ANALYSIS: Each month I run a number of surveys which gives me near real-time insights into what consumers are thinking, what businesses are experiencing, and where the real estate market is at as seen by mortgage brokers, real estate agents, and investors.
The survey of investors is sponsored by Crockers Property Management, and we can glean some insights which place some flesh around what is usually for all of us a very limited understanding about the true dynamics in the rental market.
For instance, we should expect with rapidly rising costs for insurance, council rates, debt and maintenance that rents will be rising at an accelerating pace. But that does not appear to be the case. When I ask investors how much they plan on raising their rents in the coming year they most recently said on average 5.6%.
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That result was unchanged from a month ago and down from the three-year peak of 6.3% reached in July last year. Why isn’t rental growth accelerating? Probably because research shows the main determinant of rents and their movements in New Zealand is income shifts in the household sector.
With so much pain being felt by many renters recently (not high mortgage rates though), their ability to pay higher rents is low. Landlords may think in terms of pricing to what the market will bare and in that case the market can’t bare all that much at the moment.
Nevertheless, the 5.6% planned average increase sits above current inflation of 4.7% and where inflation is likely to be a year from now which is less than 3%. But still accountants in the field of home investing tell us the numbers don’t stack up any longer for investors – not with interest rates at current high levels. That is a problem. We need a lot more rental accommodation.
Independent economist Tony Alexander: "Developers are offering incentives to people to buy their multi-unit developments and that tells us demand is clearly weak." Photo / Fiona Goodall
The exceptionally strong pace of growth in New Zealand’s population courtesy of booming net immigration of lowly skilled people is boosting demand for housing. This visibly manifests itself in stories of people cramming into small spaces – both the migrants and perhaps the people they displace.
It also can be seen in another result from my survey. On average over the past three years a net 9% of investors have said that it is easy to find good tenants. At the end of 2022 a net 8% actually said it was hard. But the migration boom since then means that now a record net 27% say it is easy to get good tenants.
So, it looks like the population boom is delivering landlords a high ability to pick and choose amongst the people looking for rental accommodation, and that can offset the lowish ability to comfortably pass on rent rises. Maybe preference is given to people without pets, maybe without children, maybe without tattoos. Who knows?
The way things are going this ability to pick and choose looks like growing further. That is because at the same time as population growth continues to surprise on the high side, prospects for construction are getting worse. Developers are offering incentives to people to buy their multi-unit developments and that tells us demand is clearly weak.
For buyers there has been so much extra stock placed on the market recently that they see little need to buy off-the-plan. Without presales, developers won’t get finance so a lot of planned developments are going to be parked for a couple of years. When they eventually are brought back to the market the issue then will be shortages of labour as skilled people will have either gone to Australia to help build the 1.2 million houses planned by the Federal government in the next five years, or to build the infrastructure our new government is targeting.
Suffice to say, while growth in rents does seem to be less than pure analysis of demand and supply would suggest, the tightness of the rental market is manifesting itself in other ways. And with just 55% of landlords in my survey now saying they plan to never sell or hold at least for 10 years compared with 64% a year ago, their selling looks set to shrink the rental stock further. Extra difficulties for renters lie just around the corner.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
