House prices leave rents behind

April 26, 2007

Average rents have risen faster than wages in the past five years and are tipped to jump further in the next two years as the rental market catches up with Auckland’s soaring house prices.

Property Investors Association vice-president Andrew King predicted yesterday that Auckland rents could leap 20 per cent in the next two years.

The head of the property department at Auckland University, Associate Professor Laurence Murphy, said a 20 per cent increase would be necessary to restore yields on rental properties to the rates prevailing in the early 1990s.

But other experts consulted yesterday were more moderate. All expect more increases, but most do not expect them to reach 20 per cent.

A consultants’ report published on Monday forecast continued pressure on the rental market as a spinoff from rising house prices.

Average rents registered with the Government’s tenancy bond centre rose in the year to March by 3.3 per cent in Waitakere, 6.1 per cent in Auckland City, 6.9 per cent in Manukau and 8.8 per cent on the North Shore.

Mr King said big rises in house prices had left rents behind.

“The market is out of kilter at the moment. There is a big difference between the cost of home ownership and the cost of renting. In the last three years that has got out of kilter.

“Renting at the moment is much more affordable than owning your own home.”

This was driving many young couples to continue renting rather than trying to buy. More renters meant more pressure on rents, which were bound to rise.

“They could go up 20 per cent in the next two years.”

An agent for Harveys real estate in Mt Eden, Ann Farquharson, said the rental market had been rising since January after a seasonal lull late last year.

She has rented homes in Mt Eden where the rent for the new tenants rose from $460 to $490 a week in one case, and from $470 to $500 in another.

On average, she said, most rents were going up for new tenants by $5 to $10 a week.

Professor Bob Hargreaves of Massey University said the typical private sector renter would have paid 26 per cent of the average wage to pay the median rent in 1993. By last year, rents had risen to 32 per cent of the average wage nationally and 37 per cent in Auckland.

Overall, rents rose by 86 per cent from 1993 to the first quarter of this year but wages rose by only 50 per cent.

Professor Hargreaves said there was a high correlation between rents and net immigration.

“Rents started to take off again about October last year. Although net immigration has come off a little, it is still quite strongly positive. Net immigration is a very volatile statistic, but provided it stays positive, that’s going to keep pressure on rents.”

But he said a 20 per cent jump in rents in two years would be almost unprecedented and was unlikely.

Professor Murphy said the faster increase in house prices meant rents were now returning landlords a yield of only around 5 per cent, compared with 6 to 7 per cent in the early 1990s.

“If you were on a 5 per cent yield and you wanted to shift it up to 6 per cent, back to what it was earlier in the 1990s, you’d have to increase your rent 20 per cent,” he said. “On a $350 a week rent, that’s $70.

“Traditionally you would anticipate that the yield should bear some relationship to the interest rate because it’s a rate of return.

“The fact that it doesn’t at the moment reflects the way people finance their [investment properties] to get a tax loss and claim it off their tax, and because people are looking for capital gains.

“But if there was a general feeling that yields were too low, especially now that interest rates have gone up … it could lead to increases.”

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