Property as we all know is at its core, a fundamental of Maslow's Hierarchy of Needs, the primary need for shelter.
Far more important than even safety and self-esteem and self-actualisation.
For this reason property exhibits the same fundaments of economics of supply and demand.
When the supply of a good (in this case property) is limited, prices go up as we have seen in Auckland as supply of property for sale has been constrained whilst demand has grown faster than supply and the access to finance has been relatively easy and cheap.
These latter two components also impact the economics of property as does the substitution of property options between renting and buying.
If the cost of buying becomes affordable and the access to finance is available then people will buy, equally if it is cheaper to rent and finance becomes less accessible rental demand will grow and consequentially rents will increase.
This is all logical.
Let's now examine these principles when applied to the constant media story of 2013 - the dire housing shortage in Auckland.
We hear weekly how Auckland needs 20,000 or maybe 30,000 new homes to be built almost immediately as well as 350,000 homes over the next 25 years to solve the housing crisis.
If the housing crisis is so dire and is the reason why property prices of houses for sale are growing at double digit levels, then why is it that rental prices of property in Auckland are not growing.
This is very clearly seen in the chart below which tracks Auckland's stratified median house price over the past 4 years on an index basis with the red line; as compared to the index of mean rents based on bonds submitted to the Dept of Housing & Building with the grey line - the index is Jan 2009 = 100.
The chart clearly shows that whilst property prices have increased by over 45% since the start of 2009 rents are up just 15% and the past 18 months have barely seen any change.
If Auckland really had a housing crisis then rents would be increasing - it's the same economics of supply and demand.
To look for proof, look at the same chart for Christchurch below.
The fact is that Christchurch has a real housing crisis.
There are too few available properties to meet demand as a consequence of the earthquake and the subsequent rebuild programme.
In that market both rents and prices are rising, almost in alignment.
Now look at Wellington, a market that is not suffering a shortage of property and we see an alignment of rental price appreciation to property sale price appreciation.
This analysis would seem to support a view that the recent appreciation in property prices in Auckland have been fuelled by speculation.
With easy access to low cost finance over the past 2 years people have returned to property assets, this has been especially true of rental investment and property re-development. Investor growth has actually increased the supply of rental properties, which has as a consequence has maintained fairly stable rental prices at and contributed to a further tightening in the property-for-sale market through effectively taking home-owner stock out of the market.
To this has been added inbound migration demand into the region from both domestic and international sources which has often been accompanied by higher equity capacity which has only further stoked the property price inflation.
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The above article was written by Alistair Helm, and is republished with his approval. The article was originally published on Properazzi here
37 Comments
Not a bad idea to ban the foreign buyers factboy.
An even better solution and more socially acceptable is to hit non-resident money with a tax that could be used to pay public servants or suchlike. Wouldn't that be better than you and me paying public servants with our income taxes? Sadly this is far too logical a solution to gain any traction with anyone sigh
They are not few and far between Zanzayne, there is plenty of evidence of them being in reasonable numbers and they tend to own a lot of houses. I know people who rent off such people, so if I have come across it in my limited circle then it is happening and should be stopped. I am a bit fed up with foreign owner deniers actually. They are not just in Auckland either
Whatever else the whole idea that owning and renting houses as a way of life needs changing, there are too many people doing it and too many things are in the favour of them, hence the runaway prices of housing particularly in the lower end. Changes need to happen to favour taxation wise, individual home ownership and discourage too many landlords in the market. Sooner the better and if you get burnt on the way, too bad, at the moment too many other people are being burnt with the way things are.
Well, I don't go to the auctions, my evidence with limited amount time I spend in Auckland and the even more limited when I am there driving around, even with such limited opportunity I have seen evidence of houses not occupied. I have been to Northcote once and having to drive round a few roads to get my bearings saw several houses clearly with no-one in them and again in Pakuranga. The house I have seen were all circa 1970's often fibro or clinker brick, what we would have thought of as second homes back then. Then there are people I am aware of in lower socio econmic areas, renting off non resident foreign owners. Both of those situations I have seen comments on various forums from people who say they are renting off foreign owners and understand they have many houses, and others who are neighbours to houses that are empty owned by non-resident foreigners. I'll go with that if it's all the same and it would appear that the amount of money leaving the country to these people is more than a billion dollars annually, no doubt a good proportion via WINZ top ups.
It is time to look at that for what it is and we might get a bit more antsy about foreign landlords and do something aobut it. Surely, when you look at how kiwis are treated in Aussie when it comes to welfare then you realise that we are paying welfare to Australian landlords of NZ houses, it must get peoples' backs up and then maybe something will get done about it
And we need to start thinking how many migrants is enough, for me we are already there
Oh and that 4% will be NZ wide, while they are around the country the percentage will be much higher in Auckland and there is enough anecdotal evidence to suggest that his 4% is not right as well. It needs proper investigation not just ask Real Estate Agents who have a vested interest in seeing to it that foreigners are not removed from the market. It will be in similar proportions to farm sales and by just looking at that it seems in some areas that looks like it's closing in on 100% of recent purchases.
Alistair, I don't agree with you on this one.
I think it is less relevant to compare rents (a weekly expense) with house prices (a capital 'investment'). I think the right comparison is weekly rent with weekly mortgage payments. (Although to be technical again, perhaps it should be rent with the mortgage payment+insurance+rates+maintenance.)
Also, the Tenancy Services bond data available publicly is of all dwellings rented. The comparison would be more targeted using 3 br house to 3 br house, for example. We buy this data monthly from the DBH so we can do that.
The results then become:
http://www.interest.co.nz/images/akl-rent-mortgage.gif
http://www.interest.co.nz/images/chc-rent-mortgage.gif
http://www.interest.co.nz/images/wlg-rent-mortgage.gif
Then you can see that a) both rents and mortgage payments are tracking similarly, although the mortgage pymt is higher in Auckland, and b) it's all to do with the interest rate. House prices are just a capitalisation of that rate, so when rates are low prices go up to where mortgage payments are 'afforded'. Ditto rent.
Rents are lower in Auckland because more potential buyers can't afford to buy and have a limit on what they can pay for rent. Some of these will be crowding out lower income renters. The ugly bit is for lower income households; they get the sharp end.
A sustained surge in supply would certainly rebalance the way demand responds. (But NIMBY middle class homeowners would not be happy, I suspect. Nor 'investors'.)
The actual rent received is chump change to the investors who're aiming to get tax-free capital gains of well over 10 % per annum ....
... as we saw in Ireland , rents fell to 1 % of capital value , as investors kept bidding house prices up ...
And when that bubble popped , it wasn't just the investors who suffered , alot of first home buyers got caught up in the carnage too ...
no, no, no - you've got it all wrong, they're not investors, they're landlords, in the rental business, doing that social stuff, providing accomodation for the less-well-off, and the transients, and the students, and tomorrows intending FHB. You'll be giving the IRD a conniption next
Well , let's pose a hypothetical scenario , where David Cunliffe's desperate first home buyer Kanik Mongia wants a property .... and the young solicitor is on $ 120 000 p.a. from his solicitating ....
.... and he buys a $ 600 000 dump in Auckland , not good enough for him to live in of course , so he rents it out to the hoi polloi ... at $ 700 per week ...$ 36400 p.a. equates to a mere 5.2 % return ...
Until you factor in the tax write-off !... Mr Mongia will be able to reduce his income tax from work , against property costs , so that return balloons up towards 7.4 % , taken off his top tax bracket ...
... my point being ( whew , there is one ) rents are just a part of the picture , the generous tax write-offs add to the money pot for investors ...
Don't follow your math at all.
Gross yield 700 a week on 600k is around 6%.
Assume borrowing all at 6%, he makes zero money.
He pays rates and insurance and some up keep, this is actual money spent.
So he makes a loss on his investment. No am imaginary loss. A real and incurred loss.
He gets a tax refund to claim back around a third of that loss.
He still makes a loss and if it wasn't for the capital gains the investment in Auckland real estate makes no sense at all even with any tax refunds.
I'm just eyeballing David C's three graphs (manually adjusting the URLs to see them) and would point out that the difference between graphing price and graphing mortgage can be fixed by noting that an increasing proportion of house purchases are not funded by mortgages. This additional sector explains not only these graphs, but my own of debt vs. price nationally.
Does lack of rental growth show there is no housing shortage...????
I don't think the relationship is "mechanical"....
Who is to say that rents don't play.... "catch up".
Maybe rents will sky rocket next yr..
my point is that Alistairs analysis is so simplistic that the conclusion is dubious.
He might be right... but I do think Landlords might not behave "rationally"..
eg... many landlords might be benevolent and be loath to put rents up on existing tenants.
When I was renting my landlord never put my rent up.... and only did after I moved out
Not all landlords behave like power companies or Multinationals...
Don't worry Alistair-help is on the way.
Read Olly Newland's double shot interview from last week where he predicts a sharp rise in rents in the not to distant future because of the new loan restrictions:
http://www.interest.co.nz/property/66656/property-investor-olly-newland…
The "low rents" market could be explained by the fact that every man and his dog is buying up investment properties to rent out and thereby over supplying the market.
Loan restrictions apply not only to first home buyers but to investors as well, so it's all going to get very interesting indeed.
Watch this space.
Occam's answer
It could simply be that in a low interest rate environment, PI's have been willing to (or forced to) accept a lower ROI which would explain the divergence between Capital Prices and Rents
When prices are escalating at current rates the investor can capitalise the gap as a cost of deriving the gain. Which suggests the "name of the game" really is capital gain. The rental income is incidental.
Alistair is right about Auckland being driven by speculation (which includes house purchases by non-residents) but he has over looked that total return on investment is a combination of rental return and capital growth and that they are inversely related to each other and normally follow higher yield/lower capital growth or lower yield/higher capital growth, with the other two options uncommon.
In Auckland’s case its capital growth speculation based on a shortage of supply, any rent is a happy by product. And in fact, having any tenant can be a hassle given they cause wear and tear (fair or otherwise).
This is why in speculative high capital growth cities you can get an increasingly high vacancy rate, not because the tenants cannot afford the rent, but because they owners prefer to keep the property vacant to preserve its condition.
On top of this, tenants can mitigate this increasing lack of supply by increasing (elasticity) the numbers of people in existing rental properties, couples house sharing, children staying at home longer etc. This flattens the rent curve as prices still increase.
Christchurch’s is not a valid comparison as the rental market is being fuelled by short/mid-term rentals from home owners having to vacant while their home is repaired or rebuilt. These home owners would normally stay in short term suppliers like motels etc. but a rental property in the short term is a better option and these properties are being charged at motel rates, which in many cases are being paid for by the owner’s insurance company.
One thing is the ability of ppl to pay more rent....if say they are at their financial limits then this could be causing the flattening of the rent curve. Meanwhile the cheap and easy credit is allowing a steepening of the buying curve.....for now anyway.
Comparing chch v auckland is very interesting however....its impossible to argue there is no housing shortage in chch.....and rents are going up.....could that be the subbies down there earning enough they are prepared to pay more?.....
regards
Things would start to look a little different if landlords had to apply for the WINZ top ups. Hope all you landlords in this forum have clear consciences about picking up welfare to line your pockets. And I'll bet many of you are cheering on current welfare reforms as well.
Oh and in case you hadn't noticed, my biggest beef is WINZ housing top ups. That is regular welfare provided even if your tenant is working but on too low an income to pay your rent demand. THAT should be applied for by you, not the tenant. It is no different really, they aren't being paid enough to put a roof over their head, you aren't being paid enough for your rental so someone has to go cap in hand to WINZ for extra. I maintain it should be the person at the end of that particular thread and that is you. We would soon have a different attitude to welfare and housing costs then, wouldn't we?
Perhaps they should. All I'm saying is the TRUE recipient of that welfare should be the applicant, at the very least people might have a different take on what welfare is. And why are people living in cars and garages, gee it couldn't be because the cost of housing yourself is getting out of hand could it now, and there is something stinky about people making fortunes out of such a situation
Yes, let's build more and more houses so that we can make even more money building and selling houses to each other and renting them out to each other until one day we realise that a lot of them are vacant and theyre not selling, and maybe they're not really worth as much as we thought they were. And we realise that all we've been doing is building and selling houses to each other and aren't producing much more than a bit of milk and its by products. Do we really want to ignore the lesson learnt in Ireland? How about a land tax on non-owner occupied dwellings and which is directly invested in the productive sector?
You defintely need to weed out a lot of landlords I am afraid. The European model of leasing houses is far far better than what we have going on here. You rent a house, pay perfectly good money and someone can tell you how to live in it, it is not truly your home, it is just the roof over your head. Too much renting and not enough owning and having pride and being able to paint your rooms whatever colour you want or plant as big a vegetable garden as you want and not be in danger of being booted out at a few weeks notice or own a dog .If you ever wondered how we got to the situation we have with bad tenants, there is part of your answer.
Home ownership is a cornerstone of a decent society. And I mean HOME not house.
I am prepared to bet that your entering into the rentals market was not primarily driven by a desire to provide an essential service, either.
90000 immigrants a year, indeed! But zaneyzane you leave out the fact that almost the same amount are departing NZ! Where the heck have they been living? Parks, beaches, cars maybe? (Asked sarcastically) Almost all would have been living in houses, flats, apartments etc which they would have had to vacate when leaving New Zealand.
The above simple fact negates almost all your arguments. The Auckland property bubble is being inflated by speculators, overseas investors and of course property investors who are trying to fleece their tenants for as much money as they can (praying ol' Olly is correct and rentals will double - I wonder about the morality of this and you wonder why people have a bit of a coolness toward PIs) .
WRONG! The net immigration is just a contributor.
The incoming immigrants are likely to have money to be able to buy for their own occupation plus in some cases extra property to rent out (some because they have little english to run a business or be employed). And they settle largely in Auckland and add to the demand side!
The outgoing emmigation is largely composed of citizens mostly born here who have no property to sell anyway and if they do they may cotinue to hold it until and if they are settled elsewhere. A much greater proportion of these are not from Auckland and do not affect the supply position.
The net effect of this is aggravated by the circumstance of each category which are both net negative to supply.
Congratulations to Alistair on focusing on The Elephant in the Room!
At Last.
You know this how? Well you don't do you? Alistair who you praise says there is NO housing shortage.... Who is driving the housing bubble if there is no supply issue? Those 90k immigrants moving to Auckland and buying houses that aren't there....? What????? Speculators, overseas and PIs are driving the housing bubble! Not 90000 cashed up immigrants!
If it is at all helpful
I know what white is and what black is but how much of each is in any shade of grey, I do not know. If you want white or black , then find your own method.
All I know is that the factors I listed are contributing to housing concerns in Auckland that are not evident elsewhere apart from the known Christchurch problem.
The Auckland problem can best be alleviated and solved by a mix of curtailing immigration and specualation while gently massaging the supply side without the help(?) of Len Brown or Nick Smith who I suspect does not know which side is up, anyway.
Post Card from Melbourne
On Saturday 5 October there was a segment in the evening news about the property market which usually runs hot as it gets into spring and the news media get excited. This time they waxed on about a couple of high-cost "inner" suburbs running hotter than usual. They had their cameras there at 4 of the outdoor auctions. All well attended. In every case the successful bidders were Chinese. One couple were in their 50's. A sample of only 4 out of 800 is not a lot, but it is indicative of the whole. It is more telling when you consider that house-and-land packages are available in the outer suburbs for $300,000 but the hot-items are ordinary houses in the inner suburbs going for $1 million plus. And the buyers are ...
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