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


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 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

Are Listings Increasing?

Hamilton rental listings suddenly lifted WE Mon 18th Nov, after following below the trend last year with a minor upward lift starting in September, there was a 14% increase in listings this last 2 weeks.  No other region is showing significant change.  My research into population vs consents below, suggests it may.

Looking through listings, there are a number of new apartment blocks on the market and that would seem to be the driver, but no detail is obvious.

Notice that 2018 line (thick black) suddenly rises from 600 last week, having risen a little the week before.  Inventory is now equal to 2015/16 and rising.  The market has delivered plenty of rental housing quickly - is this to be repeated in other centres (Wellington and Tauranga) in the next few months?

Taking a look at New Building Consents, the NZ market is at a peak compared to any previous time, and in fact looks well over any average over the last 28 years.  Each line is indexed to the average for that region, where 1000 represents the average.  This provides a fair comparison, showing:

  • The national average - the most reliable population measure, this supports the remaining data since it is close to every region.
  • The Govt sponsored boom in Christchurch
  • The earlier boom in Auckland & Wellington 2002-04, followed by a building bust that lasted until 2013
  • The boom in Hamilton that lasted until 2007 and has started again, in 2017 exceeding all other regions.

The problem with indexing consents is that we do not know what year to index against, if I change the year the conclusion changes, hence why I used average consents, but this is still limited.  Consents data on its own is not enough.

Our other data suggests that Wellington is very short of properties, but there is not such a large a boom as other regions, so does that mean the market will remain short of properties for quite a while?

Population increases have been estimated by the Stats Department since the last census in 2013, so is the population estimate by Stats correct?  Internal migration away from Auckland is high, yet most of the new people are attached to Auckland as shown below.

Thinking about how to present consents in a meaningful way I tried to compare consents to the increase in population.  ie if there are normally about 2 people per household, then new buildings should be about 2 per new member of the population.  

So I have plotted the population increase (from Stats Dept estimates) divided by new building consents (Stats Department measure).  I included national totals to provide the best comparison.  Note that results in new people per consent as the measure of buildings growth.

I do not have a strong conclusion on this chart, but leave it here for comment.  I have added some comment below

In Auckland the population growth (including births, deaths and net immigration) is often four times the rate of consents, ie if the population per household was to stay at 2.5, then this is way too many new people per new house.  That would have created a massive bow-wave of empty houses, and maybe that is why my charts of rental vacancies were high prior to 2014 and fell sharply in 2014-2015, ie many new houses started being built.  That also explains why there are more than enough private rentals in Auckland, we have already been overbuilding, but that has slowed last year to replacement levels.

Note that Auckland’s so-called housing crisis is a crisis of subsidised housing, not private dwellings.  Prices are high most likely due to speculative impact.

The levels of “new people per consent” could be high due to more people or fewer consents, so conclusions need to be careful about which is the cause or effect, they are inter-related.  However over 2 means too many people or too few houses, under 2 means too many houses or too few people to fill them (I suspect too many houses)

My pick is that the Government pushed building beyond what the market would bear and the market is now contracting, not growing.

Rent Changes Depend on Suburb

The rents for some suburbs change over time at different rates to the National rental levels.  As I have shown before, rents tend to stay in a tight percentage of income range over long periods of time (20 years or more).

I had a look at a range of suburbs in Wellington (my home town) and found some interesting trends between suburbs.  To show the trends I have included two charts showing the details by month over 20 years, plus one to show how big the changes are in percentage terms.  Check the detailed shape of the curves, suburbs respond to desirability changes differently.

This chart shows some interesting trends, eg 

  • Petone normally sits close to the national average, however it lagged for a few years before catching up again - 2015 would have been a great time to invest.
  • Seatoun is dominated by Weta rentals and appears to have risen faster than national rents up to the GFC (or was that the end of LoR production?), however it is not looking good for investment now.
  • Khandallah was the most expensive suburb, but while accelerating to a peak when the GFC broke, has now fallen well behind although may but been an excellent investment in 2011 or 2013.
  • Taita, a low decile area, dropped below the national average over the entire period, getting very low in 2013 and 2017.

To see what the net changes are, we need to look at these changes in percentage terms:

This chart compares the Suburb:National rent ratio from June 1993 to September 2018, 25 years later for a small selection of times.

As you can see Khandallah would not have been a good investment, it has dropped 28% (71% to 43%) compared to the national average over the 25 years.  However hidden in the trend chart, Eastbourne and Island Bay have performed extremely well, both rising 8%.  Seatoun would still have been the best, but only if you had seen Weta coming.  Investing in low decile areas does not look great from these stats, with rentals either trailing or struggling to keep up with the national average, eg Taita lost 22%

Unfortunately I stuffed up the save & transfer of this page so comments have been lost, but they were about general data

Auckland Rents will Rise to Match Higher Incomes

Rents appear to rise in line with incomes, most likely due to tenants making choices to move to a better rental as their income rises.  Auckland City 3BR rents, as well as the Geometric mean rents for the Auckland Region, have fallen behind expected rents given the rise in Household incomes, so we should expect rents to rise to restore balance. 

Household income increased by a surprising 8.2% for the whole of NZ between June 2017 and June 2018. These stats were updated last month - very quietly - by Stats dept here.  I guess they are concerned people may misunderstand HH income growth as inflationary.  

It is important to distinguish household income from wages, the two are not necessarily related.  An increase in HH income may be due to increasing household earners, ie increasing density.  So a flat of 4 professionals is going to earn a lot more than a flat of 4 lower paid workers or a couple raising kids while both working, with maybe most single income households coming up the rear.  HH income equal to the average, $1,600pw, is roughly 80,000pa.

I have found that household income is a good predictor of rental prices, since for most regions and cities the average rent stays in a tight range as a percentage of total household income.

The Rent/HH Income charts span over 20 years from 1998 to 2018 in monthly or quarterly steps.  Notice how flat the trends are, with a bit of variation.  

This leads to the obvious question, have rents matched the new incomes?  Well there looks like some catching up still to do in Auckland City and Wellington City, but no other main city:


Notice the drop in the two major city lines, Auckland has fallen below 35%, a previous low, maybe due to increasing incomes.  Wellington is in severe shortage and rents are rising quickly, but not as quick as HH incomes, maybe density is increasing.  Christchurch has also dropped to a new low, possibly due to lowering rents after a glut of properties in the region which has now settled.  Despite a severe shortage of properties in Hamilton and Tauranga, rents have remained at about 25% of incomes, the long term average.

When we compare Geometric Mean rents by Regions the data shows different percentages, but a similar story.  This chart includes all houses (not just 3BR) and all parts of the region (eg Wellington includes Lower Hutt and Porirua) and is monthly.  Notice the earthquake has not impacted the Canterbury Region as much as Christchurch City above.

Remember you can see one line by hovering over it and clicking.

Sudden changes such as shown in BoP for 2018 are due to the nature of Household Income reporting, which is annual, so BoP rents went up significantly last year in line with incomes, but the comparison is only reported in Jan 2018.

Income changes by Region

I produced this chart to show how much change has occurred this year, not only has the average increased 8.2%, but some regions have large increases, especially BoP at 18%.

Other examples include: Auckland households which almost caught Wellington households (maybe density of people per HH?), Otago overcame Canterbury and Waikato (maybe more students per house?) and BoP almost caught Waikato.

This leads to the obvious question, how have rents met the new incomes?  Well there looks like some catching up driven by tenants moving house to better quality:

  • Auckland, expect a 5-10% increase, rents have not risen much this year.
  • Wellington, may or may not increase, but to catch up it would take 5%
  • Christchurch has overshot after the overbuild, so expect a 5% increase or a continued overshoot - a difficult market.
  • Tauranga, Lower Hutt & Hamilton look to be increasing at a consistent rate so I do not expect catchup.  Note Tauranga income grew by 18%, but so did rents.

Rents and Ownership by Region

My friend at rentersblog asked if I could create a map of rental prices by region, that’s easy so here it is, however look further down for some more information that helps to see the comparison between regions as opportunties for both renters and landlords.

There are obvious differences between regions witha  two to one difference between say Auckland and Manawatu-Whanganui.  The chart is interactive so you can explore the results by clicking on each region.

So if rents are high or low in a region, what do sales prices look like:

And for renters this is the key chart if you are thinking of buying.  Remember it is not the price you pay, but the interest you pay that counts

Of course it would not be complete without a yield calculation for Landlords.  This is a simple rents divided by sales price, I have not included expected other costs such as maintenance and insurance as I have in the past, but they are also relative to interest cost, effectively adding 2-5% depending on your methodology.  There appear to be no surprises here, comments welcome below.

There are suprises here - take a close look at Taranaki and Manawatu-Whanganui

After publishing this I got to thinking about the results and came up with a new way of viewing the data

This says stay away from Auckland, but review the posibility of investing in Taranaki or Manawatu-Whanganui.

© Jonette 2011