I was writing the other day about some of the challenges facing Aussie property. Just to be clear, I’m not worried about a ‘crash’ or the ‘bubble bursting’, or any of that rubbish. I just think there are a few factors that could put a cap on the current cycle.
And that’s the thing to be mindful of. Markets move in cycles. And after several years of strong price growth, the chances of slower growth outcomes increases with every passing year.
It’s just a reality.
And as the cycle gets long in the tooth, the opportunities to benefit from immediate market growth get harder to come by. That’s why right now I’m working my existing properties harder, and looking further afield for my next buying opportunities.
And when you think about it in this light, the US market starts to look pretty interesting.
Because the cycle is still young in America. The economy has taken its sweet time to gain traction, and the housing market has dawdled along with it.
But now, that seems to be turning.
And the clearest read on that is in the rental market. Rents are rising quickly (much more quickly than incomes) and now people are worried about an affordability crisis.
The Wall St Journal was running the story:
“Much of the problem is attributable to simple supply and demand. The job market has improved and millennials are entering the labor pool in force, boosting household formation. But in a structural shift for the real-estate market, new households are much more likely to be renters than buyers.
In the first quarter of 2015, the number of U.S. households was up by almost 1.5 million from a year earlier… but the net increase was entirely due to renters, while the number of owner-occupied households fell slightly. That’s broadly been the case since the housing bust, with new household formation consistently coming from renters rather than buyers. The homeownership rate hit a 48-year low, according to estimates published Tuesday by the Commerce Department…”
So there’s a few things I take from this.
The first is that this seems to be what you would expect. At this early stage of the cycle, you’d expect household formation to come from renters.
So when the GFC hit a lot of people moved back in with their parents, or back into share-houses. And young kids who were thinking about moving out decided they’d be much better off staying put.
So for a few years there, household formation went into reverse. The number of US households actually shrunk.
But now that the economy is gaining traction, the younglings finally have the courage to go it alone.
(Or their parents finally have the courage to turf them out of the nest.)
And so the number of households is growing again. Starting with renters. After the renting pool grows, people will get back into buying and the owner-occupier class will rise.
But in the meantime, as all these new people compete for rentals, the rental market gets tighter and tighter. And vacancy rates have fallen to a 30-year low.
And as the rental market tightens, rents start to rise.
And across the country, rents are now 3.5% higher than a year ago. That might not sound like much, but it’s decent in a country where inflation is minimal. And it’s accelerating.
And in some states, it’s much higher. Like in the booming tech states and cities, like San Francisco, San Jose and Denver. Rents in those cities are growing between 5 and 8%.
This is classic cycle stuff.
Because as rents start to rise, two things happen. First, the cost of renting vs the cost of buying starts to even out. And so the people with a deposit do the sums and decide they’re better off buying.
Housing demand grows.
And the increase in rents means that rental yields start to rise.
And that, of course, translates into higher prices.
And so we’re looking at a resurgence in American house prices in some areas. It will be patchy at first, but as the economy strengthens, and the rest of the country comes online, we should see broad-based increases in house prices.
And so there’s an ‘early-buyer’ opportunity here.
House prices are lifting in some areas. Make no mistake about that. But there’s still plenty of bargains to be found.
And that’s the amazing thing about the US right now. In America you can pick properties up for $50K.
I’m not talking deposit. I’m talking in total. $50K!
And with a tighter rental market you’re looking at cashflow of $10K a year.
Do the maths. That’s a 20% yield.
I love Australia, but show me anywhere in the country where you can get those numbers.
So with the Aussie market facing some headwinds, I’m taking the time to do a bit more gold digging in the US.
You just can’t argue with those numbers.
Anyone done well in the US in recent years?