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OPINION: Recent media commentary has described private residential rents in Auckland as “skyrocketing” and being “among the most expensive in the world”.
Rents have increased markedly over the past 12 months and there is no doubt that rents in Auckland are high. However, I would challenge “skyrocketing” as a description of recent price movements.
Based on Barfoot & Thompson data from the 21,000 properties we manage, the average rent for a 3-bedroom home in Auckland in October was $658. This is a 4% increase over the past 12 months and comes against a backdrop of an inflation increase across the same period of 3.2%.
The 4% increase is for all of Auckland and the rate of increase varies considerably when you look at the increases for different locations across the metropolitan area. The highest increase was in the western suburbs of central Auckland (4.7%) while the smallest increase was in the Franklin/rural Manukau area (0.9%).
Comparing Auckland rents with those from other parts of the world to test the claim “we are among the world’s most expensive” is challenging given all the variables involved but an analysis undertaken by the Economist (posted by Reddit) appears relevant. The Economist’s analysis showed that in 2020 25% of New Zealand tenants spent 40% of their disposable income on rent. We just edged out Britain for the unwanted number 1 position (on 23%). Australians spent (10%) and Germans (5%).
What is not clear from the Economist’s analysis, however, is the extent to which the 345,000 people in private accommodation who receive an accommodation supplement would alter our ranking. This subsidy is available to a large number of tenants in privately owned accommodation.*
Regardless, by world standards it is fair to say our rents are high.
Delving into whether rents are more affordable today than they were 20 or so years ago is an easier topic on which to reach a conclusion as a Housing Technical Working Group project, funded by Treasury, the Ministry for Housing and the Reserve Bank published a report on this in August titled What Drives Rents.
This report includes a table which shows that over the past 20 years (ending June 2020) the country’s rental price index had increased from a zero base by 83%. Over the same period inflation (as measured by the cost price index) increased by 54% and average hourly earnings by 87%.
In summary, over the past 20 years rents have increased marginally less than incomes, but more than inflation. The data set shows that at no stage over the past 20 years have rents got out of step with hourly earnings.
The report’s main findings were that the key drivers of rental inflation over the 20-year period have been wage inflation and supply and demand. The report notes that while mortgage interest rates did impact on rents, their influence was small.
Over the same 20-year period house prices increased by 267%, and a companion paper by the Housing Technical Working Group, titled Assessment of the Housing System, addressed what has driven this increase.
This report’s key finding was that most of the recent rise in house prices was not due to a lack of housing supply, but rather a combination of a decline in interest rates coupled with restrictions on the use of land for housing.
This combination led to the greater spending capability generated by lower borrowing costs being directed towards paying higher prices for land. It was rising land costs, rather than house costs, that have increased the prices we pay.
This point is glaringly apparent in the property valuations each household receives every few years on the capital value of their property. The split between land value and dwelling value invariably shows a significantly higher value is placed on the land.
It is important to note that the report is defining land supply as urban land on the outer limits of cities on which homes could be built, redevelopment opportunities on existing urban sites and intensification opportunities (building more and up).
By restricting the quantity of land on which houses can be built, by limiting the density of housing on land designated for housing, and capping the height of buildings, we are making the land more valuable, and in the process, pushing up the prices at which existing properties change hands and the completed price of new builds.
*Public Housing Quarterly Report, June 2022.