchases can become credit in time, that is where the ‘latent credit’ idea we have discussed in the past came from.

The world is often about relative not absolute returns, if you can get 0% at the bank or 6% on property where do you put your money? Even with tax rates being high it still makes sense.

Even good rules don’t stop the tide from coming in.

That is why the Central Bank limits on mortgages won’t really matter as much as many believe they will when faced against the size and weight of the market which is far larger than that of just the credit buyers.

We have not heard a single cogent argument that can realistically stop house prices from going up, in particular as delayed starts turn an already under-supplied commodity into a scarcity. There will always be an stock and flow issue which makes predicting anything a near disaster at the best of times, but rising dividends with short supply are music to investor ears and if first time buyers don’t move the market they will.


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