Friday, 22 February 2008

Rents : Breaking the Myth

So this week, the Finnish agency in charge of statistics released the year on year rent growth, the result is a staggering 3%.

Let's have a look of Rent in Helsinki throughout the past 30 years and let's provide a fast analysis, any other interpretation will be welcome as a comment... :

Here are the main highlights:
1- Rent growth has been on the down side in the past 30 years : it's getting cheaper and cheaper to rent... (well ... on average). At least for now buying a house and taking debt on a 30 years is equivalent as paying 2 rents during the same period... indeed buying at this price level is more expensive than renting whatever calculation you come up with ...

2- Rent growth has been under the magical 2% threshold in the past 4 years, the same inflation targeted by the ECB. Looks like the good "student" from this agency are able to "lay" "average" statistic that fall within the ECB "Master". Manipulation, luck? nobody will know...

3- While rent has gone downward since 1996, housing price has gone the reverse way: nothing surprising as buying became more popular than renting. So when the reverse happen i.e rent become more popular than buying then rent goes higher and housing price tumble especially if stock are important and interest rates "sticky" high...

4- It's interesting to see that over the past 30 years, rents tend to increase sharply during a recession or slightly ahead of it: Usually the economy tend to overheat before a recession pushing interest rates higher. As interest rates are high, housing affordability plummet pushing people to rent instead of buying. I think that is what we are currently witnessing...

5- It's important to notice that rent fluctuate almost synchronously with interest rates : When there are high so is rent, when there are low so is rent. Housing price tend to lag by a few years as the amount involved are on different scale , same could be said to the psychology and demography components.

Further analysis or charts to do would be :

- rents vs interest rates
- rents vs M3 (debt growth taken by households)
- rents vs housing price
- rents vs income
- rents vs baby boomers (The demographic "tsunami" wave created between 1945-1950), wave that has created shock throughout the economical timescale (that's the one who disrupted the 1990 boom) and the one that are causing issues with mass retirements...

Feel free to provide some charts, links or analysis....


Anonymous said...

Rule-of-thumb rental rate in US should be set at ~10% of the property value. In Finland I am told 4,5 -5%. A cost analysis on our welfare home(Hitas price-controlled) shows that we should get over 1500 to break even, but we'll be lucky to get 1250. Where does that leave someone who pays full market price? Up the creek a little farther than us. The asking selling prices are mostly ridiculous, and rents comparatively cheap for most properties.

I cannot swear this is right, but in late 2007 I checked Hitas apartments for sale and there were a total of 7. As of May08 there were 54. Seasonal? And there seems to be a growing glut of new over-priced apartments like in Pasila along Alexiskivenkatu. Or am I... Delusional?

Buy vs. rent analyses in USA show that homeowners there have not accepted the new reality such as one comment on a listing "I'm not going to sell my house for less than what its worth". Sorry, honey, its worth what someone will pay, and they ain't lining up to buy these days. Renting is a better option there from a financial standpoint discounting the joys of home ownership, and I posit the same is true of the Helsinki market. By the way, I own a non-welfare home in the US, unless I don't pay my outrageous property taxes, and then the government owns it. I'll save the HITAS rant for another time, against, from an insider's point-of-view.

Anonymous said...

"At least for now buying a house and taking debt on a 30 years is equivalent as paying 2 rents during the same period"

The difference being that at the end of the day you'll still have the house to sell where as if you rent for 30 years you have...well.. nothing.

"Rent growth has been under the magical 2% threshold in the past 4 years, the same inflation targeted by the ECB"

Chances are that if you rent on the private market you probably are overpaying.

Government rentals are cheaper for only for those who are eligable for subsidized housing. They do get a pretty sweet deal in Finland, especially when compared to private market rentals.

"While rent has gone downward since 1996, housing price has gone the reverse way"

This is nasty for first time buyers, but all the more pleasant once you have bought your first home. So there is room for an upside.

"As interest rates are high, housing affordability plummet pushing people to rent instead of buying. I think that is what we are currently witnessing"

Interest rates are at an all time low

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