Market report

The market for landlords has developed in multiple directions over the last few months after increases in interest rates and changes to lending criteria while building is in a frenzy - with very regional responses. Some regions are showing high levels of rental vacancies while others have moved into severe shortages, while actual prices continue to follow Household Income - except for BoP.

Rental Listings are mostly down - Excluding Auckland

While the total number of rentals being advertised is in balance (Supply = demand) there are many anomalies;

  • Auckland has significant oversupply and this is growing, take a look at the linked chart
  • Bay of Plenty and Waikato continue to show shortages, this is especially severe in BoP
  • Wellington seems to be in balance, but this belies a new trend in Sales - see below
  • Christchurch has gone into severe shortage of stock over a very short 6 months

The following chart compares supply to demand by showing the difference from 2.5% of rented properties are being advertised. This level has long been the standard where above that an increasing level of competition for tenants exists (Auckland) and below this rental prices start rising above the norm. eg BoP is the only major city with supply much less than 2.5% and rents are rising in real terms.

Rental Prices rising?

The Spinoff ran an article today postulating the obvious - “Is government policy pushing up rents?”, this is probably true, but so is inflation. The Spinoff made this comment "Rents are rising steadily and vacancies are down. The government is looking at what it can do next.Associate housing minister Poto Williams has mused about imposing rental control to help the country’s struggling tenants.” The situation is far more nuanced of course.

Real rental prices continue to be limited by increases in Household income despite many in the media having a hack at landlords increasing prices. Renters continue to upgrade their accommodation based on their income. Of all the main urban centres only Bay of Plenty shows rent growth exceeding HH Income growth - however BoP also has an increasing shortage of rentalspotentially driving prices higher. Auckland rental inventory remains high so rents are staying close to the 20yr low of 27% of Household Income. Note, these are median rents, so specific areas may be different. The income statistic used is for the year ending June 2021, so is getting increasingly dated, meaning actual rent/HH income is lower than shown for all regions in the chart below which uses average rent to Dec 2021.

Wellington Specific Income vs Rent, comparing June 2015 with June 2021, from Stats Dept(HH Income) and MBIE(rents) The Stats Dept details are currently unavailable so I cannot report national levels, but have Wellington data already:

  • Average Wages & Salaries $2,028, up $516 from 2015 or 25%
  • Average Self employed income $399, up $196 or 49%
  • Average Government transfers $128, up $19 or 15%
  • Geometric Mean Rents June 2021, $512, up $154 or 30%
  • Income as proportion of rents has risen from 19.6% to 20.0% in 6 years.

Reflecting the shortage of properties available in Wellington we have seen a 2.1% increase in rentals as a percentage of HH Income over those 6 years. In fact the range has stayed well within the historic range of 21-25% of HH Income. While rents have risen 30%, Household Income rose 29%, a minor rental increase during a period of shortage.

Sales listings are Rising, some regions very quickly

Unfortunately I only have past details for Wellington and suburbs for Sales stats, but the situation is suggesting something is changing dramatically. Lower Hutt has 498 listings on the 7th Feb 2022, while at the same date last year it was 148, that’s over 3 times last year. Prices are likely to be held up by the interest groups like Homes, REINZ, Agents and Trademe however I do expect prices to fall. REINZ has recently focussed on million dollar homes for the last 2 blog posts, to keep the market rising.

REINZ do however admit that inventory is increasing: "Inventory levels increased in most regions, some recording a significant jump, as restrictions eased across New Zealand and those who previously held backtheir properties brought them to market. Wellington increased 206.6%, from 346 in December 2020 to 1,061 in December 2021. Manawatu/Whanganui increased 133.7% annually, from 315 to 736, and Hawke’s Bay increased 107.4%, from 203 to 421.” I cannot duplicate REINZ stats because they use their own data, and do not state which part of Wellington, region or city. On Trademe, the Wellington Region inventory increased from 1307 on 5 Dec 2020, to 2200 on 5 Dec 2021 - as below which is now even more pronounced.

House prices never Fall

I frequently read that house prices never fall. That is almost true, but on the other hand never true. Firstly, real house prices (prices reflected in today’s money values (in my case Dec 2003), prices have gone up a long way, with a few pauses on the way, including some significant falls (1992, 2000 and 2008-2012). There is another factor that is often forgotten, a house sold in say 1992 is not going to be the same quality or construction as a house sold in 2022. Many regulations have changed the nature of “houses”, more recent houses have full insulation, double glazing, wind resistance, fantastic kitchens and bathrooms and cost more to build with scaffolding and safety requirements. Comparing a current house with an older house is like comparing oranges and apples. This can be seen in the real price step-ups in 2003-2007 and 2014-16 when many of the new rules were introduced.

The Pandemic impact

The rise in real prices since the pandemic is a false rise, with no other driver than very low interest rates. As interest rates rise, real prices will fall probably back to 2019 real prices, the timing will depend on sellers accepting lower actual prices and/or inflation rising by up to 20%! (the index falling from 1050 down to say 800).

It’s worth remembering that the average 2yr interest rate was 3.5% throughout 2020 and in Dec 2021 was 4.7% (RBNZ C31), lets say interest rates rise to 7%, then last years mortgage of $800k at 3.5% will be costing $28k pa in interest only or $538pw, but at 7% that will be $56k pa or $1076pw. Households will need to absorb the increase in Interest rates while maintaining their principle payments or sell. The RBNZ is late to increase interest rates, so is likely to have to increase further than expected, maybe to the 10% of 2008, but hopefully not the 20% of the 1980s, but most likely higher than 7%.

Jonette 2011