Saturday, October 24, 2009

Rental Rates

An article in the local newspaper the Georgia Straight indicates the effects of low interest rates.
The Metro Vancouver Housing Corporation is losing many of its moderate-income tenants to the housing market.

With variable mortgage rates going as low as 2.25 percent, plus incentives being offered by sellers, families are buying homes and moving out of affordable rental properties operated by the public housing body, according to a report by regional housing manager Don Littleford.

Although this may be good news for the real-estate industry, Littleford noted in his report—to be received tomorrow (October 23) by the MVHC board—that this is a matter of “growing concern”.

"Growing concern?" For whom exactly? The public housing that is offered by MVHC is often at a very low vacancy rate. The concern is, apparently, for MVHC's profits, not so much the tenants taking on high amounts of debt, though as a good Samaritan I would be concerned for both MVHC and the tenants. What is interesting, though, is an indication that the affordable rental market is predicting trouble filling its units. To fill the units they need only drop the price by some amount to attract more applicants, which will certainly hurt their profitability to some degree. I have little doubt they are capable of filling their units to near 100% capacity, but the luxury often awarded to these professionally-run outfits is they leeway choosing their tenants at the expense of charging slightly below-market rents. This luxury may be starting to evaporate. That produces a dilemma for the PMs: take a chance and rent to a suspect tenant or leave the unit vacant. If this is the course they take, profitability can drop by more than the implied decrease in profitability due to lower market rents.

We are hearing reports of weakness in the rental market, likely because of the combination of rising unemployment (causing people to use dwellings more efficiently) and continued dwelling completions exceeding the population growth rate. Low interest rates have allowed the choice of owning to be viable for many more compared to last year -- and a great many obviously prefer to own -- but someone choosing to own instead of rent does not change the overall dwelling supply. The weakness we are witnessing in the rental market is an indication of too much supply for what the population is willing to support. That does not bode well for residential construction starts in the next while, nor are sizable rent increases likely to stick en masse. That sounds awfully deflationary to me.

Hat tip to German Guy.


M- said...

Wow, they're expecting a 17% drop in rental revenues for 2009, compared to what they'd budgeted! That's crazy! (well, either they'd budgeted expecting huge increases in rent, or now they're having to substantially drop their rents to attract new tenants).

Rob said...

Kinda wish I qualified for coop housing. Loved it during grad school.

buff_butler said...

I wonder if this is a good example of borrowing demand from the future (these people wouldn't have bought at this point in time under regular circumstances)?

There is also probably some concern after the olimpics when all the rental units reserved for visitors becomes available all at once.

Arwen said...

Part of the problem in this sector is that the prices for many "low income" places - especially anything under the 'Homes BC' contract - is renting to the middle tier if you actually look at the *incomes* of the population.

I don't know if it applies to this report, but it does to other lower tier places in the area. There's a lot of setting price based on 5 year evaluations of the area's comps, and a lot of discount buildings have gentrified up - now everything's competing for the higher tiers, so the price comps in the private market are compressed upward.

So public housing was unprepared for a bubble. Rather than basing on the reported Census incomes of Vancouverites and aiming at the lower quartile, they're hitting the median income in the demographic. (Census families, 2 bed and up: census singles, Studio/Bach and 1 bed.)

Which is ridiculous. But no one but poor renters to complain, of course.

jesse said...

It would be "borrowing demand from the future" for owning but not for dwellings.