A new research paper has found that wage inflation and the number of dwellings available are the two biggest factors in the cost of renting a home.
Like most economics papers, this latest publication from Treasury, the Reserve Bank, and the Ministry of Housing could easily be headlined: laws of supply and demand still apply.
It found that an increase in nominal wages leads directly into a 1-to-1 ratio increase in rents—all else being equal—and that a 1% increase in people per dwelling resulted in a 1.5% increase in rents.
The tri-agency paper was authored by Alan Bentley, Enzo Cassino, and Nam Ngo.
“There is some limited evidence suggesting that the higher the increase in the supply/demand gap, the stronger the wage-rent relationship, due to competition for rental properties allowing landlords to capitalize on renters’ wage gains,” they wrote.
Renters rise up
The three-agency Housing Technical Working Group’s paper said the proportion of people who rent has been increasing since the early 1990s.
These renters typically pay a larger proportion of their incomes on housing costs than owner occupiers which makes them more vulnerable to movements in prices.
The paper found that an increase in nominal wages leads directly into a 1-to-1 ratio increase in rents—all else being equal—and that a 1% increase in people per dwelling resulted in a 1.5% increase in rents.
Providing a better understanding of rental market dynamics could lead to better Government policy, it said.
Policymakers in both central and local government have been slow to allow zoning laws that enable more housing and put downward pressure on household costs.
Significant progress has been made in Auckland, via the Unitary Plan, and that success was set to be copied in other urban centres through the Government’s Medium Density Residential Standards (MDRS).
Just over a third of rental households are in Auckland, another third in the major urban areas of Canterbury, Wellington and Waikato, with the remainder in less densely populated regions.
The MDRS was a bipartisan agreement, but National has withdrawn its support and put forward an alternative that gives councils more flexibility on where houses are built.
National’s would-be coalition partner, the Act Party, opposes medium density altogether and often attracts support from voters who don’t want new housing to be built in their area.
Pay rises spent on rent
The Housing Technical Working Group’s paper found rents overall had increased broadly in line with wage growth over the past two decades, and faster than general inflation.
Meanwhile, house prices had risen further because of interest rate declines and the tax system. Rental prices are much more tightly linked to supply than purchase prices.
Renting has been on the rise in New Zealand for three decades. About 32% of households were renting in 2018, up from 23% in 1991.
The decline in home ownership has been particularly acute for young adults. Only 35% of those aged 25 to 34 were owner-occupiers in 2018, down from 65% in 1988.
Renters typically have lower incomes and less wealth than owner-occupiers. They tend to spend a greater share of their income on housing costs, but the physical quality of the housing is typically lower than in owner-occupied properties.
Bentley, Cassino, and Ngo also identified other factors that had some effect on rental prices.
The unemployment rate was negatively correlated with rental inflation, meaning more joblessness would lead to lower rental prices.
It may be that better job security encourages people to form new and smaller households—which would increase demand for properties—and also allows landlords to raise rents without pushing the tenant into default.
Mortgage rate feedback loops
Another finding was that higher rents were loosely linked to higher mortgage rates.
“However, the sensitivity is quite small and is not always statistically significant across model specifications,” the authors said.
Possible reasons for this connection could be that first home buyers were delaying a purchase due to higher interest rates, increasing demand for rentals.
“Higher financing costs and restricted land markets may limit the supply response to increased demand for rentals when interest rates rise, putting further pressure on rent inflation”.
The authors also warned there could be feedback loops in the banking sector.
“As supply begins to increase relative to demand this will increase vacancy rates and reduce yields for property investors. This may lessen banks’ appetite to lend for further rental property development”.
However, the primary finding of the study was that income growth and relative supply and demand of dwellings have been the key drivers of rents in New Zealand over the past 20 years.
84 Comments
Any discussion about population growth is completely off the table under this or whoever takes charge post-election. The default position is that immigration is solving more problems than it creates when every look into it shows that assumption couldn't be any further from truth.
It's in paragraph three:
[The paper] found that an increase in nominal wages leads directly into a 1-to-1 ratio increase in rents—all else being equal—and that a 1% increase in people per dwelling resulted in a 1.5% increase in rents.
If the population is growing faster than rentals are being built, rents go up. It's in the story.
It's not explicit though, it is implied. And changing lifestyles/demographics can have material implications on dwelling density too. If you make more housing a factor in lowering rentals why wouldn't you measure a growing population an explicit factor in increasing rentals? Seems mealy-mouthed avoiding the true cause of so many of NZs current infrastructure pressures. {Edit]
That's not a statement that a 1% increase in overall population leads to a 1.5% increase in rents.
They're saying a 1% increase in the number of occupants per dwelling leads to a 1.5% increase in rents.
These are two different things to my mind.
Or the wording is just odd.
National demo'd a lot of social housing in our area when it was in the driver's seat, never replacing them. Labour has been replacing them but they are probably only just catching up to the numbers there were.
Unsubstantiated claim, anecdotal observation. Sometime I must check numbers by year over a 20 year period.
Auckland’s housing boom was mostly due to the Unitary Plan (ushered through by Phil Goff). Although, Kainga Ora has been building lots and KiwiBuild has got some stuff built.
Where Labour deserves some credit is that they have helped to grow construction industry capacity and also copy/expand Auckland’s success with its MDRS policy.
We must have made a dent during Covid, with a fairly stable population and sustained record consents:
https://www.interest.co.nz/charts/real-estate/building-consents-residen…
Labour have taken real steps with removing interest deductibility except on new builds (so investors are strongly incentivized to build new) and the MDRS rules dramatically opening up land supply.
National intend to repeal both of these changes if elected, despite the latter being a bi-partisan agreement.
We have no clear answer as to why National reversed their position on MDRS. Perhaps they realised that city councils will consistently fail to build adequate infrastructure to support increased housing density?
Christchurch can't even resolve their storm water flooding, mains water supply contamination, or sewerage treatment. What hope is there for them to build enough capacity for housing the estimated 100k extra population over the next 15 years?
Given my cynicism of our politicians, as National are pushing for building out rather than up, promoting urban sprawl, I would look to see who has been buying up land surrounding the cities, especially around main thoroughfares.
If National have their way rural land on the fringe of urban centers will quickly see an increase in price, and I would not be surprised to find a number of trusts being involved. We know how MP's like to hide things away in those.
The only problem with pushing investors into new builds is that it pushes up the prices of new builds, thus disadvantaging FHB who want to buy them and renters. The ability to expense mortgage interest is now built into the price of the house. Also the smaller pool of new builds available to investors who previously could buy any dwelling is driving price increases, and developers like Williams Corp have been making out like bandits (name one other business where the owners were flying private jets and buying multi-million dollar yachts during covid?). Renters are being forced out of renting older freestanding 3-4 bedroom houses as the supply of them dwindles, and into tiny 2 bedroom townhouses and apartments, whilst still paying higher rents for the privilege of degrading their housing experience.
Aren't the older freestanding 3-4 bedroom houses being bought up by developers, who knock them down and build 3 or 4 smaller properties? Certainly seems to be the case in my neck of the woods. I've seen 5 older sections, that used to have a single house, turn into multiple yuppie accommodations with no off-street parking. In one case, the original property sold for just over 800k but the 3 new properties on the section are going for 600k each, maybe less if the market keeps falling. If you got access to trades and materials, and a wad of cash, it's an easy way to get a decent profit without having to worry about the bright line test making you pay tax on your gains.
Yes. That is my experience in my area as well. And to top it all off, the price of the original property is far in excess of what it is worth as a house to be occupied by its owners, its worth what a bunch of developers think the land is worth to them and its ability to support x number of tiny townhouses. The original home in your example probably would have sold for $600k to an owner occupier or an investor (if the numbers made sense) if a bunch of developers hadnt been bidding for it.
Population growth is the problem.
Our provision of things, housing, infrastructure, and life quality is under pressure. Once it was a good place to live. And you could house yourself well and affordably.
Let's aim for a stable population. Still going to take a few decades to catch up.
Interestingly, the Productivity Commission report into immigration settings showed that the number of managers, professionals and building/engineering trade workers on work visas coming to NZ didn't increase much between 2012 and 2019.
On the flipside, our intake of labourers and lower-skilled trade workers (waiters, baristas, retail assistants, cooks, etc.) was up 3-5x.
Seems unreasonable to expect high living standards in a country that has been positioning itself as a haven for economic refugees.
It all started when they were given state advances corporation 3% mortgages. They also voted Muldoon to scrap compulsory super. This planted the seed for a generation of entitlement, economic tailwinds and frivolousness. No thought given for preparing for their retirement "that's the next generation's job". Hoard a few rentals and use scapegoats such as "The Government told us to prepare for our retirement".
Even to this day, with the benefit of hindsight, they'd rather bankrupt the country while kicking and screaming than support means testing of super.
I am no boomer ,but means testing of NZ Super is complete nonsense. Look at Australia where the pension is means tested..all it has done is create and industry of asset minimizing and deeming of interest . Any NZ boomer with assets similar to the Australian permitted levels and obtaining NZ super is not only paying for their own Super through taxation of the assets, but also spending that Super , feeding it back into the economy and paying 15% back to the Goverment. And by the way, I have done a bit of investigation and 3% SAC loans preceded the boomers..it was their parents that got those. Most boomers were buying in the 70s and 80s when loans were limited to $20k, 2nd and often 3rd mortgages were required and interest rates peaked at over 20%.
SAC was disestablished in 1974. The oldest Boomer would have been 28.
Also, why did Boomers need to take out 2nd and 3rd mortgages? Smells like frivolousness to me. If mortgage rates were over 20%, then term deposit rates would have been at least 15%. Entry level house 2 x the average wage, would have been easy to save up the cash. Much like young are doing these days just for the deposit, but with 5% rates.
Could have saved a buck or two and gone to any high school NCEA L1 economics class, where even the kids down the back know that supply and demand affect price.
For sure. Fat Tony would have been in the back row of the class, if he hadn't already left.
Unfortunately, the best thing that could be taught in these economics classes is 'what money is'. They will get some basic, watered-down definition - which will be of little value to them until they can work it out for themselves outside the curriculum.
What is money? Its the free stuff the Govt gives you to spend that they take from people who they have decided have too much of it. This is called "equitable distributions" unless its referring to Maori, then its "reparations". I think that's the curriculum these days.
According to property investors page and some spruikers on this page including the one that hogged every thread but was banned for racist comments this "obvious" conclusion is wrong.
Rental prices are set (increased) based on:
- What landlord's need to change to cover their interest payments plus expenses plus profit
- The interest deductibility removal cost increases to landlords
- Healthy homes regulations
- any other measure Labour has put in place to improve housing affordability
Of course input cost influence price as well its a supply and demand in economics 101, if you increase the cost of supply you move the equilibrium as well.
That doesn't exclude demand side factors effecting the price as well.
Input costs (and things like regulation) directly affect supply. The higher the costs, the less investors will invest, which means less rental houses available to rent, which means higher rents for the ones still in the market. How did you think Ireland ended up with only 700 houses to rent in the entire country? And the UK following suit https://www.ft.com/content/c163058e-6423-4d14-bb86-374bbb679989
Despite having a masters in engineering myself, I increasingly think contemporary establishment research and science driven by peer review and statistical correlations is so god damn incompetent. The real research goes on with some obscure dude who works at a bakery and autistically researches the art patterns of yamnaya people in 2500bc then writes it to a substack for 10 other people to read.
Despite having a masters in engineering myself, I increasingly think contemporary establishment research and science driven by peer review and statistical correlations is so god damn incompetent.
Did you look at the R and Adjusted R values? They're hardly what you'd call 'tight.'
Chippy just announced thousands of new jobs being created in the building of wind farms and solar panel farms. What he didn't say was that immigrants will be needed to do the work, and this will increase the need for rental accommodation, which will increase rents.
Demographics could be at play as well. I know of a lot of empty nester boomers still living in the 3-4 bedroom family home - and a proportion of those are widows now. So you have people around the age of 70 living in houses that rightfully they can live in, but they are also the types of homes that would be desirable for Gen-X/Millennials to own to raise children.
So as the boomers reduce in number (as is happening on a daily basis), and as they downsize into townhouses and into retirement villages, this may open up a large proportion of desirable homes which have been unavailable to the market for decades.
There are 5-6 widows living in 3-4 bedroom homes around where I live (within stones throw) all of whom will sell in the next 5-10 years and move into single bedroom homes or into retirement villages.
How this impacts the overall market could be quite significant (given how many boomers there are as a proportion of our total population) - how this plays out with supply/demands and rents I'm not so sure.
In order to support growing numbers of retirees, importing larger numbers of immigrants will probably be the solution as New Zealanders are not having enough children to maintain the population.
We’re not having enough children in part due to economic reasons such as unaffordable housing.
If there is a serious recession in NZ, it is questionable if people will wish to come to here in such high numbers.
As a society, due to greed and short term thinking, we’ve made a rod for our own backs.
Rents lowering and housing affordability must be part of the solution.
Plenty of them where we bought. Within 300m of Primary School and 500m of 2 Colleges.
Mostly 1/4 acre sections (and bigger) with 150 - 200sqm houses. In the past 18 months of living here, walking the dog most nights, from "people watching" you get a feel for the neighborhood demographic. Particularly during spring/summer when they're tending to the front garden.
Meanwhile when I walk my daughter to and from school, the streets are overflowing with double parked cars for drop offs.
That pretty much happens to every older home in my area. Its destroying the character of the suburb as lovely homes and gardens are bulldozed to make way for a block of 80 sqm townhouses with zero architectural value, while the lack of parking means cars line the streets blocking the ability of anyone else to park there.
In reading the comments - nobody is linking planning changes to an increase in supply and therefore a reduced - possibly very much reduced - increase in house prices? This analysis specifically mentions it. (I'll be reading the full report tomorrow.)
Wow. So my comments about the MDRS and NPS-UD increasing supply - as evidenced by Auckland's flatline in prices between 2016 and RBNZ inspired covid madness - has fallen on deaf ears, huh? Read the report linked here spruikers. The days of banking capital gains on rental properties is coming to an end.
Renting has been on the rise in New Zealand for three decades. About 32% of households were renting in 2018, up from 23% in 1991.
The decline in home ownership has been particularly acute for young adults. Only 35% of those aged 25 to 34 were owner-occupiers in 2018, down from 65% in 1988.
And what, pray tell, did these wise sages suggest the reasons for the above were?
Or was that type of analysis not covered in ECON 101?
For starters, half of the kids in the country are now expected to attend University, so they arent even "adults" until they are at least 22. Compared to previous generations who left school at 15-18 and worked for many years to save up a house deposit by the time they were the same age. They also married younger and had children younger, so were in the market for a house, while most of todays 20-35 year olds are still single or childless and more obsessed with travel blogging than house buying.
Hilarious. In other earth shattering news, scientists decide the sun is responsible for daylight. I think any high school economics student could have told you that reducing the supply of housing will cause higher rents. Unless of course, they have already been indoctrinated into Labour/Greens thinking that rent rises are solely because of greedy, wealthy, tax avoiding investors.
So will the "War on Landlords" continue or will common sense prevail and investors encouraged to once more step in and provide housing where the Govt has proven itself incapable? Or will the future of the younger generation be to live with their parents forever or in Govt provided shoe box apartments alongside gang members, meth addicts and paroled sex offenders? Something to look forward to ......
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