Introduction

When property investors run the numbers to create a long-term cashflow forecast, you need to include an assumption for how quickly they think rents will increase in the future.

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

Some investors have queried whether that figure holds for around the country. For example, do rents in Auckland increase quickly while a small town’s rents might increase more slowly?

So, for the official members of the Data Nerd Association of NZ (our fictitious data-appreciation society), we did a little digging to compare the average rental growth every year for our 6 major cities and our regions.

In this article, we’re going to run through the numbers we found.

Overall Results

What Does The Data Show? Where Does Rent Grow The Fastest?

So, let’s get down to it – rents don’t increase in value at the same rate across the country.

Surprisingly, rents increased most quickly in Stratford District, a small town of 10,000 people (September ‘01 - September ‘21).

On the other hand, rents increased most slowly in Wellington City. Over the same period rents increased by 4.05% per year.

This is surprising, given that Wellington tends to have the highest incomes in the country and Wellington City apartments have typically generated a relatively high yield, yet Stratford is a small and lower-income area.

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Overall, rents in the median council district increased 5.51% per year, well above New Zealand’s average. That’s because smaller districts, like Kaipara, Horowhenua and South Taranaki have seen rents increase relatively quickly.

Whereas rents in the more populous areas have grown more slowly – Auckland, Christchurch and Wellington City.

Why? One reason might be that rents may have been relatively low back in 2001 in smaller regions, so perhaps they had more opportunity to grow.

Another reason might be there’s more construction in the larger cities, bringing more supply to the rental market.

However, before we all rush and buy properties in Stratford, let’s remember that rental yield isn’t necessarily everything.

Many investors tend to gravitate to the major cities in order to have security of tenants and in an attempt to get more consistent (and sometimes superior) capital growth.

So let’s just compare the major cities.

Major Cities Results

Where Do Rents Increase The Fastest in The Major Cities?

In terms of the major cities, Tauranga saw rents increase the fastest while, as we found, Wellington was the slowest.

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Christchurch, Auckland and Hamilton all experienced similar rental inflation. In these cities rents grew 4.45% - 4.65% per annum – within a stone’s throw of each other.

As an official member of the Data Nerd Association, you might be thinking –

”Those rental growth rates in Auckland, Christchurch and Hamilton are lower than the 4.82% you use for forecasting nationwide – should I use a lower rental inflation figure?”

There’s an element of ‘splitting hairs’ when it comes down to: “Should I use 4.82% for Christchurch or 4.45%.”

If you own a property that earns $500 a week in rent today and projected the rent over a 10-year period across those two rates, the difference is $23 a week in rent in today’s money. We’re not talking about massive differences.

Secondly, while there might be small differences in rental increases between areas over the last 20 years, you’d be hard-pressed to argue these will continue the same in the future.

Said another way, just because rents increased in Stratford by 6.83% per year over the last 20 years, don’t expect they’ll continue at that exact rate into the future.

There’s little economic activity happening in Stratford where that would be the case.

For me, I’d be comfortable using the national average of 4.82%. But as more conservative investor might want to use the 4.45% figure when it comes to Christchurch.

Data Explained

How Did We Get The Data?

To suss out how to rank our top rental performers we trawled through the rental bond data from MBIE.

We then used the changes in median rents between September 2001 and September 2021 to see the trend.

In the interests of full disclosure, there are some limitations with using the median in any data set. It’s the easiest value to compute, understand and use for comparison, but it doesn’t look for changes in property types.

So, for example, if a big Wellington City house that rented for a high amount was ripped down and replaced with apartments that were rented more cheaply, we won’t see that change in the data we’ve analysed.

While we can’t adjust for this limitation, it’s still worth looking at the analysis and using the findings, rather than flying blind.

Conclusion

How Should I Use This Info In My Property Investing Strategy?

To be fair, this analysis is probably more about ‘peace of mind’ than something that will cause an earth-shattering change in your strategy.

By that we mean this confirms that Auckland is not the sole centre of rental increases in New Zealand. And while the average rental increase in NZ has been 4.82%, it’s not like some areas got 1% per year and others got 10%.

Most areas are relatively consistent between the 4% - 5.5% increase per year. And then some small towns have ranged between the 5.5% - 6.9% increase per year.

If you want to learn more about rental property yields around New Zealand, check out this article: Where Are the Highest Gross Yields In New Zealand?

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Ed McKnight

Ed McKnight is the host of the Property Academy Podcast – NZ's #1 business podcast. He is an economist, having studied at the University of Auckland and the University of Waikato. He's a frequent writer for Informed Investor Magazine and has contributed to NewsHub, Stuff, OneRoof and Property Investor Magazine.