- The value of a property is not just about ‘supply and demand’. [!](Along with Chinese demand, increased population and zoning considerations, they are important but peripheral matters.)
- The value of a new property may equate to its ‘cost’ – but this is not necessarily the case.
- The value of a property is all about capitalizing its net maintainable rental (i.e. after outgoings, including municipal rates and taxes).
Viz, a factory can let for $80,000 pa net, and sales indicate net yields to be 8%.
Therefore, its value is $80,000 x 100/8 = $1,000,000
If factories in the locality are virtually identical, all sales will take place at around $1,000,000. Although capitalization of the net rental remains fundamental to the property’s value, it is unnecessary to go through the capitalisation exercise when there is sufficient ‘direct’ sales evidence.
Even real estate valuers themselves often fail to see this is no different from the assessment of the value of a residential property. As there are many residential sales, ‘direct comparison’ is the primary valuation approach, and capitalization of the net rental becomes unnecessary.
But residential values notionally remain the capitalization of their net rental, i.e. net of rates and land tax – even though this may not be the primary valuation approach.
Three facts emerge from analyses of current Australian residential rentals:-
- City yields commonly show returns around 1% net. When it is understood that long term residential yields are more commonly around 5%, clearly investors expect the enormous capital gains of recent years to continue, because better returns are to be had elsewhere – even in the current low interest rate environment.
- As municipal rates and land tax continue to rise (even with the artificial caps which are becoming commonplace), residential investors’ net earnings will drop below 1%!
- The usual resolution of such untenably low returns is a major collapse in land prices, which will see yields increase back to their long term averages.
Governments at all levels resist taking the steam out of the market by further increasing municipal rates and land tax to reduce yields and hasten the necessary correction. Whilst this may assist to placate the increasing alarm of investors and their bankers, it has done nothing to make housing more affordable for millennials locked out of the housing market.
Governments, banking, investors and most baby boomers are fixated on supporting the real estate bubble at any cost: the system is fundamentally speculative, and despite impossibly low residential yields, apparently intelligent people try to deny the very existence of a bubble in land prices!
Meanwhile, as the real economy staggers under the weight of the bubble, generation Y must patiently await the impending land market collapse if they are to get their own homes.