Pre-Election update 2023

Pre-Election update 2023

Where are we now?

With the General Election 2 months away we can be sure that interesting times lie just ahead, and also for the next few years as rents continue to move up quickly.

Auckland properties available for rent on Trademe are 3,377 today compared to 5,570 a year ago (40% lower!). The numbers of properties available have remained remarkably restrained all winter, only rising from a low of 3,127. Normally the numbers drop from now into Sept/Oct, so we should see further reductions in supply. We are currently at the lowest August numbers since 2014, so the lowest number of rentals available in Auckland for at least 9 years.

How did we get here?

A few factors came together to create a perfect (anti-landlord) storm:

  • We are seeing the results of the current government’s attack on landlords through restrictive rules and new legislation since 2017, e.g. RTA Amendment Act 2020.

  • The removal of interest deductibility starting in March 2021. This phases in to 50% this year, so now it really begins to hurt existing investors and impact on their decision making.

  • CCCFA and restrictive bank lending practices from July 2022 (which squashed lending).

  • Much higher interest rates which also squashed lending (especially after April 2022).

All of this led (over time) to some existing investors saying “too hard”; others finding the bank rules just “too hard”; new and existing investors saying “too difficult”; as well as “too risky” (if Labour are re-elected and deductibility goes to zero %). And so they have been selling existing rentals and/or not buying new investment properties (if they have to borrow).

According to the Reserve Bank new investor lending is at the lowest level for many years. In general we can say that investors have been selling rental properties and they are not buying more.

What does it mean?

As Economics 101 teaches us that, in the end it’s all about supply and demand. The supply of available rental properties in Auckland is shrinking. This is an objective fact based on Trademe data. Some commentators point out that the properties still exist, even if they are now occupied by 1st home buyers, who will have been renters before buying. However rented properties have more occupants on average that those of owner/occupiers, so demand does increase. Also, new buildings consents are falling so fewer brand new properties are under construction.

At the same time we are seeing a surge of new immigrants into NZ. On an annual basis we are up to over 80,000, and this is despite Kiwis moving to Australia in record numbers. Many of these new immigrants settle in Auckland in the first instance. On top of that, we expect another 7,000 arrivals at the beginning of each of the next 2 years as the overseas student sector recovers. So demand for rentals can be anticipated to remain strong.

So with fewer rentals available and increased tenant demand in Auckland, then rents should be going up right? And they are! However, the rules restricting rent reviews to once a year acts to slow and smooth the rent increases. So the true pressure on rents is partially hidden and only becomes apparent over time as rent reviews push up the average rental prices. We also know that good existing tenants get discounted rates as landlords don’t want them to move. However, the financial squeeze is such that many landlords have no choice but to raise rents for these great tenants as well.

Rents are rising strongly

Our benchmark Glenfield 3 bedroom home rental average has increased from $624 to $710 over the past year. That was up from a dip in the market, but basically we see an around 10-12% increase over the past 2 years.

But there is more going on than that. We are seeing wide variations in rentals achieved depending upon the quality of the house or unit provided. Over the longer term rentals move with inflation, but in the short term employees are getting pay rises and are able to afford more expensive rentals. So good quality properties attract higher demand and prices, while poorer presented houses are left behind. We are seeing large variations in rental prices for the same area and size, with quality being the key difference. So if you have the funds, upgrading properties will gain good returns and tenants (and tradespeople are available these days).

Where tenants are vacating we are of course advising our clients to move to the new market rent level. But with existing tenant rent reviews we are having some in depth discussion as to the options. Some of our landlords have chosen to do rent increases of $30-$35 p.w. even knowing that they are still charging below market rates. Many landlords are hurting at present so they have to increase rents but are also trying to keep their good tenants in place. In a years time we can review and probably increase again, and hopefully the tenants will have more ability to absorb the next increase. Everyone is doing it hard these days. These landlords are aware that if tenants leave they will have 2 or 3 weeks vacancy to fund (equivalent to $25-40 p.w. for a year), and with no guarantee the new tenant will be as good as the last.

The Election

Our information shows a clear turning of the Auckland property market 6 weeks ago. This fits with a lot of commentators views. Given that Auckland is around 10% under its long-term trend we can anticipate some recovery in prices. This will be tempered if the Government is re-elected as we are aware of many investors who will be forced to sell their rental properties as the combination of high interest rates and 100% non-deductibility means it is just not affordable to keep them. Rents will go up more and for a longer time.

The alternative scenario is the election of a National/ACT government where both party's have committed to reversing the removal of interest deductibility. They may also reverse some of the other anti-landlord rules introduced by Labour. This will allow investors to return to a more normal level of purchases as interest rates go down. This extra supply will put a lid on rent increases over time. We expect this would bring rents back into line with with the long-term trend of matching inflation.