Opinion: Rents 'Sure to Rise'

By Olly Newland The latest statistics make interesting reading indeed. What they show is there has been a huge surge in people choosing to rent. There will be serious consequences if this trends continues ... which I am sure it will. Many have come to realise that renting is still far cheaper than owning especially while capital growth remains so elusive. The last surge in renting was in 2008 but for different reasons. The rise in house prices and the higher interest rates prevalent at the time forced people into renting. Now the picture and the reasons have completely changed. The following article by Mr B Hickey of interest.co.nz demonstrates what is happening in the market. (Although he and I draw different conclusions.)

Rents unchanged for 2 years despite surge in numbers renting April 9th, 2010 New Zealand's median weekly rent was unchanged at NZ$300 in March from NZ$300 in both March 2009 and March 2008, but the number of New Zealanders lodging bond rentals has surged in the month by more than 54% to 19,683 in the last two years as many opt to rent rather than own. ...

Read the Hickey article at interest.co.nz here. Investors should note well what these statistics are saying and then connect the dots ... or miss out on the bonanza to come. I have seen all this before. I can vividly remember the same sort of thing happening in the late 70s and late 80s as the recessions in those times had exactly the same effect as today's statistics reveal. During a fit of mental instability, I used to own around 40 rental flats scattered through Otahuhu, Meadowbank, New Lynn, Mt Wellington and Kohimarama in the belief that if 10 were good then 20 were better and 40 better still. It didn't quite work like that as I quickly found out. My days and weekends were an endless round of door-knocking, rubbish clearing, repairing, painting, tenant evictions and cockroach eradication. As the recessions in those times deepened, the cash flow gratifyingly increased -- but so did the workload which in turn increased the stress. Eventually I was forced to sell the lot and I concentrated thereafter on better quality properties with better quality tenants. During those recessions I noted with great interest how prospective tenants would climb over each other to rent flats from me as the hard times continued to roll. Rent 'auctions' were frequently held on the lawn whenever a flat was advertised and people would offer me bribes ranging from straight cash, to jewellery, not to mention other benefits (!) which I would not describe here, but rather leave to the imagination. You would think that during recessionary times people would find it hard to find the money to pay extra rent -- but that is not so. Then, just as now people will go without luxuries before they give up the roof over their heads. Nevertheless it always amazed me as I went around rent collecting how my tenants, while very reluctant to pay me no matter how reasonable, still wasted money on non-essentials. It was common to find heaped around the flats piles of beer bottles, take away cartons, cigarette boxes, racing stubs, discarded shoes, and stained mattresses -- not to mention the salivating dogs that must have eaten more meat in a day than the average family could consume in a month. Nothing has changed. Today, if you visit the poorer areas which have a high preponderance of renters you will still see the same wastage. Despite what the do-gooders would have us believe, there is still money to spare, a state of affairs that will surely come to an end as reality sinks in. The statistics do not lie. As more and more people choose renting over owning, plus the steady push from immigration, natural increase coupled with a chronic housing shortage the conclusion is obvious. see: www.stuff.co.nz/business/opinion/2553184/Housing-shortage-looms and www.nbr.co.nz/article/housing-shortage-pt-i-crisis-what-crisis-90424 If that wasn't enough there is yet another ingredient to add to the mix. On May 20th, a few weeks from now, the Government will reveal its 2010 Budget. Judging from the noises emanating from all quarters it will make the 'Mother of all Budgets' from the National Government during the recession of the early 90s, look like play-time at pre-school. It has been made clear that dis-incentives will be included in the Budget in an attempt to wean people off property as an investment and instead 'encourage' them to invest in other areas. Given the recent history of 'other forms of investment' e.g. record business failures, billions lost with finance companies, frozen investment funds, and a share market run by cowboys for cowboys, I think there's a snowball's chance in hell that there will be stampede out of property. However, it is quite possible that some of the pressure on rental accommodation is coming from people who believe that property investment is not the way to go for the time being and Nirvana will be found in some other form of investment and hence they rent, saving their pennies for the goodies coming their way. The cargo-cult mentality is still alive and stirring once again. Do you recall the rush by similar sorts into the 'sure-fire' investment vehicles of the past? How much money was lost by the poor souls who believed that instant wealth was obtainable through deer or ostrich farming, Kiwi fruit, kohlrabi growing, macadamia nuts, smell-alike perfumes, acai berry juice, US tax liens, online affiliate marketing, pyramid selling, water powered engines, super vacuum cleaners, encyclopaedia sales, Claytons 'whiskey', Nigerian inheritances, inner city shoebox apartments etc. A few of these ventures struggled into profit but the rest sunk without a trace leaving investors poorer but sadly wiser. This widening of so-called 'investment opportunities' (as in 'Never mind the quality, feel the width') will, I predict, happen again if the Budget skews investment into unknown territory. Of course, in more recent times there have been any number of 'property-based' scams and disappointments and not just the dodgy ones everyone's heard of, like BlueChip. Just one example: we see the utterly naive paying through their collective noses to attend a 'Trading Workshop' (with profits to 'help the poor' in some third world country) who are, it transpires, possibly pitched/stitched into illusionary 'trades' (really purchases) of fifth-rate properties, or bare overpriced sections sited by some mosquito-infested swamp. The coming shake up/enforcement of tougher new rules for those engaged in giving what can be broadly termed 'financial advice' will, I hope clear the decks of the smooth-talking spruikers who have operated without restraint for years - and about time too. The 'Authorised Financial Advisors Act' comes into force shortly. This will send a mighty shock through the system and my prediction is that many pseudo-advisors will disappear never to be seen again. Once these wolves in sheep's clothing are forced to not only (a) qualify to be advisors, but (b) provide a disclosure statement detailing their past misdemeanours and the chain of commissions, interests and kickbacks they've been tucking their bunny clients into, the investment landscape will never be the same - and good riddance. (I've supplied my own disclosure statement to anyone who is even considering using my consulting and mentoring services for several years not because it was a legal requirement but because it was the right and proper thing to do.) And don't forget one other thing: The leaky home crisis. see: www.stuff.co.nz/national/politics/3210155/Leaky-homes-A-crisis-that-just-won-t-go-away Tens of thousands of houses have been effectively taken out of the market by this scandal. A whole decade of building has been lost. This will only serve to turn the screw even tighter. A surge of renters as the statistics show right now, has a knock-on effect on rental levels in the medium and long run. There is always a lag factor, but as the number of available rentals dries up -- whether shoebox apartments, houses or flats -- the pressure will come on. If ever there was proof needed that rents will soon dramatically rise then these statistics provide that proof. The property market is changing and changing fast. As never before, obtaining sound independent advice is needed to prosper in this changing environment. Used with permission. www.ollynewland.co.nz © 2010 Olly Newland. All rights reserved.