Rent/HH Income

Rent has Always been 22-27% of Household Income (excl Auckland)

Over the last 20 years, rents* have remained a relatively constant proportion of household income**. This suggests a strong relationship, and realistically that is what you would expect, renting households will look for a rental that suits their total net income including self employed income (say couriers, trademe reselling), wages AND benefits (eg Accommodation Assistance). If a household income increases more than rents, then many tenants will seek a better standard of house at a higher price. Conversely, if household income decreases, many tenants look to downgrade to live within their means. Social housing provides a backstop, but increasingly this will be rare because investment in this sector went backwards in the last government and has taken time to grow with the current Government in an overloaded construction market.

* Rents = geometric mean rent as published by MBIEwebsite every month. I calculate the calendar year average of the monthly published rents.

** Household Income = Stats Publish Median Household Income each year, including wages, benefits as well as self employed income.

*** The latest chart is updated for May 2022, using reported household income from June 2021. I have used an estimated Household income growth rate equal to last year based on the assumption that most of last year’s growth was driven by "self employed income". Last year rents/HH Income grew very quickly because my estimate of HH income was significantly too low at 4%, it came in at 8%, this year I am assuming a HH Income increase similar to last year until the real data arrives in September.

Major Regions

The chart measures affordability of housing from a renters point of view. Above the long term trend and it becomes less affordable. Below the trend and prices have likely dropped as in Christchurch in 2017-20 and even further in Hamilton in 2002. Auckland and BoP are both falling below previous years - Auckland becasue of an oversupply of rentals, BoP because incomes were rising so quickly last year. However, Wellington went into short supply and is now in oversupply territory which is weighing on prices.

For the rental market, affordability is simply how much of your household income is spent on rent. A study of this percentage using public data from MBIE and Stats has some surprising insights over 24 years.

Notice these key features of the chart:

  1. Changes in 2021;
  • Increased income from Wages (5.8%) and self employed income (25%). HH Income is annual and the latest data is June 2021, published Sept 22.
  • Increased rents due to shortage of supply in Bay of Plenty and many minor regions. Especially all South Island regions, eg Nelson, Otago, Northland and Manawatu where ratio are 27-28%, up from 24%.
  • The Canterbury ratio has risen on the back of HH Income failing to rise as well as rents rising, due to a shortage of rentals. Rents have risen 7% in both 2021 and 2022.
  1. The proportion of rent to Household income has remained almost constant over 24 years for each region with some minor variation, usually returning to the long term average. This is especially so for the entire country, ie Rents are directly related to Household incomes.
  2. Some regions are prone to extreme breakouts, see both Waikato(20% in 2002), post earthquake Canterbury(26% in 2012) and BoP(>25% in 2017, 2019 to 2022). Is the serious supply shortage in BoP caused by the sell-off in 2015 of almost all social housing in Tauranga? I cannot tell from this data, but I suspect it is.
  3. Auckland rent/HH Income is 5% higher than all other cities (28% compared with 23% for the average other cities). This is potentially due to Auckland including a greater proportion of high priced rentals to international workers, rather than Auckland simply being more expensive. Note that Auckland rents are rising overall, despite the central city rents actually falling.

Household Income

Minor Regions

Reviewing the rest of NZ, some sharp changes are in progress. eg why is Nelson, Northland, Manawatu, and Otago at 27-8% in 2022, well above the long term range of 20-25%? Why is Southland so low overall (15% rising to 20%) and Northland (25% to 30%) so high? (student support and Holiday homes respectively may be the cause)

I do expect that these locations are too small to show this trend. small changes to the region’s rental character can change annual rents and or income for the entire region.

Minor regions are mostly showing increasing rents:HH Income ratio. Their population may be growing faster than their housing construction. However, income appears to be growing more slowly - the income chart above shows “Total Regions" well below Wellington and Auckland, suggesting seriously lower household income in all other regions. Note that the minor regions have typically shown a rent:HH Income ratio of between 19% to 25%, but the last 3 years the ratio has moved to between 21% to 28%, similar to the major regions. Shortage of supply in almost all regions is very likely to be raising that ratio.

Landlords or Property Investors cannot increase rents arbitrarily, rental price increases are constrained by available Household Income. Tenants may decide to upgrade to a higher rental bracket if their Household Income enables such an upgrade. The opposite is also true, tenants will downgrade if their Household Income is too low to support their current rental.

Check out supply foreach region here

Jonette 2011