KEY POINTS:
Rents could rise 6 per cent a year, creating a new source of inflation, Westpac economists suggest.
Westpac said rents had been subdued for years, rising at an average rate of just 2.2 per cent a year over the past four years.
It expected rents would accelerate rapidly by 6 per cent per annum and would stay that high for five years, creating inflationary pressure.
One of the reasons for this was increased demand for rental housing.
"High interest rates will reduce supply," it noted. "With mortgage rates above 9 per cent, rental yields at 4 per cent and little prospect of capital gain, the numbers just do not stack up for landlords."
Fewer landlords would be keen to build new properties for rent, but with local rates and insurance rising, and capital gains being capped, renting was now an attractive option.
"We estimate that rents need to rise by 34 per cent to bring them back into line with current house prices -- a process that could take five years."
Other factors in the rents rise were wage growth, increasing Housing New Zealand rents and median new rentals, which were already on the increase.
Westpac noted that it was unusual to have rising rents and stagnating house prices.
"Normally house prices and rents move together, as both respond to macroeconomic conditions -- for example, falling unemployment in the mid-1990s led to strong house prices increases and rent rises.
"But during the 2000s low interest rates and tax changes caused an explosion in property prices over and above what economic conditions would normally dictate.
"The same factors kept rents low -- landlords were chasing tax relief and capital gain more than yield."
However, a long period of high interest rates would subdue property prices and boost rents, Westpac said.
Also affected was the cost of construction. Construction cost inflation, which usually eased when the housing market turned down, had already dropped from 9 per cent to 6 per cent.
But it seemed unlikely to ease much further, because the shortage of builders would continue as non-residential building picked up.
Economically, the housing slowdown would mean people would be taking less money out of housing equity by extending mortgages or downsizing.
But the $4 billion drop in available spending would more than be compensated for by the money which the dairy industry was set to inject, Westpac said.
It was expecting dairy farmers to receive an unbudgeted $7.2 billion windfall -- almost double the housing market's effect.
All in all, the housing slowdown was coming during the strongest external conditions New Zealand had experienced in three decades.
"Getting on top of the housing market will not be sufficient to tame inflation this time," the bank said.
It expected interest rates to be hiked a further two times next year unless the global credit market worsened.
Tenancy Protection Association co-ordinator in Christchurch Helen Gatonyi said the figures are not what she's seeing on the ground.
"There was a stage when they were a bit static but there has been a gradual increase over the last 12 months and it certainly wasn't 2.2 per cent. We've already been seeing increases of rent on the ground of between 10 and 20 per cent," Ms Gatonyi said.
She said her colleagues are expecting rents to rise by up to 20 per cent this year.
Ms Gatonyi said her colleagues in Auckland and Wellington say tenants are experiencing similar rises.
She said any increase is going to hit people hard on tight budgets with electricity, fuel and food increasing in cost also. And for those on benefits, it is really going to hurt.
"Their disposable income is really none at all."
- NZPA, NZHERALD STAFF
