Rents should have been falling

Statistics New Zealand this morning released its monthly residential rentals series. I don’t usually pay any attention to these data but since I’d been thinking about the very low level of real interest rates, I decided to take a quick look for once.

The series goes back to November 2006.   They have both stock and flow-based measures, the latter being available on a regional basis.   Nominal rents have risen by about 50 per cent since 2006, and these are the changes in real (CPI-adjusted) rentals on each of these measures over that period.


Something like a 15-20 per cent increase (depending whether you prefer the stock or flow measure) over 13 years might not seem too bad.  That’s a rate of increase of about 1 per cent per annum.

But that really is the wrong way to look at the issue.  After all, renting a house/flat involves paying for the use of a long-lived asset.    And the key influence that should influence any change in the supply price of such assets is changes in the cost of finance, returns to alternative uses of money etc.

In November 2006 the real 10 year government bond rates was about 3.25 per cent (roughly so whether one uses the one indexed bond then on issue or takes a nominal bond yield and subtracts surveyed medium-term inflation expectations).  The real 10 year bond rate is now about 0.15 per cent.   What about the risk premium?  The Treasury guidance to government agencies suggests using an equity risk premium of 7 per cent.  One could play around with different estimates, and with assumptions about how much diversification housing might add to a portfolio.  But it doesn’t seem unreasonable to work with a rough estimate that the required rate of return should have fallen by perhaps a third since 2006.    All else equal, in a well-functioning market, we might reasonably have expected to have seen a significant fall in real rentals over that period.

Of course the standard counter is “oh but falling interest rates raise the price of fixed assets”.  Often enough that isn’t even true for assets in genuinely fixed supply –  since long-term real interest rates rise and fall for reasons that often have something to do with the expected future returns in the wider economy –  but even to the extent it is true, in a well-functioning housing market the only component of a “house plus land” bundle that is in genuinely fixed supply is unimproved land itself.    The supply of anything else can be augmented, and in a well-functioning market almost without effective limit.

In a free market, in a country with as much land and as few people as New Zealand, most unimproved land isn’t very valuable at all.  Just suppose it was worth $50000 a hectare (and actual New Zealand farmland traded at a median of just under $25000 a hectare most recently) and that you could get 7 houses to a hectare (a decent sized section and the associated roads and footpaths), the value of the unimproved land under a standalone house would be worth less than $10000.   As something like a perpetuity, the lower interest rates might have raised that value by a third, an amount that –  relative to New Zealand median residential prices –  is really almost lost in the rounding.

The substantial reduction in real interest rates shouldn’t dramatically affect the supply price of new building.   Raw materials prices –  timber, cement, fittings etc –  should not be affected.  Nor, really, should the price of labour: perhaps interest rates are low partly because productivity growth is low but, broadly speaking, any such weakness will be matched over time by lower growth in real wages.    If anything, there is an in-principle argument that much lower interest rates may have lowered the supply price of new developments, because there is often quite a lag between acquiring land for development and being able to put the finished product on the market (inevitable market delays and regulatory delays),  Lower interest rates mean lower costs of financing those lags.

In a well-functioning market it might not have been unreasonable to have expected, say, no change in nominal rents nationwide over the 13 years, not a 50 per cent increase.

But, of course, we don’t have a well-functioning market at all.  We have one consistently and systematically rigged against competition and development by local councils and their central government enablers.   There is no scarcity of unimproved land in New Zealand. But councils –  councillors and staff planners – combine to create an artificial scarcity of developable land, such that in the face of one of the largest falls in real interest rates in history, to unprecedentedly low levels, rental housing is not abundant and cheap (as readily reproducible longlived assets should be in this climate) but scarce and expensive.  Utter government failure if ever I saw one.

Bits of both arms of government occasionally talk a good game about freeing up land supply, but it is central government that is currently consulting on making less peripheral land available.  It is a senior member of the Labour Party council –  a Wellington city councillor –  who when she rang me on a canvassing call a few weeks ago offered the unprompted observation (when I asked about fixing housing) that she didn’t want any more of that “sprawl” –  this in a city with abundant, if often undulating, land.    In many cases, their vision is to have us packed in like sardines –  more “efficient” like that, supposedly –  and they feed that personal preference, or sense of inevitability, by making land so expensive that many people feel they no longer have that historic New World option of space –  in cities that, by global standards, remain pretty small.

When people complain about rents, and particularly the plight of people at the bottom with few choices but to rent, they need to sheet home responsibility to our governors –  central and local.  Perhaps a future National government would be different, but they too talked a good talk when they were last in Opposition and did nothing then.  There isn’t yet much reason to think they’d be different next time.

Whatever the other risks, downsides, and complications of exceptionally low interest rates, the market has delivered a climate in which the real cost of decent housing should never have been cheaper.  It takes governments –  central and local, left and right ( in this area a distinction without a difference as they all enable planners) –  to have produced rising real rents in a decade like this.


23 thoughts on “Rents should have been falling

  1. Consideration needs to be given to the sheer inertia of adding to not only land provision but infrastructure, material supply (even with import additions), training of new trade personnel, regulations etc etc.
    We do not seem to be capable of overcoming any or all of these.
    And then if an upturn occurs in Australia some of the better one disappear because Oz has such higher wage returns than we do.


  2. Yes, altho several of those are directly regulatory in nature – the sort of constraints govts put in the way of an effective system of development (all while further aggravating the situation with large immigration inflows)


  3. Michael excellent not once again

    My observation is many places , for example Wellington have had material rental inflation in last 5yrs… this makes the issue you have discussed here more even more interesting for the believers of low interest rates alone can fix things (without fiscal)

    regards Lance Reynolds

    Aspiring Asset Management


  4. “”the value of the unimproved land under a standalone house would be worth less than $10000.”” I had to count the zeros. That would convert my family from millionaires to near paupers but we have time to sell before the government listens to a Cassandra. Did anyone listen to economists during the Dutch tulip mania?

    My guess is the accommodation benefit distorts rents upwards; is that true and are there any means of estimating to what extent?


    • But do remember that “unimproved land” is a stylised bare section with no particular location, and not even any fencing or drainage etc. Your Birkenhead section price, by contrast, includes the value of drainage and other development necessities, incl streets. My point was that those services could be added to newly-developed farmland, but it isn’t cheap to do so and those costs have to be covered, either in an upfront price or (as in some US contexts, as a legally binding additional annual charge). Your section price will also include some locational premium- not far from the centre of a largish city.


      • Not too sure why anyone would think that the accommodation supplement distorts rents. The accommodation supplement is a subsidy for social welfare tenants to meet market rents. The alternative is for the government to build more social housing but as you have seen with Kiwibuild the government can’t build anything fast enough. The wait list queue for HNZ housing is around 8,000 unhoused people sleeping on streets and in cars.


      • (Reply to GGS at 10.08)
        If I were a landlord, and the Government had just announced that my tenant would be given extra money to help pay their rent, why wouldn’t I try to raise the rent and capture some of this for myself? (Other than that I am a really nice guy and would never actually try to make my investment property more profitable to save for my retirement!) After all, the tenant was managing (with whatever difficulty) before; so if their income goes up $100 from the accommodation supplement and I can increase their rent $80 then they are still $20 better off.
        What prevents that in a competitive market is that if I raise my rent then the tenant moves somewhere else. The whole point of the current market is that the tenant can’t move because there are not enough houses in the market. In this situation where there is a lack of competition by fiat of the planners, government help for renters mostly ends up in the hands of landlords.
        Labour governments seem to take a static view of the world: In GGS’s formulation, there is a “market rent” and giving more money to tenants enables them to meet that fixed market rent. But the world is not static, and giving more money to tenants simply increases the market rent. Market rents can only be reduced by rent controls (and that idea has been tested to destruction in many places around the world) or by increasing competition between landlords by building enough properties. Whether the properties are built and/or owned by the Government or the private sector makes no real difference: what matters is that enough are built.


      • Paul, I have accommodation supplement tenants. No landlord with a brain actually bothers with what the government does with how much subsidy they decide to put in. It is quite simple as far as landlords are concerned. We price to keep good tenants. Usually rent increases lag because landlords will not increase rents unless they have to. Every rent increase risks losing a tenant after all as we all know it is about long term investment gains. Rent is only intended to cover costs plus provide a living wage. Those landlords on salaries from another work source do not even bother with any rental profit.


      • Rent controls only works if landlord costs do not increase. Unfortunately council rates increase at an exorbitant rate each year plus incremental compliance costs have to be recouped. It is quite simple. Rates go up, rents go up. Insulation costs go up, rents go up. Heat pumps installed, rents go up. Lazy tenants that dry their clothes indoors and create black mould and does not clean and blames landlords require a cleaner to go check regularly, rents go up.


  5. Rents should have been falling +1

    1) The RMA should have all zoning and density restrictions removed and a set of national effects based standards be put in place.

    2) The immigration rates should be managed down to something sustainable linked to maximising gdp/capita growth


    • It is easy and a complete waste of time and effort to keep harping about bring immigration rates down. It is about time to suggest something more useful like how? Keeping the key facts in mind. An aging population that needs more and more help care and a booming $17 billion Tourists and International student industry that feeds directly into the services and hospitality industries.

      Unless alternative industries can arise it is just complete nonsense to keep harping on about bringing down immigration rates.


  6. The ‘how” is technically easy and I have laid out my specific ideas previously. New industries and changes in capital/labour ratios would appear as the relevant relative prices (eg real exch rate) change. That is why major changes should be pre-announced and implemented over several years, with support from mon policy.


    • Rather than look at our downward spiral in productivity as a negative, perhaps this is NZ being the first in the world to face up to our incremental aging population. Our open and agile economy is adjusting to the global norm today and in the future with tourism and health care related hospitality services.

      Chinese companies with the largest domestic market in the world allows its significant pricing advantage differentiation to dominate global consumer products markets. It is inevitable.

      For example 12 months ago I would never even have considered a Huawei P30 Pro as a viable replacement for my Iphone having been a Iphone purchaser for the last 7 years. I was a brand loyal Apple Iphone user. Today I own a Huawei P30 Pro tempted by the different users, account after account of reliability and technical excellence and 4 great cameras managed by a very responsive AI computer and the massive 50% plus free watch discount price gap.


      • Our exchange rate is high compared to who? It is already at a discount to most of the OECD countries and the US. That is why we can’t get a Trade deal with the US or with Europe. We already have a significant and unfair trade exchange rate on the lower end against most of our European and US trading partners.


      • Michael, I cannot understand how you can even consider that adjusting the governments immigration target rate down from 50.000 to 20,000 as a “how”. That rate has been unadjusted for at least 30 years now. Some years we have negative immigration growth and other years we have peaks of net 70,000 immigration gains. It is not a “how” when no one bothers about that targeted rate. No one uses it or even bothers whether that rate has been exceeded regularly by tens of thousands or even less by tens of thousands in any year. You can drop that rate to zero and immigration will continue to do the same thing that they usually do ie respond to industry needs. Why do you think the Labour/NZfirst/Greens government is issuing special workers visa fast track licences to 30,000 employers? Industry needs workers or fruit lay rotten on the grounds and old people lay drooling and pooping on carpets.


      • My policy proposal is not about overall net migration but about the number of residence visas approved, something which is directly managed within a Cabinet-approved target.


      • Micheal, look at the government Kiwibuild rate of 10,000 a year. So do you seriously think that is a easy technical “how”? The housing problem with the right target with the right mon pol got solved? Are you living in lala land?


      • Michael, perhaps some simple maths may help you.

        5 migrant residents plus 3 foreign workers equal 8 people.
        2 migrant residents plus 6 foreign workers still equal 8 people.

        If industry needs workers it really does not matter what the residency target is.

        Think of business as a river. Unless you spend a lot of money to divert a river or to build a dam, a river will flow through the easiest natural path. The easiest natural flow for business is to provide for a growing health care sector and to cater for tourists. You will have to spend an enormous amount of money to divert this natural flow towards profit. This is a massive river diversion which requires the government to spend massive infrastructure change amounts to change industries towards more automated factories. Productivity is less working after all.


      • Your policy prescriptions have already been proven unworkable. There are currently tens of thousands fewer migrants whether intentionally or more than likely due to incompetence. The result is rotting fruit on the grounds and old folk drooling and pooping on carpets with industry leaders just desperate for more workers. The growing aging population does not decide to stop growing old if you decide to change residency targets.


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