A new paper by Treasury, the Reserve Bank, and the Ministry of Housing says housing supply and wage inflation are the two biggest factors in setting rental prices
In other words, the law of supply and demand still applies.
Don’t build enough rental property and rents rise.
Pay people higher wages and they can pay more rent.
I wonder how much the tax payer money was spent on this report which tells us absolutely nothing we didn’t already know.
John Kenel
Assured Property
See full article from Interest.co.nz below:
By Dan Brunskill
A new paper by Treasury, the Reserve Bank, and the Ministry of Housing says housing supply and wage inflation are the two biggest factors in setting rental prices
A new research paper has found that wage inflation and the number of dwellings available are the two biggest factors in the cost of renting a home.
Like most economics papers, this latest publication from Treasury, the Reserve Bank, and the Ministry of Housing could easily be headlined: laws of supply and demand still apply.
It found that an increase in nominal wages leads directly into a 1-to-1 ratio increase in rents—all else being equal—and that a 1% increase in people per dwelling resulted in a 1.5% increase in rents.
The tri-agency paper was authored by Alan Bentley, Enzo Cassino, and Nam Ngo.
“There is some limited evidence suggesting that the higher the increase in the supply/demand gap, the stronger the wage-rent relationship, due to competition for rental properties allowing landlords to capitalize on renters’ wage gains,” they wrote.
Renters rise up
The three-agency Housing Technical Working Group’s paper said the proportion of people who rent has been increasing since the early 1990s.
These renters typically pay a larger proportion of their incomes on housing costs than owner occupiers which makes them more vulnerable to movements in prices.
The paper found that an increase in nominal wages leads directly into a 1-to-1 ratio increase in rents—all else being equal—and that a 1% increase in people per dwelling resulted in a 1.5% increase in rents.
Providing a better understanding of rental market dynamics could lead to better Government policy, it said.
Policymakers in both central and local government have been slow to allow zoning laws that enable more housing and put downward pressure on household costs.
Significant progress has been made in Auckland, via the Unitary Plan, and that success was set to be copied in other urban centres through the Government’s Medium Density Residential Standards (MDRS).
Just over a third of rental households are in Auckland, another third in the major urban areas of Canterbury, Wellington and Waikato, with the remainder in less densely populated regions.
The MDRS was a bipartisan agreement, but National has withdrawn its support and put forward an alternative that gives councils more flexibility on where houses are built
National’s would-be coalition partner, the Act Party, opposes medium density altogether and often attracts support from voters who don’t want new housing to be built in their area.
Pay rises spent on rent
The Housing Technical Working Group’s paper found rents overall had increased broadly in line with wage growth over the past two decades, and faster than general inflation.
Meanwhile, house prices had risen further because of interest rate declines and the tax system. Rental prices are much more tightly linked to supply than purchase prices.
Renting has been on the rise in New Zealand for three decades. About 32% of households were renting in 2018, up from 23% in 1991.
The decline in home ownership has been particularly acute for young adults. Only 35% of those aged 25 to 34 were owner-occupiers in 2018, down from 65% in 1988.
Renters typically have lower incomes and less wealth than owner-occupiers. They tend to spend a greater share of their income on housing costs, but the physical quality of the housing is typically lower than in owner-occupied properties.
Bentley, Cassino, and Ngo also identified other factors that had some effect on rental prices.
The unemployment rate was negatively correlated with rental inflation, meaning more joblessness would lead to lower rental prices.
It may be that better job security encourages people to form new and smaller households—which would increase demand for properties—and also allows landlords to raise rents without pushing the tenant into default.
Mortgage rate feedback loops
Another finding was that higher rents were loosely linked to higher mortgage rates.
“However, the sensitivity is quite small and is not always statistically significant across model specifications,” the authors said.
Possible reasons for this connection could be that first home buyers were delaying a purchase due to higher interest rates, increasing demand for rentals.
“Higher financing costs and restricted land markets may limit the supply response to increased demand for rentals when interest rates rise, putting further pressure on rent inflation”.
The authors also warned there could be feedback loops in the banking sector.
“As supply begins to increase relative to demand this will increase vacancy rates and reduce yields for property investors. This may lessen banks’ appetite to lend for further rental property development”.
However, the primary finding of the study was that income growth and relative supply and demand of dwellings have been the key drivers of rents in New Zealand over the past 20 years.