Upward pressure on rents

Rents have been rising at an average annual rate of just 2.2% over the past four years, but Westpac chief economist Brendan O’Donovan predict that rent inflation will accelerate rapidly to 6% per annum, and will stay that high for five years.

O’Donovan estimates that rents need to rise by 34% to bring them back into line with current house prices – “a process that could take five years”.

High interest rates are a factor that will drive rent increases as it becomes more difficult for landlords to build new properties. Simultaneously, home ownership is looking unaffordable to an increasing number, which means an increase in demand for rental properties. To rent costs around 4% of a house’s value per annum, whereas a mortgage costs over 9%.

The next economic factor supporting the projection for higher rents is that the average wage is forecast to increase by 5% per annum according to O’Donovan. “Currently affordability is good, suggesting
rents do have room to rise. Rents are cheaper than normal as a proportion of the average wage. And the average wage itself is set to increase strongly.”

Thirdly, Housing New Zealand (HNZ) rents are rising, says O’Donovan, and rising faster than private rents. HNZ owns almost 17% of the rental accommodation in New Zealand. HNZ rents rose 17.8% between June 2003 and June 2007, while private rents rose just 10.4%, he says.

The Department of Building and Housing’s bond lodgement data shows that median new rentals are already on the rise.