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Boom and bust?

The building boom currently underway is clearly having a serious impact on supply, so much so that cities like Hamilton and Auckland are showing significant gap changes between supply and demand:

  • Auckland supply is now greater than at any time in the last five years, compared to July this year, when supply dipped well below last year.  
  • Hamilton was at a all-time low in March and now has more supply than 2017 or 2018

However, supply is not equal to demand in many of our biggest cities as years of under-investment has seen a shortage of properties driving rental and sales prices up.  The current boom is having small impacts so far.  

Private Rental Listings shows the number of listings I expect if 2.5% of private rentals are listed at any one time (Inventory).  Plus the over-supply(+ve Surplus) or undersupply (-ve Surplus)


The NZ Regions Rental Inventory chart shows supply in relation to an expected balance of 2.5-3% of existing rental homes being up for rent at any one time.  While Hamilton is increasing supply there is still a lot of demand to use up, 1.8% of properties being advertised is well below the 2.5% I would expect for balance, ie where supply meets all demand.  Auckland is just keeping up with population increase, remaining just below 3% of active bonds (existing rentals)

 Wellington and Tauranga continue to fail to meet demand despite an incredible construction effort.  There is still plenty of room for more homes, I estimate a shortage of about 450 public rental homes in Wellington and 250 for both Tauranga and Hamilton.

Note that Housing New Zealand are continuing to build at subsidised housing at a frantic rate, completing about 2,500 homes since the change of government and continuing at pace - here is a local Naenae development with 37 homes:

IMG 0294 copy


Government interference in the construction industry (or any industry for that matter) tends to suffer from over-hyped expectations.  These expectations create a boom with an inevitable bust - just look at Christchurch in the chart above, 2016-17 was the result of an overbuild for a market that was not there anymore.  I expect the same will occur for the rest of the country over the next couple of years.

Edited addition:

I was thinking about the growth rate of rentals in each region so decided to plot what that looked like to see how big the problem is after Judith Collins apparently said that landlords are leaving the industry.

She is right:


Clearly the growth rate of new rentals has kept up with growth in demand, however with growth rates now below 1% for BoP and the average for NZ at 1.5% we have a looming shortage of properties.  The good news is that Wellington building boom is helping to catch up.  The bad news is that despite the building boom in Auckland we are heading very low, although there is plenty of room to move since Auckland this week hit an all-time seasonal high for advertised rentals.



Auckland Household Income Drops

NZ Stats published annual Household income on Thursday, with some large changes to some of my assumptions developed with a HH income estimate from last year.

In particular, Auckland Household weekly income, excluding Self Employed, instead of rising as expected, reduced for the 2019 year from $1,867 to $1,866, not a lot while if I add Self Employed it dropped from $2,255 down to $2,251.  It has never reduced annually since 1998.   The only rise was in Government Transfers, ie Dole, Super, Benefit etc.

Meanwhile Wellington and Hamilton incomes increased exactly as I predicted for all regions, ie an increase of 4%.

Auckland Rents

With the lack of growth in Auckland Household incomes over the past year, the affordability of renting has reduced as rents continue to rise.   Auckland has remained within the range it has adopted since 2006, endorsing my data showing that Auckland is not short of Private Rentals.

With rent/income in the middle of the range of 27.5-29%, there is not going to be pressure to raise rents above inflation or renovation impacts in Auckland anytime soon.  I predict that rent rises will be hard to implement in 2019/20.

Wellington Rents

However, the opposite remains true in Wellington, where Rent/income is now known to be above 24%, the upper limit over the last 12 years.  This will continue to put pressure on prices in Wellington.

An unexpected change is for Bay of Plenty.  My forecast of income was from $1,521 to $1,581, but it only rose to $1,535, raising the rent/income ratio to over 27%, apart from Auckland, the highest regional ratio, helping to drag the National total up to almost 26%, the highest since 2004.

Rent Growth

Expect price rises above inflation in Wellington, Bay of Plenty and Hamilton, but that is obvious from supply shortages shown in my Regional Listings charts.

Auckland and Canterbury will continue to see rent rises below inflation, because they have plentiful supply and insufficient demand for private rentals.  Will Auckland rent rises retract further to a YoY rate of zero?

Private Rents are growing at rates expected with current supply - demand imbalance/balance:



Note Private rentals exclude Subsidised public rentals such as Housing NZ, Corporates and NFPs - see here for that analysis

City Apartment Rents

Wellington City apartment Median Rent is about 30% of the average Wellington (total Wellington) household income.  Inner city tenants are more likely to be sharing an apartment and on high incomes, making 30% look higher than the average for Wellington. 



However the chart shows the trend changed between 2010-2014 as demand became constrained and the Median Rent stuck very close to 30% of average Wellington HH income (excluding Self Employed income).


Wellington Rental numbers 3-year slump

Investment property numbers in NZ grow on a straight line, however a small dip is now evident.  Researching the cause of this dip shows that most of the loss of rental properties comes from the two earthquake impacts on Wellington, and a little from the earthquake effects on Christchurch.

Plotting “Active Bonds” - more simply termed "total rental households” for regions shows some surprising trends.  The National total correlates to a surprising straight line rising by very close to 1000 households per month.  Interpreting that, NZ has an increase of 1000 homes becoming rental properties every month.

The rate of increase slowed a lot over 2018/19, with closer to 500 per month now being the normal growth.

The Active Bonds chart below shows National and Auckland bonds against straight lines with correlation of .9989 and .9992 respectively.  

So Nationally we are not keeping up with likely demand.  But it is not Auckland that is short!


Canterbury and Wellington also have great correlation if plotted up to the date of the Canterbury Earthquake, Feb 2011, 0.9982 for both.

Wellington Rental Supply Constraint

Take a look at the green and red lines near the bottom, I have expanded the scales below.  

As you would expect, Canterbury lost a lot of people because of the quake, so the line changed position, rather than slope, with a hiatus from Feb 2011 to Feb 2014, supply is now matching demand.  See chart below.

Wellington on the other hand experienced a second earthquake in 2016 and has barely added a single rental property since then, yet the population continues to increase.  This aligns with the continuing shortage of rentals shown in this page combined with my Rent Growth Rates chart here

It is hard to see the current building activity matching an apparent 5000 home shortage of rental properties in the short term which provides for a super opportunity for investors.  Yields will only increase from current levels in the short term.


Data Anomaly Investigation

The above charts show some strange growth, eg Wellington from 12,000 in 1993 to 45,000 now seems too high so I did some work on the reliability of the Active bond stats, this took a lot of effort:

What this shows is that there has been a strong growth in rentals, but that MBIE have failed to register a lot of rental bonds, some of these may be business rentals and not requiring a bond, some may be landlords not registering, but I suspect the answer is complex and confused.

However that does not change the conclusion, registered Active bonds in Wellington ceased growing in 2016 and I expect they should be still on a straight line, making Wellington short of about 5000 rentals.


Wellington Cycle Ending?

The market cycle in Auckland ended about 2 years ago, but that just seemed to kick off the rest of the country.  The Wellington market is finally running out of steam and I suspect the rest of the country is into the last stages of the market before prices stabilise and rentals try to catch up.

Why do I say this?

Wellington Sales listings are now on the rise after 3 years of a shortage of listings: 


Demand for rentals is now seriously tight:

Rents are not all growing at the same rates, some regions are short of rentals and in some there is developing a glut.  A simple comparison of growth rates in rentals across the main regions shows a dramatic increase for Wellington while the growth rates have slumped in Auckland and Otago.   There are logical reasons for this - that do not included greedy landlords - mostly demand/supply.


Rents rally for multiple reasons, not only can a shortage drive up rents, but Household income is the main driver of rents.  As can be seen below, Wellington is in catchup mode, not only with a shortage of rentals but also from a low of 18% of incomes to the typical historic upper level of 20% of incomes, with a bit of overshoot.  I personally expect rents to come back a bit in Wellington as apartment blocks open shortly.

However with interest rates dropping, competition for the housing dollar at the top end may now come from lower priced and more affordable house purchases.  I have not thought of a way to show data for this possibility, unless you take the upward trend in the chart below from 2002 to 2008, when interest rates were increasing.


Contrast Auckland which was high during a shortage in 2012-2015, but now has more rentals available driving the rent as a proportion of income from 25% down to 22%.

Please comment below, I have avoided too much comment on this analysis and would appreciate feedback.


CGT & Landlords Selling?

Discover how much Active Bonds are growing and what influences the level of supply

National

Charting the YoY growth in number of active bonds from the published data of MBIE, it is obvious that apart from some short periods of dips in the past, the growth rate is a relatively constant rate of ~12,000pa.  All the previous dips in supply have been during public discussions about CGT.

At no stage has the growth become a loss, ie dipped below zero.  The worst period was in August 2013 when only 724 active bonds were added to the national rental pool.


Regions not impacted by CGT

The discussions about CGT do not appear to have had any influence in Auckland, Waikato and Canterbury.  It is not obvious why, but there is a large dip in Auckland in late 2011, the only discussion at that time I can see on Landlords.co.nz is about dwelling purchase price growth starting again, I suspect this may be the reason but do not know.

Notice Auckland stock increases about 4000pa, with a short oversupply in 2008-2010, followed by a severe dip 2012 to 2014, then another rise in 2014-2018.  A linear trend model shows the Auckland line being almost flat about 4500pa, rising from 4250 to 4750 over the 20 years, ie with 150,000 rentals in Auckland, that is about 3%.


CGT Sensitive Regions

Wellington and Bay of Plenty appear to be very sensitive to public discussions about CGT, because both regions slowed in growth during these discussions, even to the point where there is a clear loss of rental homes during short periods:

  • Wellington in 2007 and 2017
  • Bay of Plenty in 2013 and 2016

Has Wellington bounced back in the latest data as people believe CGT looks less likely to fly?

However if Wellington had continued to grow at 1400pa, there would be more than 4000 higher today - possibly hinting at why there is a shortage of about 800 rental properties now showing in weekly stats?


There are many calling out CGT for potentially causing a loss of rental homes on the market, this data suggests that the market is sensitive to discussion in some regions, but the lack of sensitivity in other regions suggests it will just not happen.

Unfortunately debate about CGT is usually coupled with debate about housing health regulations, which may also be a factor in reduced additions to the rental housing stock.  

Overall there has not been a reduction in rental stock, however a reduction in rental stock growth in Wellington and Bay of Plenty has definitely led to increases in prices.  Current rental listings (inventory of vacant houses) in Wellington and Bay of Plenty is severe.


Wellington Rents, the real story

Wellington rents continue to be well below those of Auckland;

January 2019:

  • Wellington $457 pw (despite the seasonal high)
  • Auckland $525 pw - Auckland is not seasonal

Rents as a Proportion of Household incomes

Auckland rents however, are being held back relative to incomes due to oversupply.  Wellington Rent/HH Income has a long way to go to catch up with the peak in 2010, but have started to rise after a 5 year period of relatively stagnant rental prices, now that there is a severe shortage of rental housing.   (for 2019 income, I have estimated to include the increased Accomodation Supplement - it has the same value in 2019 for both Auckland and Wellington, but actual rents are much higher in Auckland)

The long term severe shortage of properties in Tauranga is showing with rents a point above the long term trend of about 23% of household incomes, having recovered from 26% in 2017.

Note, recent publicity about rent prices in Wellington exceeding Auckland is simply fake.  The survey was from advertised vacancies, not actual rents.   Auckland’s surplus means that lower priced dwellings are included, but a shortage in Wellington means most lower priced dwellings are taken off the market quickly or are advertised on Facebook during January (seen last year), hence inflating the average price of advertised properties.  MBIE publishes actual bond prices on a monthly basis, so this data is based on the actual prices agreed by tenants and landlords, with some adjustments if some higher or lower suburbs have more or fewer recently rented properties.

Our 2 Rental Markets

There are two separate rental housing markets New Zealand and the two are quite independent.  

  • The Private rental market with private landlords running a business for profit
  • The Social rental market where social agencies provide subsidised rentals for those who cannot afford market prices

Sometimes these cross over a little, because a social agency may provide the subsidy direct to a for-profit landlord to increase the size of the social market supply.

Supply - Demand balance of Private rentals by region

Auckland is is squeak oversupplied with Private Rentals.  However we are short of 2,700 properties throughout NZ.

Both Auckland & Christchurch are well within a safety margin of supply meeting demand, so I view them as in balance.

My first chart is a simple Supply less Demand chart showing in the main view the oversupply in each region (negative numbers mean a shortage).   It has two parts though, and by clicking on the “Surplus percentage?” words you can see an indication of how important the size of each oversupply is. 

  1. The primary chart shows the actual difference between an assumed 2.5% supply/demand balance (my previous post) is exceeded  or not met by supply   eg Auckland has 147,000 active bonds, so 2.5% of that would be 4,400, but there are 4,700, or approximately 300 properties in excess of balance - my chart shows more precision at 296. (January 2019)
  2. Chart 2 shows the importance of the supply balance, the percentage of Active bonds (or total private rentals) the Surplus represents.  A small percentage, say within ±0.5% is likely to be just the normal variances, but a percentage difference of more than ± % is likely to show an imbalance.  Most are negative, ie in shortage, with the worst being Gisborne, but of the larger centres, Bay of Plenty is showing serious shortages at -1.5%.


So we have a feel for the size of the imbalance, but does this drive higher rents?  It seems intuitive, but the following charts suggest not entirely.

Comparing rents to incomes, we can see that over the last 20 years, rents are relatively stable, not growing as some people believe.  Yes, they grow but at roughly the rate of household income, leaving rents pretty much the same percentage of household income today as they were in 1998.  Despite rents increasing by about 200%, so has income.  Note that HH income is not the same as wages, households may simply have more earners to increase HH income.

Auckland is very quickly declining since a peak in 2015 (hold your mouse over the chart, the data lights up) despite apparently being in balance.  Auckland inventory is rising though - see here

Bay of Plenty is rising however, supporting the point that a shortage may increase prices, but similar shortages in Wellington and Waikato do not support the idea, however anecdotal evidence in Wellington is that rents rose very quickly in late 2018 to now, which will not show through until I have 2019 HH income.  I do not know the current Hamilton market well enough.

Canterbury follows the expected path post earthquake, with a rise in rents due to serious shortages, followed by a sharp fall as the region became overbuilt.  With balance being now met, expect rents to stabilise.

Of course a shortage can be addressed by building more properties, so how many are being built in the major centres?  The answer is that the Private dwelling building boom is evident in all major centres, EVEN AUCKLAND, where Private Supply is slightly ahead of Demand.  (Note from the Act: "a building consent is not required in relation to: (a) a Crown building or Crown building work to which, under section 6, this Act does not apply;” so we have no visibility of Social housing build)

However, this does not show the impact in each region, since each region is of a different size, so I have reproduced the chart showing the same data but divided by the average for each region.  This shows that all regions follow a nearly identical pattern.

The Stats department recently published some detailed estimates of internal migration and the impacts on population in each region in the form of growth by region.  I suspect their data quality is poor, given they are 5-6 years past the census they rely on.  As can be seen the enormous growth in NZ population is not distributed evenly - possibly due to immigrants staying where they arrive, but maybe NZers moving cities to escape crowding.  

This chart suggests that Auckland has almost 10,000 more than the combination of the remaining major centres.  At ~43,000 new residents, Auckland would need at say 4 people per household (no idea of the average of immigrants) 10,000 homes for each of the last 3 years, the figure above suggests.  That would mean there would be a severe shortage of homes, about 13,000, but the Private market is in balance.  I very much doubt the social housing market is 13,000 homes short.

I suspect the correct interpretation is that the quoted population changes are incorrect due to internal migration numbers, we shall have to wait to see the new census.


Rental Supply Shrinking

But not where you are led to believe.

Taking a look at the major centres shows a considerable difference from the perception the news media are being fed.  Auckland and Christchurch have plentiful supply of private rental properties, the real supply shortages are in the remaining regions.  The worst of the major regions is the Bay of Plenty, or Tauranga.

However in some smaller regions supply is simply very short.

Looking at all regions, only Canterbury and Auckland stand out as being close to equilibrium of 3%.  Knowing that Christchurch is about right, since prices have stopped falling, it would appear a closer “balance” to reality in NZ is about 2.5%.  However there are now many regions where supply is seriously low, and has been for a long time:

  • Central North Island regions are all well below 1%
  • Minor South Island regions have all lost significant levels of supply, now almost all below 1.5%

Some regions may be very different because of advertising or bond usage differences

Rental Distribution

An interesting study I was doing to identify what sort of rent to charge in a couple of areas I have an interest in.


Make of it what you will - comments welcome below


© Jonette 2011