KEY POINTS:
For some property investors, there is a silver lining to the cloud that hangs over the housing market. Capital values are faltering but prices remain too high for many would-be buyers. As they swell the ranks of renters, the winners are landlords who can charge more for their properties.
The cost of renting - on a purely cash-flow basis, excluding capital gains - is now typically less than half the cost of owning, notes the Massey University Real Estate Analysis Unit's latest report on the rental market.
"Increases in rents over the last quarter are most likely partially attributable to demand pressure from net migration and potential first home buyers who are remaining in the rental market for longer than expected," it says.
The report shows the national median weekly rent rose from $280 in September last year to $285 in October and $290 in November. The national median was up 7.4 per cent in November 2007 compared with the same month a year earlier.
Research by economic forecasting organisation Infometrics shows that rental inflation during the first quarter of last year was 3.3 per cent compared with the same period in 2006, but jumped to 6.8 per cent during the April-to-June quarter of 2007. In the final quarter of the year, rents rose 6.4 per cent on average compared with the same quarter in 2006.
Yields on rental property had been falling as rents lagged behind the cost of buying properties financed at historically high mortgage rates. But Infometrics notes that with house price inflation easing over the December quarter, gross rental yields crept up to 4.39 per cent, their highest level since last February.
Many investors who have bought recently have properties where rental income does not cover purchase costs. The assumption is that capital gains on the eventual sale of the properties will make this worthwhile.
These "negatively geared" landlords will be particularly pleased to see rents going up. But there could be limits to the benefits that landlords reap from the upswing.
Tony Alexander, chief economist at the BNZ, says in a recent commentary that anecdotal evidence suggests rents are rising more quickly than is evident from data in the consumers price index. Some property owners were talking about getting increases of 15 to 20 per cent when tenants changed and obtaining an extra 5 to 10 per cent from existing tenants. Data from real estate agency Barfoot and Thompson shows that the annual rate of increase in its rents had lifted to 9.4 per cent from 4 per cent a year ago.
But there are doubts about the potential for further rent rises.
Infometrics notes that while demand for rental accommodation appears to be solid across all sizes of dwelling, rental inflation for four-bedroom properties has dipped to its slowest rate since mid-2006. "This trend may be a result of increased pressure on household budgets from higher food and fuel costs, encouraging families to 'economise' on the number of bedrooms when choosing a property to rent."
Property investor and commentator Kieran Trass says statistics he tracks show that part way through last year, there was an increase in the average number of occupants per household. This followed five years of falling occupancy.
Trass' interpretation is that accommodation costs in general are rising; mortgages may be expensive but rent is also a stretch. As he points out, $350 a week for a rented home could easily swallow half the take-home pay of a middle-income earner. Occupancy per household will continue to rise as renters look for ways to cut costs.
"We might see a 5 or 10 per cent lift in rent but I can't see it going any further than that."
Rental affordability will hit poorer areas hardest and, thus, the landlords who own properties in those areas.
Andrew King, vice-president of the New Zealand Property Investors' Federation, believes market conditions may encourage reductions, rather than increases in occupancy, pushing up demand for rented homes. He says people who rent long term, with the aim of eventually buying, may be prepared to compromise on space and lifestyle for awhile but, if they put ownership off for an extended period - as many are now doing - they are more likely to move to a larger rented property.
King recently compared growth in income with growth in rents during the past four years and the figures came out at 22 per cent and 21 per cent respectively.
"I think there is probably still room to go for rent increases."
Bob Hargreaves, director of the Massey unit, says that in the past, sharp increases in rents have been related to strong immigration flows. Recently, net migration has fallen, although it is still positive.
But there are limits to rent rises; if inflation is 3 to 4 per cent, rents might be 2 to 3 per cent ahead of that. He says to increase rents, landlords have to convince tenants to pay more and "the worst thing you can have is an empty property".
Karen Coleman, marketing manager for property management and real estate company Crockers, which operates in and around Auckland, says not all types of property have been commanding increased rents.
There is a glut of small apartments in Auckland. "We can't get enough people to fill them."
However, there have been substantial increases in rents on three-bedroom homes in good areas with good schools.
Craig Paddon, a property lawyer and investor, is not expecting a rental boom. "Like any market, the price you can obtain depends on supply and demand. In this case, the supply of houses and tenant demand. We seem to be entering a period of net emigration; more people leaving New Zealand than arriving coupled with a softening property market which may see some investors offload properties. These will generally be lower-priced properties that may well appeal to first home buyers."
Those factors, plus tax cuts, the Government's affordable housing policies, and access to KiwiSaver funds by first home buyers will, in Paddon's view, contribute to a significant increase in people entering the market as owners rather than tenants in the next five years.
He believes rents will go no further than to catch up with the stagnation of recent years before levelling off again.
One theory among property investors is that rents are not as high as they should be here because many landlords fail to review rents regularly. They are afraid to upset tenants so do not behave in a businesslike manner when it comes to the returns from their investments. If rent is not reviewed regularly, it is difficult to impose large irregular changes on existing tenants.
We may not be entering a rental boom but, for investors who think they fall into this camp, the time is probably right to crunch some numbers.
* Maria Scott is a Christchurch journalist who specialises in personal finance.
