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‘Perfect Storm’ coming to rental market: Property Institute


29 November 2017

‘Perfect Storm’ coming to rental market: Property Institute

Property Institute of New Zealand Chief Executive Ashley Church is warning of a ‘perfect storm’ in rental market conditions which will see big increases in rents in many parts of the country, primarily as a result of a shortage in the supply of rental housing.

“While it’s normal to see rent increases in the period following a property boom – these ones will be made worse as a result of the combined effect of unusually high inward migration and loan to value restrictions which have closed investors out of the market”.

“The consequences of these things are now coming home to roost – and Labours plans for Capital Gains taxes, ring-fenced tax losses and significant new compliance costs will compound that even further by ensuring that many property investors don’t return to the market”.

“It’s all leading to a perfect storm of circumstances and means that we’re in for big rent increases in some parts of the country over the next couple of years”.

His warning is supported by the results of the latest Property Institute / Valocity Regional Insights Report which shows that there have already been significant increases in the cost of renting in most parts of the country over the past 12 months.

According to the Valocity data:

The average nationwide increase between the 3rd quarter of 2016 and the 3rd quarter of 2017 is 4.5% for a 1-2 bedroom dwelling and 4.2% for a 3-4 bedroom dwelling
The highest average increases are:
9.2% for a 1-2 bedroom dwelling in Hamilton ($316pw in quarter 3 of 2016 / $345 in quarter 3 of 2017)
13.2% for a 3-4 bedroom dwelling in Dunedin ($395pw in quarter 3 of 2016 / $447 in quarter 3 of 2017)
26.8% for a 5+ bedroom dwelling in Christchurch ($725pw in quarter 3 of 2016 / $917 in quarter 3 of 2017)

Mr Church’s view that these figures are the result of a growing shortage is reinforced by recent industry suggestions that rental stock volumes are falling and that demand from tenants is outstripping supply - with claims of a fall in rental stock volumes by as much as 35 per cent in Auckland since October last year.

Mr Church also notes that there doesn’t appear to be a consistent correlation between the growth in median house prices over the past year and the locations with the largest rent increases.

According to the Valocity data:

The median value of a 1-2 bedroom dwelling, in Wellington, has increased by 28.8% over the past 12 months – and the cost of renting those properties has increased by 9% over the same period
The median value of a 1-2 bedroom dwelling, in Hamilton, has increased by 33.7% over the past 12 months – and the cost of renting those properties has increased by 9.2% over the same period

However:

The median value of a 1-2 bedroom dwelling, in Dunedin, has increased by 41% over the past 12 months – yet the cost of renting those properties has only increased by 7.6% over the same period
The median value of a 5+ bedroom dwelling, in Christchurch, has actually decreased by 3.5% over the past 12 months – yet the cost of renting those properties has increased by 26.8% over the same period

Mr Church also notes that gross yields – the amount that a property earns as a percentage of the value of the house – is consistently low across the country with 1-2 bedroom and 3-4 bedroom houses mostly ‘earning’ considerably less than what a landlord could earn by investing the same money in an interest bearing bank account.

“With yields on those properties generally earning less than 4% before expenses – it’s already unattractive to invest in property in a flat property market. Add the prospect of Capital Gains taxes, ring-fencing of tax losses and increased compliance costs to that and it’s going to get much harder to get the private sector too excited about providing some of the tens of thousands of rental units that the country is going to need”.

Property Institute Valocity Regional Insights Report
Meanwhile – the New Zealand housing market has continued to maintain a holding pattern according to the latest results of the Property Institute Valocity Regional Insight Report.

According to the Report, the median sales price across New Zealand has remained almost unchanged at $483k over the past 12 months - even though sales volumes, nationwide, have dropped by 29.9% from October 2016 levels.

“As predicted, there’s no ‘correction’. Kiwis have just made an orderly retreat from the market while they wait to see what happens next”.

Mr Church also notes that, according to Valocity data, first home buyers are still accounting for around 28% of all new mortgages across the country – well ahead of other borrowers. He also notes that mortgages to Investors have remained steady at about 17 - 18% of all new mortgages.

“This figure has been consistent for several months – but it represents a 34% drop on what investors were borrowing a year ago – which has probably been a big factor in the tapering off of house price pressure in the short term”.

“That’s obviously good for prices - but I worry that the exodus of investors from the market will end up having a negative impact on housing supply, which is a longer term driver of house price inflation”.


OTHER HEADLINE RESULTS FROM THE REPORT

Auckland median sales prices have strengthened slightly, although the rate of the annual increase has decreased to -0.6%
Auckland’s median Sales Price appears to be propped up by a slight increase in sales above $1,000,000, now reflecting, increasing to 27.6%.
Nationwide – the median sale price remains soft, down 1.5% year on year
Over 50% of all sales nationwide transacted for above $500,000
Nationally, First Home buyers continue to account for a larger proportion of mortgage registrations than Investors (27.9%) – this is the result of LVR restrictions which continue to impede investors.
Nationally, registrations to investors remain 33.9% below the same month last year.

Ends

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