Saturday, June 15, 2024

Wages, home supply key drivers of NZ rental market

Te Tai Ōhanga/Treasury, Te Tūāpapa Kura Kāinga and Te Pūtea Matua have published a joint paper assessment of the key drivers of rents in New Zealand. 

What Drives Rents in New Zealand? National and Regional Analysis provides an assessment of the key drivers of rents over the last 20 years.

The assessment shows that wage rises and the relative supply and demand of homes were the two key drivers of rents at both the national and regional level.

The analysis in this joint paper was carried out by Alan Bentley, Enzo Cassino and Nam Ngo through the Housing Technical Working Group, a joint initiative of the Treasury, Ministry of Housing and Urban Development and Reserve Bank of New Zealand that was established to improve technical understanding of the housing market.

“When the effect of other factors is excluded, a 1% increase in nominal wages leads directly to a 1% increase in new tenancy rents,” the paper’s authors say.

New tenancy rents respond more quickly to market changes than rents paid by sitting tenants, the paper states.

“A 1% increase in the average number of people in each home, an indicator of relative supply and demand, leads to a 1.5% increase in rents at the national level.”

This link between rents and the number of people in each home could occur for several reasons, such as, that rents tend to rise when there are not enough houses to go around, or that renters tend to share accommodation more when rents rise, researchers found.

The study found rents increase when mortgage interest rates rise, but the impact is quite small.

“This is consistent with previous analysis done by the Housing Technical Working Group on the impact of land supply restrictions.”

This is because when land supply is highly constrained, we would expect financial factors, such as interest rates, to have a greater impact on house prices than rents. 

Understanding these key drivers of rents is important to monitor and assess the balance of supply and demand in the housing market, enhance government policy for renters, improve the accuracy of house price forecasts, and identify potential hot spots at the regional level, Treasury said in a statement.

The share of New Zealand households who pay rent has increased significantly during the past three decades, rising from about 23% in 1991 to 32% in 2018. The number of rented homes rose from about 290,000 in 1996 to 530,000 in 2018, the paper states.

“Rents matter since low-income households have little discretion over how much they must spend to put a roof over their heads,” the authors said.

“Renters typically earn less than homeowners, spend a greater share of their pay on housing, and are less wealthy.” 

Between 2003Q3 and 2022Q2, rents increased broadly in line with wages, but faster than inflation:

  • new tenancy rents increased a cumulative 83% 
  • average hourly earnings up 87%
  • consumer prices (CPI) rose 54%, and 
  • house prices 267% .

The HTWG identified these differing growth rates, amongst other things, as evidence to support their conclusions presented in Assessment of the Housing System: with insights from the Hamilton-Waikato Area (HTWG, 2022). 

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