Costs of healthy homes regulations and impact of mortgage interest tax changes blamed for record rent rise, helping drive biggest unassisted inflation jump since 1980s.
In Auckland’s Saint Marys Bay, a restored two-bedroom villa will set you back $2,660 a week right now. Letting agent Sue Christie’s listing describes it in gushing terms, as providing two light-filled living spaces, cleverly connected and extending to a large paved courtyard and entertainment area at the rear, brilliantly located within walking distance of Ponsonby and Jervois Road, Westhaven, and Victoria Park.
That’s shorthand for no lawns. And for that view out over Waitematā Harbour that Saint Marys Bay is famous for, photos suggest you would have to crane your neck at the side window.
By contrast in Waipukurau in central Hawkes Bay, a two-bedroom kaumatua flat is on the market for $200 a week. That does have lawns, says Rikki-Lee Diack, and they’re mowed by the landlord!
These rental homes have one thing in common: they’re part of a rising rental market that is dragging up inflation.
Existing weekly rents rose 3.2 percent in the year to September and, factoring in new tenancy agreements, they rose 7.8 percent. With food prices also up 4.0 percent, they helped drag up the Consumers Price Index 4.9 percent – more than double the Reserve Bank’s inflation target. Aside from GST increases, that’s the highest quarterly increase since 1987.
That’s making investors nervous. That’s worrying businesses. And increasingly it’s scaring those who hold the household purse-strings – especially in families unable to buy their own home.
There’s a bit of dispute over who’s to blame. At realestate.co.nz, they say professional property managers aren’t raising rents as fast, suggesting that it’s jittery mum-and-dad investors anticipating a reduced ability to deduct mortgage interest, from this month.
Landlords are also pointing to the costs of complying with new healthy homes regulations. The Real Estate Institute’s property management boss Joanne Rae is calling for a three-month extension to the compliance timeframe.
“As lockdown alert levels started to lift from September, this allowed tenants to relocate to different regions. We did see some tenants give notice and others move into a property they were already committed to prior to the August lockdown.”
– Joanne Rae, Real Estate Institute
Rae said there were likely a number of factors at play in the rent rises.
Last year, the Government imposed a freeze on rent increases from March 26 to September 25. Meanwhile in August 2020, a new Residential Tenancies Amendment Act came into effect limiting rent increases to once every 12 months.
“Some landlords may have restarted their rent reviews annually, so they now fall in September each year,” Rae said. “This could have an impact on rent prices in this September month.”
But Rae also pointed to the overwhelming impact of supply and demand. "We continue to see very high numbers of potential tenants enquire about available rental properties, and the combination of a shortage in listings and some investors having sold their properties has meant that rents have held firm and, in many regions, continue to rise.
“As lockdown alert levels started to lift from September, this allowed tenants to relocate to different regions. We did see some tenants give notice and others move into a property they were already committed to prior to the August lockdown. I don’t believe we have seen the usual volume of tenants moving and we expect more movement as restrictions ease, and we move down alert levels.
“Historically, from mid-November through to early January, rental market enquiry slows. We then see a large influx of tenants competing to secure property from late January through to early March. It will be interesting to see if COVID-19 has an impact on this trend particularly if there are still restricted viewing opportunities inter-regionally” she adds.
"My property manager in Hamilton was about to send out a rental increase, and the lockdown happened so they withdrew it until the levels changed. It has now just been sent out to the tenants. It was a $15 per week increase."
– Sharon Cullwick, Property Investors Federation
The Property Investors Federation said government regulations like healthy homes, the threat of rent freeze rules and the impact of mortgage interest tax deductibility changes have all increased costs on landlords. Executive officer Sharon Cullwick also pointed out landlords were allowed to increase rents only once a year now. Echoing Rae, she said it had been one year since the last Covid-19 rent freeze – so many landlords would put up their rents in September and October.
"My property manager in Hamilton was about to send out a rental increase," she said, "and the lockdown happened so they withdrew it until the levels changed. It has now just been sent out to the tenants. It was a $15 per week increase."
ANZ economists warned Christmas demand would push inflation up still further.
Price pressures in housing show no signs of easing, say ANZ economists Finn Robinson and Miles Workman, and they expect that will have added 0.6 percentage points to headline inflation. Rents continued to grind higher, they say, adding another 0.1 points to headline inflation.
Council rates increases averaging about 7 percent came into effect this quarter, adding 0.2 percentage points to headline inflation. And construction costs were through the roof, adding a further 0.2 points. "Demand for new housing remained very strong over the September quarter, while labour and materials shortages continued to plague the building industry."
"While temporary surges in petrol prices aren’t something the Reserve Bank usually worries about too much, this increase will make the headline CPI figure look even more concerning, and, since petrol is a necessity a lot of the time, will make it even tougher on household budgets."
– Finn Robinson and Miles Workman, ANZ
The CPI has been re-weighted today, to reflect the past 18 months' decline in international air travel and overseas accommodation, prepaid in NZ. Rents now have a slightly bigger influence on CPI, and food slightly smaller.
September’s movement was the sixth consecutive monthly rise in food prices – mainly influenced by higher prices for fresh eggs, chocolate biscuits and sweets. On the most part, fruit and vegetable prices fell – but extraordinarily, tomatoes rose another 3 percent in September, when their prices should be dropping towards summer (in the past three years they have dropped 15 percent, 7.4 percent and 2.9 percent respectively). Year on year tomatoes are up 23 percent.
Brent crude oil has gone up week after week, feeding through to prices at the pump. Brent Crude futures have now climbed more than 30 percent since late August as growing demand and tight supply show no signs of easing.
The ANZ economists expect petrol and other fuel prices to contribute 0.3 percentage points to headline inflation.
"Oil prices collapsed when Covid first struck in 2020, but with economies starting to recover and reopen over 2021, oil prices have surged – and that’s turned up directly in petrol prices," Robinson and Workman say.
"While temporary surges in petrol prices aren’t something the Reserve Bank usually worries about too much (as they don’t tend to impact longer-term inflation expectations), this increase will make the headline CPI figure look even more concerning, and, since petrol is a necessity a lot of the time, will make it even tougher on household budgets."