Wages rises and number of houses available biggest influences on rents

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A 1% increase in wages leads directly to a 1% increase in new tenancy rents, while a 1% increase in the average number of people in each home, leads to a 1.5% rise in rents nationally, says a new paper released by the Reserve Bank.

Tuesday, August 8th 2023, 1:14PM 3 Comments

by Sally Lindsay

The joint paper by the Housing Technical Working Group, Ministry of Housing and Urban Development, Treasury and the Reserve Bank shows wage rises and the number of houses available are the two key drivers of rents at both the national and regional level. This has been consistent over the past 20 years.

Authored by Alan Bentley, Enzo Cassino and Nam Ngo of the Housing Technical Working Group, the link between rents and the number of people in each home could occur for several reasons, such as, rents tend to rise when there are not enough houses to go around, or that renters tend to share accommodation more when rents rise.

“Rents matter since low-income households have little discretion over how much they must spend to put a roof over their heads,” the authors say.  “Renters typically earn less than homeowners, spend a greater share of their pay on housing, and are less wealthy.”

For example, between the second quarter of last year and the third quarter of this year, rents increased broadly in line with wages, but faster than inflation. New tenancy rents increased a cumulative 83%.

The paper says rent inflation at a national level is also affected by increasing mortgage rates meaning higher rents and the increasing unemployment which leads to a drop in rents.

However, those contributions are smaller and less significant than wages and the physical supply and demand for dwellings. The small effect of mortgage rates on rents is consistent with previous analysis done by the tri-agency Housing Technical Working Group on the impact of land supply restrictions.

Renter numbers rise

During the past three decades the number of households who pay rent has increased significantly, rising from about 290,000 in 1996 to 530,000 in 2018.

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 increasing number of renters has meant an associated decline in home ownership, which has been particularly acute for young adults, with  those aged 25 to 34 owning their own home declining from about 65% in 1988 to 35% percent in 2018.

More 40% of households do not own homes in Gisborne and Auckland, compared with less than 30% percent in Marlborough and Tasman.

Renters typically have lower incomes than owner-occupiers, spend a greater share of their income on housing costs, and have lower material wealth, the paper says. The physical quality of rental housing is typically lower than in owner-occupied properties.

Inflation

Rent inflation has been above average in many provincial North Island regions since about 2016. Counter-balancing this has been below-average growth rates in Auckland.

Bentley, Cassino and Ngo say there is some limited evidence suggesting the higher the increase in the supply/demand gap, the stronger the wage-rent relationship, due to competition for rental properties allowing landlords to capitalise on renters’ wage gains. And new tenancy rents respond more quickly to market changes than rents paid by sitting tenants.

Under the theoretical framework of the rental market, the authors say higher rents increase the return to landlords, lifting the supply of rental properties. Higher house prices reduce the supply of rental properties as the yield to landlords is cut.

Higher mortgage rates diminish the supply of rentals as the cost of capital to invest in property rises. Higher inflation moderates the supply of rentals as it increases landlords’ expenses.

Importance

The research is important, say the authors, to monitor and assess the number of rentals and demand in the housing market, provide a better understanding of rent drivers so they can lead to better government policy as renters typically are more vulnerable to large movements in housing costs and improve the accuracy of house price forecasts and identify potential hot spots at the regional level.

Finally, they say the research helps the Housing Technical Working Group  to test theories of how land and housing markets operate. These results provide evidence to support another Housing Technical Working Group conclusion the New Zealand land market in aggregate lies somewhere on a spectrum between completely abundant and completely restricted supply, with variation in the degree of restrictiveness across the regions. In theory, in a completely restricted land supply, interest rate changes should have no impact on rents.

Tags: rents

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