This has happened in the past because it’s happened in other countries as well, what happened to rents in those areas? Did they crash as well?I’m just thinking if people own positive cash flow property that pays for their mortgage if a crash happens, will their rents get reduced and they’ll end up in the negative situation?Steve, They won’t fall as much as house prices do. Rent’s really based on incomes, you know?That’s why rents don’t rise as much as prices do in a bubble. They don’t fall as much in a slump.
If people lose their jobs and you, therefore, don’t have the same security income from tenants, but house prices will fall more than rents.Ryan Okay. This makes so much sense to me because let’s say I want to buy a house, if interest rates go down, I can afford to borrow more and therefore, if the whole markets doing that, that pushes prices up. But as a renter, interest rates go down, it doesn’t-affect how much I can pay to rent a property. I’ve got an income that I earn, I divvy portion of that to live and to pay rent and so,
yeah, I understand now why rents wouldn’t-fluctuate and why they don’t fluctuate in line with the property how do property valuations work to market and I’ve never understood that.Steve, I’m glad it helped. The catch that people – yeah, sorry.Ryan I was just going to say do we know how much rents did drop in relation to house price in previous crashes across the world? Or is that just not a figure people really looked?Steve, It’s a figure I could drive, but it’s not the great deal. If you look at the house price crash in America, that was of the order of %.
I think you would find rents might have fallen by %. That sort of thing.Ryan That’s a massive difference.Steve Massive difference, yeah. The reason that people say that they’re okay as long as unemployment doesn’t rise, everything’s going to be fine. Well, the relationship I’vetalked about between accelerating mortgage debt and rising house prices are only part of the relationship.
Australia’s went down to here and bounced up again. Andthat was because of the impact of the first homeowner’s scheme. These people dived and took on mortgages.Ryan Yup. I remember that time.Steve And they fall. The trend for this to go negative. Yeah. And then the second time, around when, again, we started having a decline in mortgage debt growth. That when people started borrowing for all the investment projects in mining. So it boosts kind of the business side. And then, as debt started to slow down.
They were actually rising a percentage of GDP. That’s when investors followed the housing market again. So, consequently, what we have – this is the key what do valuers look for when valuing a property one I want to come down to in a moment. The key relationships – that’s the chart you can see right now.And I’ll explain the logic when we are actually in the interview. But what actually drives the market is an acceleration of mortgage debt. So what I’m graphing here, the blue line is changed in house prices in America and.
The red line is the acceleration, not the change, the acceleration of mortgage debt as a percentage of GDP. Okay, can you see the relationship?Ryan Yup. It seems to be in line with each other.Steve Okay. Yeah. One drives the other, so econometrics on this then it’s definitely the case. Accelerating mortgage that drives change in house prices.
Bryan Yeah, where the red line preceded the blue line.Steve Yeah. This is now looking at the – this is real house prices in America versus Australia since. So America had this big bubble and crash and now, some real house.