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Rental Growth Tipped to Slow Down

Rental Growth Tipped to Slow Down

As tenants grapple with financial pressures and landlords face more competition, the rental market is likely to stabilise, leading to balanced and sustainable growth, writes David Faulkner, of Property Brokers.

19 June 2024

Over the past five years, New Zealand’s rental market has experienced significant growth, with rents increasing at a rate higher than inflation. Since records began in 1993, rents have increased at a median rate of 4.6 per cent per annum, according to Tenancy Services data. This has increased significantly in the last five years with the median rent rising at a rate of 33.3 per cent.

As of April 2024, the median rent for new tenancies was $600 a week. However, this trend is expected to decelerate due to several converging economic factors: rising unemployment, a sluggish real estate market resulting in fewer property transactions, and an increase in available rental stock from reluctant landlords.

Rising unemployment

One of the primary drivers of the anticipated slowdown in rental growth is the rising unemployment rate. Unemployment directly impacts the rental market as it affects tenants’ ability to afford rent. When people lose their jobs, they often struggle to meet the rent, leading to increased vacancies and downward rent pressure.

Recent data from Statistics NZ indicates a gradual increase in the unemployment rate, a trend that is likely to continue as the economy faces uncertainty. Businesses are grappling with higher operating costs and reduced consumer spending, resulting in layoffs and hiring freezes.

As unemployment rises, the pool of prospective tenants shrinks, forcing landlords to compete for a smaller market. This competition can lead to more favourable terms for tenants, including lower rents or additional incentives, thus slowing overall rental growth.

Tenant movement

During periods of economic recession and rising unemployment, tenant movement tends to decrease significantly. This reduction in mobility is primarily driven by financial uncertainty and the need for stability.

With job losses and income reduction, tenants are less likely to incur the costs associated with moving, such as deposits, moving expenses, and potentially higher rents. Additionally, the fear of not securing new employment or stable income in a volatile job market makes tenants cautious about relocating. Instead, they prefer to stay in their current accommodation, where they may have established rental histories and relationships with landlords, providing a sense of security amidst economic instability.

This decreased movement contributes to lower turnover rates in the rental market, impacting rental dynamics and pricing.

Slow market

The real estate market in New Zealand has been sluggish, characterised by fewer property transactions. This slowdown can be attributed to a combination of high interest rates, stringent lending criteria, and economic uncertainty. Potential buyers are either priced out of the market or hesitant to make significant financial commitments in an uncertain economic environment.

This stagnation has a twofold impact on the rental market. Firstly, potential buyers who cannot afford to purchase homes remain in the rental market longer, temporarily increasing demand for rentals. However, the more significant impact comes from property owners who intended to sell but are now opting to rent out their properties, thereby increasing the supply of rental units.

Reluctant landlords, who would prefer to sell but cannot achieve their desired sale price, add to the rental stock. These additional properties increase competition among landlords, leading to more choices for tenants and potentially lower rents.

As the balance between supply and demand shifts, the rapid growth of rental prices is likely to decelerate. To give you an indication on how the market has changed, OneHub by Trade Me Property has reported a 23 per cent increase in new listings for May 2024 vs May 2023, yet there has been a 23 per cent drop in property searches.

The trend of short-term rental properties, such as those listed on Airbnb, shifting to long-term rentals has added to supply. Changes in GST for short-stay accommodation will add 15 per cent to the asking price for those rentals, meaning we will see a proportion move their properties to the long-term market.

Rents and inflation

For the past five years rental prices in NZ have grown at a rate exceeding inflation and some regions have seen double-digit growth. While this has benefited landlords, it has also strained tenants’ finances. At the time of writing, the OCR is sticking at 5.5 per cent, yet at the time of the lockdown it was as low as 0.25 per cent. Rents have increased at a much steeper rate of 6.6 per cent over the past five years.

With the recent economic challenges exacerbated by the pandemic, the government’s focus has shifted towards reducing inflation. As the economy slows and unemployment rises it’s simply unrealistic to expect rents to continue to rise at the rates they have been. A slowdown is inevitable.

The convergence of rising unemployment, a slow real estate market, and an influx of rental properties from reluctant landlords is set to slow rental growth. Over the past five years rents have grown at a pace exceeding inflation, but this trend is unsustainable in the face of challenges.

As tenants grapple with financial pressures and landlords face increased competition, the rental market is likely to stabilise, leading to a more balanced and sustainable growth rate.

Understanding these dynamics is crucial for stakeholders in the rental market, including landlords, tenants and policymakers. By anticipating and adapting to these changes, they can better navigate the evolving landscape of New Zealand’s rental market.

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