Commentary

How the Auckland housing crisis is affecting the rental market

September 11 2017  |  4 min read


Data released monthly by Core Logic, REINZ, Barfoot and Thompson and others all show one thing regarding the Auckland housing market. Turnover has been falling since the Reserve Bank made banks implement minimum deposits of 40% for investors from late-July last year. Prices more recently have been flattening out and here and there falls are occurring. Does this easing of the pain for those seeking to buy a house mean that things will also soon start to get easier for renters? No.

There are many factors in play but the key one to note is this: Not enough dwellings have been built in Auckland since the middle of the 2000s. Auckland went into the global financial crisis with a small housing shortage which then became a lot worse as construction fell to its lowest level since the 1960s in 2011.

House Construction

Since then construction has lifted to 35% above the 25 year average. But population growth has soared since 2012 courtesy of migration as fewer kiwis shift overseas and more people shift to New Zealand. The upshot is that the housing shortage has continued to grow. Our expectation is that this underlying fundamental will continue in the next few years. Growth in house construction will be restricted by shortages of builders and finance for property developers. Growth in demand however will remain high due to sustained above average net migration inflows.

House prices will continue to drift upward apart from some bargains in the coming year as over-stretched investors look to offload properties they cannot find anyone to buy off them to develop.

The shortage of dwellings means not only rising prices but rising rents and there is a growing risk that the pace of average rent increases will lift soon. The reason for this extends beyond the simple supply and demand dynamic into the shifting legislative environment facing landlords and tenants.

Increase in percentage of renters

Life stages have shifted by perhaps a decade or so in recent years due to factors such as the following: More people studying rather than working, paying off student debt, facing higher house prices, working stints overseas, living longer, less secure full-time employment, and housing becoming a common investment asset. These developments mean that the proportion of the population renting rather than owning a house has shifted permanently higher.

Safe, dry homes for all

Under the next government legislation will move to strengthen the rights of tenants over the freedom of landlords. We will eventually see reduced ability of landlords to raise rents when they want and move tenants out when they want, and improved ability of tenants to force landlords to maintain prescribed standards of accommodation.

On the face of it this sounds good for tenants. But it always pays to consider what the reaction will be of landlords to a management regime involving higher expenses and reduced after-tax-returns from the likes of capital gains taxes and reduced deductibility of expenses. Some will leave the sector, selling their properties to owner-occupiers or large investors who approach property investment as a business and not a supplement to wage and salary or retirement income.

Supply and demand

Growth in supply of rental properties is likely to slow down while growth in demand will remain strong. The upshot will be higher average rents – not the least because landlords will look for compensation for the reductions in after-tax returns some parties seek to impose. But will the sales of properties by some investors accelerate the movement of some renters into home ownership? Yes, but there is a key factor to be considered.

Not all young people looking to buy are renting. The keenest in fact who are racing to build a deposit as quickly as possible could well be living with one set of parents. They will be in a strong position to take advantage of the flow of investment properties onto the market over the coming couple of years from landlords looking for better returns elsewhere or a less stressful life. Demand for properties by renters will not change, but the supply of rental properties may decline as some are bought by those first home seekers living with their parents.

Where to from here?

For renters then, the main message I wish to convey is this – and it is the same one we have been delivering for nine years. There is a worsening shortage of property in Auckland. This will cause prices to trend higher – for both houses and rents. Legislative changes favouring tenants can do little other than accelerate rising rents. Nothing beyond radical measures aimed at massively boosting house supply can change this situation.

The outcome beyond higher rents is likely to be more people per house on average – and that is the norm in cities overseas where people tend to sleep in small and perhaps crowded apartments, but they live their lives including eating most meals in city meeting places.


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