Upsurge in rents has further to run – BNZ

Increasing population growth set against tight housing supply suggests the recent acceleration in rents has further to run, according to a BNZ economist.

Mike Jones (pictured above), BNZ chief economist, said rents have gone up a lot in the past couple of years, along with just everything else, with the annual rent inflation in the total stock of tenancies rapidly climbing to around 4%, after the COVID-related freeze in rent increases in 2020.

Meanwhile, national inflation in new rents, according to MBIE data, is running at around 5½% year-on-year, but regional differences are stark. For example, rents in Wellington have fallen over the past year, while those in Southland and Taranaki have surged at double-digit rates.

According to BNZ, whether rental inflation continues its strong run is dependent on a handful of big macro factors: population dynamics, income growth, and the supply-side.

“In short, we think the interplay between these point to rental inflation continuing to lift over the coming 12 months,” Jones said. “Such an outlook is broadly in keeping with our expectations of the same for house prices (for which we continue to forecast a 3% lift over H2 2023 and 7% over 2024).”

Migration-driven population growth

Population growth is soaring on the back of strong net migration flows, putting pressure on the rental market.

“Clearly a great deal of uncertainty exists around just how large, and how sustainable, the current migration boom will turn out to be. We’re already seeing signs that monthly net migration inflows may have peaked,” he said. “Even so, if our assumption that annual net inflows settle around 50-70k is anywhere near correct, it implies some ongoing upward pressure on rents.”

Increasingly tight housing supply

BNZ said supply dynamics look increasingly tight, falling in most parts of the country over the past year, particularly in Auckland, where inbound migrants typically make their first stop.

“This time a year ago, there was a relative abundance of rental listings (4.5% vacancy rate) and annual growth in rents was negligible,” Jones said. “Over the subsequent 12 months, as population growth has surged, the vacancy rate has more than halved and new rents have lifted by around 4%.”

While Auckland has seen the largest decline in the rental vacancy rate, it was still above the NZ average, in absolute terms. Same for Wellington and Northland, he said.

In contrast, rental markets in Taranaki and the eastern parts of the North Island – Gisborne, Hawke’s Bay, and Bay of Plenty – remained extremely tight, with vacancy rates in these regions near to or below 1% and have fallen over the past year.

“Amid a general upswing in rents, we might expect these regions – those that have the biggest supply deficit – to be most susceptible to strong increases in rents,” Jones said.

He said the outlook for supply depends, in part, on investor activity.

“Election uncertainty is clearly having an impact in this regard as investors await the ultimate fate of mortgage interest deductibility,” Jones said.

Is income growth enough to absorb rising rents?

“Our earlier affordability analysis showed that, at least at a national, aggregate level, rising rents appear to have been roughly matched by strong growth in incomes,” Jones said.

“This may remain the case in the short term as past record tightness in the labour market continues to buttress wage growth. In this environment, and with supply tight, landlords may be able to recoup higher costs through higher rents.”

BNZ believed it won’t take too long, however, before affordability constraints bite. Already, some areas, notably Gisborne/Hawke’s Bay and Bay of Plenty, are getting stretched, Jones said.

“And our forecasts have aggregate labour earnings growth beginning to tail off from around now, to admittedly still strong rates of around 4-5% next year,” he said. “Just focusing on rent-to-income measures also doesn’t account for the more general cost of living crunch. Household incomes are under siege on all manner of fronts. There’s very little buffer.”

BNZ said it was also expecting supply tightness to ease in time. This as some renters that can put together a deposit, including non-NZ citizens that become eligible to purchase house, opt to exit the rental market and buy a property; and as higher rents eventually generate a supply response, particularly existing housing stock, such a granny flat, spare bedroom, or a bach, being rented out.

“Putting all of this together, after a period of strength over the next year or so, we’d expect strong rent inflation to eventually ease. The timing of the latter is very uncertain but looks like a story for the second half of next year,” Jones said.

Click here to access the pdf copy of the full report.

Use the comment section below to tell us how you felt about this.