Has the rent freeze failed to curb rising rents? Falling interest rates boost rental returns

Data from Trade Me Property suggests the residential rental market quickly returned to normal in May.

Rental supply and demand recover

Website spokesperson Aaron Clancy said the number of homes available to rent nationwide in May this year rose 56% from the previous month and 3% from the same time last year. ‘As the alert level dropped to Level 2 and New Zealanders began returning to a new normal in May, we saw supply and demand in the residential rental market recovering after the upheaval of previous months. So far, tenants and landlords alike are confident in the market.’ Last year’s data showed nationwide demand for rental properties rose 120% in April, but stalled in May. Meanwhile,

• Aaron Clancy predicted that, following the temporary standstill caused by lockdown earlier this year, ‘demand for rental properties over the coming months will be higher than in previous winters’. He attributed this mainly to two factors: lockdown may have prompted some tenants to reassess their rental homes and seek somewhere more liveable.
• Many New Zealanders returning from overseas also need to find suitable accommodation as soon as possible.

‘We believe this is putting pressure on the market and making it harder for tenants to find the home they want,’ he concluded.

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Rents continue to rise

Aaron Clancy said that although the number of rental properties was growing, and many short-term rentals had moved into the long-term market because of the pandemic, there was no evidence of an oversupply. ‘If demand really did fall, or there was an oversupply, we might see rents come down.’

He had previously predicted that COVID-19 and the Government’s tenant protection policies would end the nationwide rental market’s 24 months of sustained rent growth. He was concerned this would create further difficulties for landlords and investors at a time of economic uncertainty.

Clearly, however, some market developments have departed from expectations. The reality is that the Government’s emergency legislation freezing rent increases for 6 months does not apply to newly listed rental properties, so it did not prevent the national median weekly rent from rising in May. ‘In May, the national average weekly rent was NZ$510, up 2% on the same time last year.’

Regional disparities widen

In May, Wellington’s median weekly rent rose 5% year on year to NZ$550, while Auckland’s reached NZ$550, up 3%. But Aaron Clancy acknowledged that not all the data was positive. Areas whose economies rely heavily on tourism saw the greatest changes in rental housing supply.

‘In Otago, the number of homes available to rent rose 46% compared with April, and 28% compared with May 2019.’ In the hardest-hit area, Queenstown-Lakes, data showed rental property supply increased 90% compared with May 2019. Other tourism-focused areas also recorded sharp year-on-year increases in supply, including Rotorua, where residential rental supply rose 39%. Aaron Clancy suggested these fluctuations could reflect local rental markets urgently seeking a way forward after lockdown, as both supply and demand had changed considerably in these areas:

Supply: As visitor numbers fall, some short-term holiday homes are switching to long-term residential rentals, increasing the supply of rental properties;

Demand: The tourism downturn may also force some workers to move away to adjust to changes in their employment or personal circumstances. This means more properties are being listed while fewer people need rental accommodation.

‘If major employers in these areas cannot provide jobs, local residential rental markets will continue to face an oversupply.’

Falling interest rates favour investment

Regional imbalances do not alter the more attractive investment prospects that falling interest rates have brought to residential rentals nationwide, even in Auckland, where rental yields are relatively low.

Rental yield is the rent tenants pay as a proportion of a property’s market value. In other parts of the country, where house prices are relatively low, rental yields are usually 5% to 7%, compared with around 3% in Auckland.

Kiri Barfoot, spokesperson for real estate agency Barfoot & Thompson, said that as of April and May this year, typical rental properties in Auckland were yielding 3.27%, while many banks’ fixed mortgage rates had fallen to record lows below 3%. ‘This means a balance, or even a shift, has emerged between borrowing costs and the potential returns from rental properties.’

Barfoot & Thompson calculated rental yields by comparing the average annual rental income from three-bedroom homes in Auckland with the average sale price of three-bedroom homes it had sold over the previous six months. The average rent for an Auckland three-bedroom home was NZ$584 a week, or NZ$30,368 a year, while the average sale price over the previous six months was NZ$938,688, giving a yield of 3.27%.

‘Although this figure is only one calculation for prospective property investors to consider, the change still deserves our attention.’

Kiri Barfoot said that with many people expecting mortgage rates to remain low for a considerable time, this could also send a strong signal to investors. Barfoot said: ‘For anyone considering buying an investment property, the key now is to find a property among the growing number of listings that is less exposed to current vacancy pressures.’