Back in March of this year there was a bit of noise around the fact that rents across New Zealand had risen by an average of $30 per week between 2018 and 2019. This was in stark contrast to an average rent increase of just $12, per week, in each of the 10 years between 2008 and 2017. This wouldn’t have come as a surprise to anyone who understands how the property market works, but, as expected, it led to howls of outrage from the usual quarters and renewed calls to control or even regulate the rental market.
Such demands say more about the naivety and sense of entitlement of so-called tenants rights groups than they do about the market, because the impact of further regulation would be to increase rents further, not reduce them. Indeed, it is moves to exert increased control over the market, by the current Government which have, at least partially, brought about the current increases. And the same factors which caused those are still in play. For this reason, we can expect to see another big jump in the weekly average cost of renting when the figures are released for the period between 2019 and 2020.
There are at least five reasons why rents will continue to increase:
1. Lack of capital growth
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Despite a media perception that landlords are rich fat cats cashing in on poor vulnerable tenants, most property investors are just mums and dads facing the same daily issues as the rest of us. Most of them lose money on their investment in the first few years of ownership because the cost of owning a property usually exceeds the rental income, sometimes by a big margin. This is the property investment equivalent of putting money in the bank and paying the bank for the privilege of doing so. This isn’t such a concern during periods of strong capital growth when they’re seeing an increase in the value of their investment, but in flat markets, such as the one we’re in now, investors will look to maximise the income on their investment to reduce their losses, which means higher rents.
2. Ring fencing of tax losses
Not only do almost all property investors lose money on their property in the first few years, but also the Government has now removed their ability to offset part of that loss against other income. The ability to claim these losses wasn’t a loophole as some less informed commentators have claimed, it has been a staple of tax law, for all forms of investment, for over one hundred years. In only removing it for property investors the Government has effectively guaranteed that some of these will leave the market at precisely the time we need more rental properties. Again – this will mean higher rents.
3. Increased compliance
Both this Government, and the previous one, have been progressively introducing new measures with which all landlords must comply. These include measures around making rental properties warmer and drier and, to be honest, most landlords broadly support them. However, this doesn’t reduce the impact of the costs associated with compliance and, inevitably, some of these costs will be passed on to tenants. You guessed it - higher rents.
4. Higher insurance premiums
There are some big changes coming to the way in which insurance companies reflect their risk, which means that investors who own property in parts of the country which are more susceptible to natural disasters, such as earthquakes, will soon face some big increases in the cost of insuring their rental property. I’ll be writing a lot more about this in the coming weeks, but for now, just be aware that it will increase the costs of renting in those locations as landlords look to recover this additional cost.
5. Nervousness
In addition to the actual costs associated with the changes already outlined, there is also a very real nervousness about what the Coalition may do next. Property investors are very aware that this Government is deliberately fomenting envy as a political tool and that an aggressive and ill-considered capital gains tax was avoided only because of the intransigence of New Zealand First. This nervousness will lead to departure from the market and a hesitation to enter it, which, again, will lead to higher rents as market supply, as a percentage of the growing population, contracts.
- Ashley Church is the former CEO of the Property Institute of New Zealand and is now a property commentator for OneRoof.co.nz. Email him at [email protected]
