Introduction

When investors buy a new property, it’s always a good idea to conduct a “cashflow forecast”, which will give you an idea of how your property is going to go over the long term.

But, when running these forecasts, investors have to answer this question: “How much do I think my rent will increase per year?”

And it’s not a straightforward answer. Rental increases fluctuate annually and can be affected by economic events.

In this article we’re going to run through the numbers and some scenarios so you can decide what to use when forecasting your investment properties.

Rent Increases

How Much Do Rents Increase In NZ?

Over the last 28+ years rents have increased by an average of 4.33% annually (for the years there is data).

In February 1993, the median rent in New Zealand was $150 a week. But as of July 2021, the median rent was $500 a week.

From the above graph, we can see rents have only stagnated twice at a national level.

The first, during the 1997 Asian Currency Crisis; the second, in the wake of the 2008 financial crisis.

So, the key message here is rents have consistently increased in New Zealand, apart from the times where the economy has been in recession.

Forecasting

How Much Rental Growth Should I Forecast As A Property Investor?

So, when creating a long-term cashflow, property investors need to forecast how quickly they think rents will increase in the future.

Here at Opes Partners we tend to use the average annual increase from the past 20 years. Right now, that’s 4.82% per year.

Depending on which timeframe you look at, the rate you could use may be slightly different. For instance, over the last 10 years rents have increased 4.90%, and as we said, over the last 28 years the rate has been 4.33%.

We tend to use the 20-year average rate, because it has a mix of longevity (20 years is a long time) while also being current.

So, using this timeframe as our forecast means having to ignore data from earlier than that period, aka 1993 to July 2001.

But why would we ignore certain data?

Well, the rental increases over that period were 3.17% per year, which is significantly slower than the rental increases we’ve seen over the last 20 years at 4.82%.

And as you’ll see below, because rental increases have been more consistent recently, we don’t see that earlier period as relevant when thinking about the increases you might achieve as a property investor.

Annual Increases

Do Rents Increase By The Same Amount Every Year?

No, rent increases change every year based on what’s going on at the time.

During mid-1999 rents were falling by 0.6% per year. This was chiefly due to the recession we were going through at the time, caused in part by the Asian Currency Crisis.

However, during the economic recovery and rebound from that downturn, rents skyrocketed and grew 11% per year by late 2003.

More recently, rental increases have hovered consistently between 4 - 6% per year.

Other Data?

What About Other Data?

Now, the data used in this report comes from the Ministry of Business, Innovation and Employment.

Through Tenancy Services, this ministry collects details of bonds tenants give to landlords when they decide to rent a property.

This lets the government know how much tenants have agreed to pay landlords. And in this data-set, we’re looking at the median rent paid.

However, it is important to mention if you look at a different set of data, you’ll get a slightly different answer and see slightly different numbers.

You might also like to look at TradeMe’s rental price index or the Statistics New Zealand’s rental indices.

But, for our forecasts, we use MBIE data, because:

  • TradeMe doesn’t release its data publicly
  • Stats NZ data doesn’t go back before mid-2017
Final Thoughts

What Should Investors Take Away From This?

 

A forecast is just that: a forecast. Just because you forecast something, doesn’t mean it will actually happen.

So, if you want to see your rents increasing over time, you need to regularly review the rents you’re charging.

Under the current Residential Tenancies Act, you can do this once every 12 months.

This means giving notice to your tenants that rents are going up, often through your property manager.

But remember, if you are putting up rents, you need to be prepared that your tenants could give notice and walk away.

Laine Moger

Laine Moger

Laine Moger has been a journalist and reporter for the last 6 years. She previously worked for Stuff, The North Shore Times and Radio NZ. She has a Bachelor of Communications (Honours) from Massey University and a Diploma of Journalism from the London School of Journalism.