Podcast: Average Rents Hit Another Record High | Ep. 203

Posted by Ed McKnight on 20/04/20
Average Rents Hit Another Record High
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Show Notes

What's Covered in the Show?

In this episode, we discuss how median rents in New Zealand hit a record high in February 2020. In that month the median rent hit $520 per week, up from $495 the year before.

That equates to a 5.1% increase over 12 months, compared to general inflation of 1.6%. That means that rents are increasing at a faster rate than all other goods. That's bad news for tenants as more of their income will then be going towards rent.

Our conclusion is that a large part of this increase is due to the additional regulation that has been levied on landlords. Rental property owners are likely to be 'pricing in' the additional costs and risks of having tenants. These include: higher costs from the Healthy Homes Act, lower revenue through the ring-fencing legislation, and the requirement for landlords to pay a letting fee, rather than the cost be passed on to tenants.

These additional costs are naturally passed on to tenants.

Another interesting finding in the podcast is in the dynamics of demand and supply. There are multiple regions highlighted where the demand for rental properties decreased, the supply of rentals increased and yet the average price increased.

This is because of the relative price sensitivity of both landlords and tenants i.e. demand and supply move in different ways and different factors will play differently.

Transcript

Transcript of the Podcast

Ed McKnight: Hey, it's Ed here from the Property Academy podcasts, now this is one of the last episodes that Andrew and I recorded together in-person before we went into the Covid19 shutdown, and we're talking about rents and the increases in rent that we've seen over the last 12 months. Now, I know this is a bit of a sensitive topic at the moment, but I want to release this episode anyway because there are some particularly interesting discussions about why rents have increased and how the dynamics of both supply and demand in the rental market work. So I hope you enjoy it.

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight and I'm Andrew Nicol, and today on the show we're going to be talking about median rents because they have just hit another record high often on this podcast we talk about how house prices have just hit another record high, and we report on it almost every month, but we've just come across a press release that's been released by Trade Me, obviously they have a significant number of rental listings, listings on their platform, and so they've released some new data that says that the national median weekly rent has just hit a record high of $520 per week, which is 5.1% up on February, 2019 so the previous year.

Now this is particularly interesting because inflation in New Zealand at the moment is about 1.6% over the last 10 years. So, general prices are increasing at 1.6% over the last 12 months, rents have increased 5.1% so that's arguably bad news for tenants because it's, it's taking up a larger proportion of their pay packet relative to other other prices. But it's great news for landlords because we're starting to see movement in terms of rents.

Now this is really interesting because rents have been, or rental increases have been quite slow over the past couple of years, and I think that just to agree for a moment with Tony Alexander, independent economist who, who's previously been on the show, he said that it's usually because New Zealanders are quiet nice, we don't like to necessarily put up the rent. If we're doing okay, then we'll just leave the rent as it is, even if the market's increasing.

But I think what this really represents is that now that we're starting to have more and more regulation coming into the market, uh, landlords are saying, well, look, I've got more regulation, I've got more risk let's, put up the rent. It doesn't matter whether that my tenants been in the for 10 years. I need to put it up to, to price this in. So it's, as I would argue, a direct result from regulation.

Andrew Nicol: Agree. I think that is completely, um, the, there's direct correlation between the, uh, the increased regulation and, and the increasing costs in rent, and, um, so, so the three major things which have maybe impacted most, are, the, uh, so far is that they firstly the letting fees, so, so if you're a, uh, if you're a landlord, it used to be that a property manager would charge your tenant a letting fee for sourcing that tenant, now that has to be paid by the landlord. And that's normally a week's rent plus GST.

So you lose a week rent straight off the bat, and then you've got the healthy homes act. So if your house is older, well, even if it's new, um, and it's not up to the specifications as far as heating goes, you have to pay a little bit more. And so, you know, it could be anywhere between two and $10,000 that you've got to pay the insulate the house more, or, or, uh, or to put in a bigger heat pump, and then you've got ring fencing. So whilst you still get the tax benefits, you don't get them today. You can't offset your own income.

So again, a third of that loss that you make, uh, you used to get back from the IRD. You no longer do that. So those three things collectively, have meant that it costs a landlord more to be a landlord. And so it's, it's no different. I always compare it to, uh, something like the minimum wage. If minimum wage goes up, you can expect the price of your coffee and your muffin in the morning to go up as well, because that cafe owner who's paying those people on minimum wage has to recoup that cost somewhere or close.

So you've got two options. You either sell your house or you put up the rent. And so that's where this is all, um, all happened. Now, interestingly, so when Australia introduced ring fencing or the equivalent of 15 years ago, they had 25% increase over a two year period and their rents, it was astronomical. And then they decided, actually that was probably a bad idea. And so they did away with that and allowed you to offset your personal income again.

Now we haven't had that kind of increase yet. Uh, and I think I would put that down to the fact that rates have been coming down. Interest rates have been coming down, and so it's actually still affordable from a credit perspective, but we are still passing on some of it to the tenant now.

Ed McKnight: And let's talk about that as well. So we've talked just before about a 5.1% increase. So it went to $520 as the median. So that means an increase from $495 a week. Now that's $25 a week, which might not sound like a lot, but that's actually $1,300 a year extra that tenants are paying to landlords, which, which I suppose depending on the sort of situation you're in, could potentially be significant...

Andrew Nicol: Well, it's $2,000 that you've got to make on your pay packet, before you pay tax.

Ed McKnight: And the other thing I want to mention as well is that we usually do see quite large jumps in February. Now why is it, why is that? It's because we've got more students coming into the market who are now all of a sudden you've got a large group of people looking for rental accommodation for the year, and so we're seeing the largest increases in rent in some of those student cities.

So Wellington region rent prices increased 7.5% over the last year. Hamilton increased to a record high of $470 that's up about 7% on the previous year. Palmerston North real student city with Massey there, is up 10.3% whereas Auckland, where there's a lower proportion of students, certainly a lot of students, but a lower proportion is only up one to 2% around there.

So we're seeing seeing more movement in the cities where there's a higher proportion of students coming into that market in February.

Andrew Nicol: And actually just on that Wellington market, which is a really interesting one for me. Uh, so I'm just trying to find that a median rent. What's the median rent there for the... For Wellington? 570 Which is actually the same as Auckland.

So that's really interesting cause we know we're probably going to pay more for a property in Auckland and yet achieve the same rent. And this is, this comes down to the growth versus yield argument. So whether or not you're wanting to buy an Auckland, the super city, where you might get six, seven, 8% growth, compared to Wellington where you might get, say, five, six, seven. Um, and so, uh, although in saying that, I just looking at the numbers, they break them down and they, you know, they include Lower Hutt and that which brings it down. And I presume that they include Upper Hutt as well, which again, would bring that number down quite a lot.

But just in the last week I caught up with a friend of mine in Wellington and he's, uh, looking for a house to rent at the moment. And really struggling to find something, uh, that would suit his family. And, and you know, he's looking at paying about a thousand dollars a week. So whilst, you know, this is the median, um, it's, there's a very low, uh, stock level at that, desirable house kind of level.

Ed McKnight: And just to give an indication of that as well Trade Me's released what the, the number of inquiries per property. So the most popular rental across the entire country, uh, had 155 inquiries within two days of listing. So that's over 75 inquiries per day for the most popular listings, which is an astronomical figure for your property manager to wade through, well worth the money, in my opinion in that instance.

Now, the other interesting thing, which if you read this press release, would probably stick out to you because one thing I hear from people commenting on the market, and this is this is very simplistic. If you ever hear people just saying it's demand and supply, then you probably should give them a bit of a shifty sidewards look, because here are the stats. I've seen that demand in Wellington in terms of the inquiries demand in Wellington was down 1% on last year, so we've had a small decrease in demand, and we've seen the supply of rentals increase 12% so we've had demand decrease a little bit.

We've had supply of rentals increase, but we've also seen the price increase 7.5% now you're probably thinking, well, how does this work? You know, the price should really go down, decreased supply, decreased demand, increased supply. How is it that we've got a higher price? And what it actually comes down to, and this is why you, um, this sounds quite self-serving, but should listen to an economist, is that the fact that demand and supply don't always react the same. Y

ou know, tenants and landlords have, they will react differently to movements in, in, in demand and supply. And what I mean by that is that when I start to look at these at figures like that, and I saw that Invercargill, down in Invercargill, demand was up something like 10% supply was up 20% but prices rose 20% so again, you're saying, well, supply increases faster than demand. If we've got more properties on the market than we have tenants, how is it that price goes up? And it's because of the sensitivity, the price sensitivity of of tenants and landlords.

So here are the facts. When I listened to that and I start to model, model that data, what that says to me is that landlords are less price sensitive than tenants. Tenants are theory price sensitive, landlords not so much. And so what I mean by that is that if rents go up, it takes a lot of rental increase, a lot of increases in the median rent to attract another, uh, another landlord into the market.

Where as, it only takes a small decrease in rent to attract another renter or tenant into the market, because if you're in a flat, for instance, in a student city, a small decrease in rent may attract you into the market. You get your own flat together and go and find another property. It takes a significant increase in rent because landlords don't typically go for, uh, don't, don't typically enter the market for the rental return, they enter for the capital gain to get somebody additionally into the market.

So what that says, and when you have one group of people, in this case, tenants who are really sensitive towards price and landlords, who are not sensitive to price, that means that you can have a big increase in supply, a small increase in demand, but you still see price go up, and this comes down to technically in technical terms, it's called price elasticity of demand and price elasticity of supply. But it's really about, well, who's the most sensitive to price? And it's not landlords. So we can still see an increase in supply and have prices go up.

Andrew Nicol: And just though the final thing that I wanted to talk about here is if you're going to use property is an investment mechanism when you're in retirement, the great thing about these stats is that your, your, your return on investment, the amount that you're getting is going up at a rate that's higher than inflation.

So your purchasing power with your money that you earn per week is more valuable next year and the year after and the year after. So you're still able to buy the same amount of things, if not more. Um, compare that at the moment to say, uh, interest rates at the bank. Um, people who have got money in the bank will be really hurting right now because interest rates are dropping to such a low rate. They're barely going to be able to, um, give a return, let alone keep up with inflation.

Ed McKnight: Exactly and we're actually going to talk about this on another episode as well, because some things have structurally changed in the market that probably will, uh, will mean that investors will want to adapt, and I'm even talking about an investors in the cash market who have their money in term deposits, will adapt where they can get the best return.

But let's wrap it up there now, please don't forget to rate, review and subscribe to the podcast. Boy, it helps us get the message out to more people and one of the things we're doing during the Covid19 shutdown is we are doing weekly webinars to keep everybody up to date with what's happening in the property market and with just done an analysis of 165,000 different data points, which we're going to go through to talk about, which are the suburbs, which are the areas in New Zealand that are going to be the hardest hit and which are the ones that are going to recover most speedily.

Now I'm going to link to where you can sign up for that webinar. Uh, in the show notes. So just tap or swipe over that cover art, or just go to opespartners.co.nz, you'll see it right there. Now that's going to be on Tuesday, the 7th of April. And if you are listening to this show after the 7th of April then we are going to be releasing a recording of it, so go to opespartners.co.nz you'll see the recording there.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of New Zealand property market.