What has been happening to private rents?

I don’t usually look at Sunday’s Herald but I was filling in time in an airport yesterday and noticed an article on private residential rents, drawing on MBIE’s tenancy bond database.  I don’t think I had previously realised that the data were easily available, at both a TLA and regional level.

One of the striking aspects of the house price boom has been the way rents have lagged well behind house prices.  House price to rent ratios have increased substantially.  Of course, in many ways that should be no surprise.  After all, real interest rates have fallen very substantially over the last 25 years or so  (having risen sharply over the previous decade).  Even in New Zealand – with the highest real interest rates in the advanced world –  real interest rates are lower than at any time in modern history (the heavily regulated period of the 1970s and early 1980s excepted).  Falling rental yields might reasonably have been expected, and that is what we have seen.

The MBIE data go back to the start of 1993. Since then, consumer prices (the CPI) have risen by around 60 per cent.   Average private rents on this measure have risen by about 150 per cent in that period.  The QV measure of house prices has risen by just over 300 per cent in that time.

Perhaps what is most striking, and something the Herald article didn’t bring out, is how similar Auckland’s experience has been to that of much of the rest of the country.    Since the start of 1991, Auckland rents, on this measure, have risen by 158 per cent.  Those in Gisborne –  the median regional council – have risen by 130 per cent.  Auckland rents have risen faster than those in most of the country, but they just don’t stand out the way that the increases in Auckland house prices do.

rents since 93

And if we restrict the analysis simply to the period since, say, 2007, the picture is not materially different.

And what of incomes?  Nominal GDP per capita increased by 144 per cent from 1992q4 to 2015q2.  Even in Auckland, rents have not increased much relative to (national) average per capita GDP.  Purchasing a house might have become “unaffordable” for many, but accommodation doesn’t appear to have.

And that conclusion is reinforced when one recognises that these MBIE data do not purport to be like for like measures.  The average house today is larger than the average house in 1993.  The average house is better appointed now than in 1993 (more likely to have double-glazing, heat pumps, or central heating).  And as the home ownership rate has dropped in the intervening years, it is likely that the median rental property in 2015 is further up the 2015 spectrum of New Zealand houses than the median rental property in 1993 would have been along the spectrum of New Zealand houses in 1993.

In the CPI, Statistics New Zealand attempts to adjust for the quality and compositional issues.  However, they only appear to report, in Infoshare, rental prices since 1999.  And even that series, which includes both public rentals and private rentals, is made harder to read by the abandonment of market-related rents for state houses in 2000/01.  But since 2001 (ie after the levels adjustment from the policy change), the CPI rentals component has risen by 37 per cent (very similar to the change in the CPI over that period), whereas the MBIE private rents series has risen by 87 per cent.  Per capita nominal incomes have risen by 71 per cent over that same period.    Even over the period of the biggest house price boom in modern history, a constant-quality house looks to have become more affordable to rent, not less.  And, of course, that is what one would normally expect.  Stable long-term ratios of house prices to incomes, for example, tend to reflect the fact that as incomes rise, the size and quality of houses tends to increase.

Of course, if land use restrictions –  in conjunction with policy-driven population pressures –  had not driven urban land (and house) prices sky high, we might perhaps have expected to see real rents falling.    All else equal –  which it never is –  sustained lower real interest rate lower the real cost of providing rental accommodation services.  But the fact that Auckland rents have not increased enormously relative to those in the rest of the country tends to reinforce the idea that it is not so much an issue of an extreme shortage of accommodation in Auckland, as of the regulatory restrictions on land use.  Such restrictions, which “bite” more in Auckland because of the population pressures, offer returns to landlords through actual/expected capital gains.

And for anyone interested in the rental increases at the TLA level, here is that chart.  (To deal with a few missing observations at the start of the period, this chart uses the percentage increases from the first 12 months of the series  to the most recent 12 months).

rents since 93 by TLA