I read the statement by our current PM Christopher Luxon about what landlords will do with his plan to reduce their costs from interest rates. I was incredulous that this lummox had ever paid attention during even a basic economics course. Landlords aren’t going to pass any cost reductions on to tenants in rent values. They always charge new tenants the rental rates that the market can bear. Luxon needs to read some of the analysis from Treasury, Reserve Bank, and Housing or any economist who has studied what guides rental rates in this country.
Listening to Luxon is like being timewarped and having to again listen to Muldoon explaining his view about economics being all about simple cost accounting. Luxon appears under-briefed or living in some fantasy land unrelated to reality.
For the past 30 years, New Zealand has seen more and more people moving into the country. However, there hasn’t been enough housing or other necessary services for everyone. This problem has been caused by the decisions and laws made by the governments over the years. They are responsible for how many people move into the country, and they haven’t invested enough in public housing. They also wrongly believed that private companies would solve these issues without the government’s help.
In particular the government led by Prime Minister John Key didn’t do much to fix these problems, especially during and after the tough economic times from 2007 to 2010. We have been living with that governments deficiencies ever since.
Because there has been a shortage of accommodation, now not only in Auckland but throughout most of the urban and provincial centres, the rent prices are almost entirely based on how much tenants can afford to pay for accommodation – that is what rental market rates are. This isn’t exactly hard to find – even Luxon could just look at a Stats infographic.
What individuals and families can afford is almost entirely based on household incomes. But also limited by the interrelated lack of ability to escape tenancy by buying property for household occupation as house and land prices have spiralled upwards.
Household incomes are constrained by the profits of businesses and employers and how much they can pay while still making a profit. Purchasing land and housing is constrained by the ability to afford a mortgage. Which with the rising prices of properties and the higher interest rates is increasingly harder to do unless family wealth is capable of acting as the bank of Mum and Dad.
Ask any landlord including Christopher Luxon with his numerous paid off investment properties. He and other landlords don’t set rental prices based on their their levels of cost. They set them according the local prices per room and will only lower them if they are unable to find tenants at those rent rates.
Reducing landlord costs only gives them more profits. It seldom even causes new property to be created for rental. Almost all owners of residential investment properties will buy existing properties, They seldom commission new residential property to be built. This is almost inevitably left to people wanting to build a new home or historically to the state housing sector.
There is absolutely no market reason for landlords to set rents based on costs. In New Zealand for at least the last 20 years they have queues of people wanting to rent their properties. There is a nett shortage of accommodation compared to population and most people cannot afford to buy or build housing with their current household incomes with current land and property prices.
As the August 2023 Treasury / Housing / Reserve Bank report on rentals states in its introduction, rental prices and economic behaviour related to it are better indicator of market supply and demand for housing than any measure (my bold).
New Zealand rents have received growing attention as the proportion of people who rent has been increasing since the early 1990s. This paper aims to provide an initial framework to improve our understanding of the factors that impact housing rentals in New Zealand. This analysis is useful for several reasons. Firstly, rents provide a better signal of the balance of supply and demand for dwellings than house prices do. This is because rents do not reflect expectation for future gains as house prices do. Secondly, providing a better understanding of rent drivers can lead to better government policy as renters typically pay a larger proportion of their incomes on housing costs than owner occupiers and so they are more vulnerable to large movements in housing costs. Thirdly, forecasting rents can also improve the accuracy of house price forecasts, as they are one of the factors that influence house prices. Finally, the framework helps us to test theories of how land and housing markets operate.
Housing Technical Working Group: “What Drives Rents in New Zealand? National and Regional Analysis“
In the results section there are a number of simple economic factors drawn.
All else equal, an increase in nominal wages leads directly into a 1-to-1 ratio increase in rents, as shown in all columns of Table 1. The correlation is stronger contemporaneously, but we also find that lagged wage inflation contributes to rental inflation.
Housing Technical Working Group: “What Drives Rents in New Zealand? National and Regional Analysis“
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In terms of relative supply and demand, a 1 percent increase in people per dwelling leads to a 1.5 per cent increase in rents (Table 1). There is some limited evidence suggesting that the higher the increase in the supply/demand gap, the stronger the wage-rent relationship, due to competition for rental properties allowing landlords to capitalize on renters’ wage gains.
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Across all model specifications in Table 1, the unemployment rate is negatively correlated with rental inflation, i.e an increase in unemployment rate would lead to a decrease in rental inflation. There are two possible explanations for this. Firstly, better job security can encourage people to form new and smaller households, which in turn, increases the demand for rental properties. For example, young adults may be more inclined to leave the family home when unemployment is low. Secondly, a strong labour market and positive economic outlook would ensure tenants’ current and future ability to pay, allowing landlords to raise rents.
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All else equal, an increase in population is positively correlated with rent inflation, while an increase in dwellings is negatively correlated with rental inflation.
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Another finding is that the sensitivity of rent inflation to mortgage interest rates is positive. However, the sensitivity is quite small and is not always statistically significant across model specifications. There are several possible explanations for the sensitivity of rent inflation to mortgage rates. For example, first home buyers may delay buying due to rising mortgage unaffordability, increasing demand for rental property. Higher financing costs and restricted land markets may limit the supply response to increased demand for rentals when interest rates rise, putting further pressure on rent inflation. There may also be feedback loops in the banking sector, which can limit the supply response of rental properties to lower interest rates. As supply begins to increase relative to demand this will increase vacancy rates and reduce yields for property investors. This may lessen banks’ appetite to lend for further rental property development.
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Across all specifications in table 1, the impact of general inflation beyond that already captured by the nominal wage coefficient, measured by CPI less rents, is positive but not statistically and economically significant.
This is exactly what you’d expect from any market analysis that indicated a mismatch between population and housing. Landlords respond to the ability of tenants to pay rents. It has little to do with their costs until it gets to the point that tenants are unable to pay enough for landlords to make any profit, either on rents vs costs or via capital gains.
In the New Zealand market with its chronic long-term shortage of housing relative to population and ever increasing house prices, even lacking a profit from rents doesn’t cause much of change in landlord behaviour. Many if not most rental properties are also investment properties for the owners. They can (and often do) farm their properties for un-taxed capital gains while claiming the rental losses across all of their income- resulting in a reduced tax rate.
This government doesn’t intend to tax capital gains nor increase costs to landlords by making interest non-tax-deductible. They also appear to have no coherent plans for significantly increasing housing stocks (past wanting ratepayers and councils to pay developers infrastructure) to wind back the deficit between nett inwards migration and housing stock.
So effectively and despite Christopher Luxon’s damn stupid opinion, all they are doing is allowing landlords to take increased profit from market rentals. It’d be highly unlikely that there will be any significiant reduction in market based rents. Meanwhile the governments planned lack of any effective action on housing and infrastructure will ensure that any reductions in global interest rates will rapidly trigger a property price rises.
I guess that is exactly like you’d expect from the parliamentary parties who are full of MPs who are landlords and the political parties and MPs that take large donations from property interests.
This is part of what causes the observations about “Key facts “Key Facts of Rents in New Zealand” section, and the associated demand for rental places.
The share of New Zealand households who pay rent has increased significantly during the past three decades, rising from about 23 percent in 1991 to 32 percent in 2018 (Stats NZ, 2020). The associated decline in home ownership has been particularly acute for young adults, with the proportion of New Zealanders aged 25 to 34 who are owner-occupiers declining from about 65 percent in 1988 to 35 percent in 2018 (Bentley, 2021). The number of households in rented dwellings increased from about 290,000 in 1996 to 530,000 in 2018.
Housing Technical Working Group: “What Drives Rents in New Zealand? National and Regional Analysis“
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The usually resident population in New Zealand increased by over 1 million people during the study period, from an estimated 4.0 million in June 2003 to 5.1 million in June 2022, at an average growth rate of 1.3% per year. Over the same period, the number of dwellings also increased by 1.3% per year, by 500,000 to 2 million. However, these long-run growth rates hide periods of mismatch between population and dwelling growth (Fig. 2). Variation over time in New Zealand’s population growth rate is driven primarily by changes in net external migration. Notably, the population was growing at a faster rate than dwellings during the period 2015–20, increasing the number of people per dwelling to a high of 2.64 as at June 2020. Border restrictions over the following two years curtailed population growth, whilst dwelling growth continued, reducing people per dwelling to 2.56 as at June 2022. This is similar to the 2.58 people per dwelling as at June 2003, at the beginning of our study period.
Basically the pandemic caused a hiatus in population growth, but all that did was to reduce density levels in housing stock. During this period, rentals continued to increase as the population spread out further in newly available housing (including repurposed tourist accommodation). Resumption of high rates of nett inwards migration caused a rapid rise in market rental rates over 2022-2023.
In the absence of significiant increases of available housing compared to population growth, landlords and property owners will take whatever profit is available, and still take any capital gains profit as well. Market economies do not engender charities in times of shortage. They engender price gougers from those holding scarce resources.
Meanwhile Christopher Luxon clearly thinks like a economically stupid cost accountant. Another lazy framers of the economy as a business – when it clearly is not. He is absolutely guaranteed to to screw up the economy like the last couple of them (Robert Muldoon and John Key).
They either do cost cutting of infrastructure (our urban infrastructure) while increasing population to boost short-term business growth or add uneconomic infrastructure to boost growth to carry forward as assets that carry debt but limited return on investment (Think Big and Roads of significance to National) and often both at the same time. All the while they sprout lazy pious and confused nonsense that is ineffectual whilst trying to kick the inevitable problems into the future. Christopher Luxon and his inept cronies will be damned by future generations that they have impoverished.
The best general solution would probably be to pass legislation that required the MPs and their families and trusts must divest from all investment properties before being allowed in parliament. Because to me it looks like National, NZ First and Act are operating policies designed to swell the bank balances of their MPs, the families of MPs and their donors.
I have a BSc and a MBA, both with large chunks of maths, economics and statistics. I have worked in the private sector, either in management or as a creator of export IP, for my working life. I have been involved in politics in one form or another for the past 40 years. I am unsympathetic to fools who ‘reckon’.
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