Economists have played down property investors’ warnings of rent hikes – because tenants are already so stretched that the market won’t sustain any further rises. So now a publicly-funded research project is investigating just what is affordable.

The Parliamentary letters secretary for Associate Housing Minister Poto Williams will be kept busy this month. Advocacy group Renters United is encouraging tenants whose rents have been raised to send the minister a “bill”, detailing just how much the increased rent is taking from their grocery budget.

The campaign has upset the Auckland Property Investors Association, which says fake rent bills “cheapen the real struggle ordinary Kiwis face amidst skyrocketing living costs”. Its parent body surveyed 1719 landlords this month: 76.8% of the respondents said they would probably increase rents on their properties, by $21 to $30 on average.

Whatever the politics, it seems all agree: getting into a home has become unaffordable.

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But what does “affordable” mean? Clearly, very different things to different people. The banks say one thing in assessing mortgage applications; housing agency Kāinga Ora says another in setting the terms for its First Home Loans. The struggling KiwiBuild programme requires that developers sell homes in “more affordable price ranges”. For existing properties, that’s no more than $650,000 in Auckland and Queenstown, $550,000 in Wellington, and $500,000 in the rest of New Zealand.

There are 10 KiwiBuild developments advertised for sale: seven apartment blocks and three terraced housing complexes in south and west Auckland, one apartment block in Queenstown and a semi-detached housing complex in Rotorua. Especially with the rising costs of building materials and labour since the Covid border closures, developers have decided that KiwiBuild’s definition of affordable is, for them, unaffordable.

That’s why, as part of the $47 million government-funded National Science Challenge into Building Better Homes, Towns and Cities, economists have been tasked with discovering the magic number. What is an affordable price for a first home? What is an affordable rent?

“The time has come for an extraordinary solution to this unfolding emergency. We need to short circuit the faltering RMA to get more houses built.”
– Judith Collins, Opposition Leader

Last month the Government announced a package of reforms intended to restrain price rises, most notably by taxing investors’ interest payments, and requiring them to pay income tax on their returns if they on-sell their residential properties within 10 years.

Opposition leader Judith Collins, in turn, announced yesterday that she would submit a Private Member’s Bill to the Parliamentary Ballot, seeking to put in place emergency powers to speed up house building. Her proposed law would require all urban councils to immediately zone more land for housing – enough for at least 30 years of expected growth, she says.

Describing hers as the party of home ownership, she said: “National doesn’t share Labour’s view that you can tax your way out of a housing shortage.”

A few hours later, the Reserve Bank published the outcome of its Monetary Policy Review. As expected, it left the official cash rate unchanged at an all-time low 0.25 percent.

But it too has cracked down on investors by setting in place new loan-to-value ratios that generally require them to put down a 40 percent deposit to buy a new rental property, and next month it will announce whether it also wants to use debt-to-income restrictions to further restrain “speculators”.

All of this battery of action and rhetoric is intended to achieve one thing: to get people into homes.

“Unsurprisingly, there are renewed threats of skyrocketing rents as landlords seek to pass their higher costs on to tenants. This is unlikely to succeed as rents are largely a function of household income.”
– Dr Michael Rehm, University of Auckland

In the long term, that means building more houses and apartments to increase the supply, but in the short term, it almost inevitably means robbing Peter to pay Paul. So investors are just as motivated as renters-cum-homebuyers to discover what the magic number is.

Sharon Cullwick, executive officer of the NZ Property Investors Federation, is wary of predicting if and when other landlords will really raise rents, lest she be accused of trying to instigate cartel behaviour under new criminal provisions that came into force this month.

But she does believe investors will wait until the impact of the interest payments are really starting to impact on them. The reduction in interest deductability will be phased in from October.

“We’ve got lack of supply at the moment,” Cullwick says. “But you do get to the stage where you’ve got someone on a fixed wage living in a house, and the rent goes up on that particular property. They can either decide to pay the rent or they can look for something else – if they do look for something else it may be a cheaper property, it may be the same quality.”

For all their talk of hiking rents, they can’t raise them above what the market will bear. Cullwick says seven out of 10 survey respondents claim they don’t charge the full market rent – though determining the market rent is based on extremely crude measures like checking TradeMe to see what other similar properties are going for.

That, or announcing an increase to their tenant, and seeing whether they pack their children and pets into the back of the station wagon and move out.

How is affordability measured?

“We need. To. Build. Houses.” That’s the ultimate answer, in Sharon Cullwick’s view, and most other observers and market participants, too. But that doesn’t provide a roof over children’s heads today. So we need to make housing more affordable now.

This discussion of how we measure affordability was prompted by the words of Dr Michael Rehm, a senior lecturer in property at the University of Auckland Business School.

In a column published on Newsroom, he writes: “Unsurprisingly, there are renewed threats of skyrocketing rents as landlords seek to pass their higher costs on to tenants. This is unlikely to succeed as rents are largely a function of household income. Tenants will not deprive themselves and they will not stop saving up to purchase their own home in order to prop up their landlord’s speculative punt.”

This is counter-intuitive. We assume that when there is a shortage of supply, the landlords wield all the power. They can name their prices. But Rehm and other economists say this isn’t always the case; renters are more likely to be on low, fixed incomes without any ability to dig deeper and pay more. If their landlord tries to hike rents, they’ll give 28 days notice and move in with the in-laws instead.

According to Mark Stephens from the Urban Institute, in Edinburgh: Housing is affordable when housing of an acceptable minimum standard can be obtained and retained leaving sufficient income to meet essential non-housing expenditure.

The Ministry of Housing and Urban Development has been modelling that. Its experimental Housing Affordability Measure uses Stats NZ household-level income data to provide a picture of shifts in housing affordability. Within that are three measures:

* The Housing Percentage Measure identifies whether each household in New Zealand is spending more or less than 30 percent of its income on housing costs. According to Rehm, housing is already unaffordable by that measure. In Auckland, an average 38 percent of HH income is consumed in rental housing costs, according to preliminary data he and the National Science Challenge team are analysing.

* The Housing Affordability Measure for renters counts the income left over, after housing costs, for renters in different parts of New Zealand, and compares it to the national median income after housing costs for all households. The Housing Affordability Measure for potential first home buyers applies the same tool to potential first home buyers.

* Finally, the Housing Affordability Index re-scales the household data from the Housing Affordability Measure so that affordability for renters at the start of the time series is set to 1000 – helps government officials understand the trends over time of housing affordability.

This is all slow progress – which is why the National Science Challenge work is so important in delivering speed and independent academic rigour. Rehm is part of the Affordable Homes for Generations research team, and his focus is on determining affordable purchase price and rental price points.

That work is still underway, but there are some clear starting points. Newsroom has analysed Household Expenditure data collected by Statistics NZ in 2007, 2010, 2013, 2016 and 2019. The findings are shown in the above two charts.

Rent costs have increased from 28 to 34 percent ($371.60 on average) of renters’ weekly expenditure, over those 12 years. 

For home-owners, the cost of mortgage repayments and rates increased from 30 percent to a peak of 35 percent in 2016, before dropping to 32 percent in 2019. A key point to note is that although home-owners are spending as similar share of their money on accommodation to renters, they also have more spending money to start with. For renters, they had to budget an average $1,100.80 a week, in 2019. Home-owners had $1711.80 to spend.

Rehm says that during this same period, renters’ average savings rate also increased from 0.6 percent to 2.3 percent.

“In my view this suggests that renters are trying harder to save for a house of their own but rent is consuming more and more of their incomes.”

“Changes in recent years to rental standards have often been followed by threats of spiking rents, or selling houses, that haven’t eventuated – just look at the changes to the ringfencing of rental income and costs and the healthy homes standards.”
– Brad Olsen, Infometrics

The same financial flexibility that gives investors an advantage over renters bidding for a toehold in the market, will also come back to bite them. Because those same renters, unable to buy a home, are left in their rental property without the wherewithal to pay more rent.

“Tenants do not leverage their incomes to pay rent,” Rehm says. “Some unfortunate ones might rely on payday loans, credit cards and the like to meet rent payments when they hit rough patches but by-and-large rents are paid with current wages and government subsidies like Working for Families and the accommodation supplement.”

Infometrics economist Brad Olsen agrees, at least to an extent. His consultancy does expect rents to continue rising, as the lack of additional rental supply means there is great levels of rental demand than rental supply. “However, we’re less than sold on rents spiking, with rental increases generally limited by changes in household income.”

He says average rental inflation has tended to move broadly in line with average wage rates, but these averages likely hide distributional impacts for renters, particularly those with lower incomes.

“Changes in recent years to rental standards have often been followed by threats of spiking rents, or selling houses, that haven’t eventuated – just look at the changes to the ringfencing of rental income and costs and the healthy homes standards,” he said.

“With previous Infometrics analysis showing that renters are more likely to be employed in the industries hardest hit by the pandemic’s economic downturn, and those on lower incomes already unable to afford even ‘usual’ increases in rents, we are concerned that the state housing waitlist will continue to rise at pace and emergency housing spending will remain at eyewatering levels.”

“When you’ve got a situation that you have an open home, and you’ve got 50 tenants turning up to look at that property, then someone will pay extra money to secure that property.”
– Sharon Cullwick, NZ Property Investors Association

Sharon Cullwick, too, accepts the economists’ analysis that rental prices may be dictated in large part by the renters’ ability to pay, rather than by the lessors. “I feel sorry, because I’m a tenant too, as well as a landlord. It is so expensive out there. Even food’s gone up. Petrol’s gone up 20c in the past three or four weeks. Everything seems to be going up – but you know, the cost of buying or building a new house is expensive, to go through council consents, even to put down basic things like ground cover,” she says.

“If landlords try to raise rents and they can’t find the tenant, then they realise the price is too high-priced for the market.

“I understand exactly what they’re saying, but I think now, when you’ve got a situation that you have an open home, and you’ve got 50 tenants turning up to look at that property, then someone will pay extra money to secure that property.”

She, for one, is preparing to raise rents on her tenants. “I’ve had tenants who have been in one of my houses for 15 years. And they’re great tenants – and they are so under-rented, probably $100 below the market rent.

“If I decide to give them a small rental increase, say $30 a week, and they turn around and give me 28 days notice that they’re moving out, then the Government is going to change the law so I have to rent it to the next tenant at the same low rate.”

She says it’s rent control by stealth – and she is worried that with the Ministry of Housing and Urban Development already quietly working on rent indexing, that the law will shift further in that direction. 

The big squeeze

Back to Michael Rehm, and he confirms the Newsroom analysis that tenants nationwide have been “squeezed” by the ‘market’ into paying increasing shares of their incomes in rent. “There are of course limits to how far this can be pushed – at some stage you run up against consumption of basic goods and needs.

“The other factor is that tenants, when pushed by landlords for higher rents, will sometimes choose to worsen their housing services. For instance they will opt to take in another flatmate or family member and this could result in overcrowding. In one sense this undermines landlords’ collective effort to increase rents as that compresses demand into fewer, overcrowded dwellings thereby increasing vacancies and placing downward pressure on rents.”

“I do believe if house prices reduced to a point where investors can achieve a fair, respectable return from rental income then that would be a far healthier situation than what we have now.”
– Dr Michael Rehm

The question now is whether a slowdown in house price rises will also be followed by a slowdown in rentals. That emerged with dramatic effect in countries like Ireland, in the GFC, where house prices fell and rents followed them. But if house prices rises do slow down in New Zealand, it’s not because the market is contracting but because more of the costs are being shifted onto the landlords – so it’s yet to become clear how much of that can and will be passed on to tenants.

“Landlords are gambling on future capital gains and they simply tolerate the ongoing losses. This forces them to subsidise their rental ‘business’ with other income sources. In order to achieve positive cash flow, leveraged investors are under pressure to defer maintenance and increase rents as much as they can,” Rehm says. 

“I do believe if house prices reduced to a point where investors can achieve a fair, respectable return from rental income then that would be a far healthier situation than what we have now.”

Newsroom Pro managing editor Jonathan Milne covers business, politics and the economy.

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