ANALYSIS: During the pandemic when the number of tourists visiting New Zealand was near zero, many owners of properties which had been in the short-term rental pool or which accommodated foreign students made these houses and units available for long-term tenants. Now, that situation is changing, and the rent implications seem clear.
Units are being let again to students and tourists – with returns from servicing the latter group tending to easily exceed returns from taking in Kiwi families and individuals. That is one outcome of the Government’s efforts to dissuade people from holding investment property – a search for higher returns to offset the loss of ability to deduct interest expenses.
In a monthly survey of landlords which I run with Crockers Property Management we can see a rising proportion of investors are planning to raise their rents, and the average rent rise they are seeking is increasing. This is not the sort of thing the Reserve Bank will want to see happen because rents feed directly into the inflation rates.
Equally importantly, the rising cost of renting comes at a time when house prices have been falling, with the average price nationwide now down 17% from the November 2021 peak but still 17% above March 2020 levels pre-pandemic. Auckland prices have fallen 22% to sit just 9% up from three years ago. Only Wellington with a 24% decline from the peak sits less above March 2020 with just a 7% gain.
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Rising rents versus falling prices is rapidly shifting the equation for current renters in favour of buying and that is going to create an interesting situation somewhere down the track – maybe late this year. Prices may have just about stopped falling, but rents will keep rising while population growth accelerates because of the migration boom, and newbuild supply growth is set to slow quite a bit.
When potential buyers are confident that interest rates are headed down, and they lose their fear of prices falling after they have bought, there will be a fairly strong period of cyclical catch-up buying. Such is the nature of housing cycles, and this most recent downward leg has been a doosy.
But before anyone starts throwing numbers around about how fast prices may rise once they do start going up again, it pays to remember that regardless of what is happening with inflation and interest rates, the Reserve Bank has the ability to specifically target the housing market with credit tools.
Independent economist Tony Alexander: “A rising proportion of investors are planning to raise their rents, and the average rent rise they are seeking is increasing.” Photo / Fiona Goodall
It has already made strong use of Loan to Value Ratio restrictions and next year will gain the ability to impose debt to income maximum ratios, which look like they might hit investors more than first home buyers, who are likely to have the playing field still skewed in their favour.
Speaking of skewed, one dynamic running through the newbuild market at the moment is this. Many people signed up for their new off the plan unit when prices were much higher. At the time their bank said they would provide the necessary finance. But now prices are much lower and the debt to market valuation calculators of the banks are spitting out the answer that lending to many of these buyers is no longer financially feasible.
Some off the plan buyers are having to walk away from their purchases because they cannot get the finance. Some may be able to get the needed mortgage amount from a second-tier lender. But as a rule, that will cost them more than sticking with one of the main banks.
This serves to remind us that buying off the plan is usually something safe to do and now and then at some points in the house price cycle can deliver high returns. But the downside is exposure to the risk of losing one’s deposit when house prices fall and the finance disappears. Parents with children in this unfortunate position who have thus far held back from providing finance may find themselves with no alternative other than to raise debt themselves to help their youngsters get over the hurdle and avoid loss of the savings they have built up over a long period of time.
- Tony Alexander is an independent economics commentator. Additional commentary from him can be found at www.tonyalexander.nz
