Can tenants afford to pay more? 'Often they don't have a choice'

Tenants expecting rent to go down in line with property prices could be sorely disappointed. When Infometrics principal economist Brad Olsen tried to reason for a rent decrease last year when interest rates were down, his own landlord laughed.

That’s because, as Olsen knows, a range of factors go into the price of a rental, not just house prices or interest rates. Whether tenants can afford the increase isn’t necessarily a driver.

Even though property prices are unlikely to grow much and are decreasing in some areas, that is mostly irrelevant, unless the landlord has bought recently at lower prices, says Nick Goodall, head of research at CoreLogic.

Landlords’ overall costs are more relevant than house prices, says Goodall. “To expect the cost of rent to come down is probably a little bit hopeful. Every single person [in New Zealand] is experiencing the effects of rises in the cost of living right now and that includes landlords.

“For landlords, it’s mortgage rates going up. It's the fact they can't write off those interest costs, it’s the cost of healthy homes standards and the changes to the Residential Tenancies Act. All these things are putting a squeeze on landlords and will lead to fewer investment purchases, which will mean there's less out there to rent.”

Olsen agrees: “You wouldn’t believe how many landlords across the country have said to me, ‘All of my costs have gone up, my insurance has gone up and my rates are going up’.

“But more importantly, there are more people who want to rent than there are rentals available. That imbalance has put pressure on the market.”

CoreLogic data shows there were 10,000 properties available for rent in New Zealand this month, down from 13,000 twelve months earlier.

Rents rose 3.68% nationwide in the year to March 2022, according to Stats NZ data. Some cities such as Masterton, Taupo and Rotorua saw much higher increases - the highest they’d seen in 30 years. Rents, however, in Central Auckland fell due to the absence of international students and overseas workers. The city centre houses 38,460 people and had negative population growth in 2021. “I’ve heard first hand from a number of people that there are good bargains to be snapped up,” says Olsen.

Infometrics principal economist Brad Olsen: "There are more people who want to rent than there are rentals available." Photo / Tania White

Goodall says tougher regulations have dampened investor activity, which will eventually impact supply. “It’s going to get harder to make the finances work [for an investment property] when you are incurring greater cost,” he says.

The question is, though, can tenants afford to pay more, especially those at the bottom end. “Often [they] don't have a choice,” Goodall says. “Landlords have the ability to lift rents. Tenants generally just have to shoulder that increased cost. The fact is you need to continue to pay your rent. But the increases will be impacting tenants’ ability to spend on other goods and items.”

Goodall says that not all landlords will increase rents just because they can, but some will want to regain ground lost during the 2020 rent freeze. What’s more, changes to the Residential Tenancies Act mean rents can now only be raised once a year.

“If you're not sure about what the next year is going to entail, then you probably want to try and get your property rent back in line.”

Rising wages will be another factor. When wages rise, so will rents, most likely, says Olsen. “A perfect example of this is when the Government increased the amount of money that students could get by $50 a week. The immediate response from many students was, ‘Oh well, my rent is going up $50 a week.’”

Goodall and Olsen believe rent inflation will likely drift back to 3% per year. Olsen says there is a limit to how much tenants can pay, especially at the lower end of the market. That group of renters are hardest hit by inflation rises. He does expect the rate of rent increases to slow over the next year, albeit not go down.

Olsen adds that the same factors that are starting to slow the housing market will eventually flow through into rents. But it’s a pipe dream to expect that rents will reduce significantly across the country, he says.