Retreating residential rents

A little piece of news that hasn't been widely reported this week should be of concern to property investors.

There was an article on landlords.co.nz reporting that rental prices on residential properties had fallen in the month of May. The piece, quoting Massey University research showed that rents had fallen from a high of $300 a week to $295.

It doesn't sound like much, but it can make a difference. It will make a bigger difference if the trend continues.

The property market is a funny thing, but one of the trends we have seen before is that when house prices rise, rents stay flat or can even fall. Under this scenario, which is what we have had for many years, yields on rental properties look extremely poor.

However, when prices stop rising or fall, it is often the case that rents start to pick up.

This increase in rent provides a bit of a fillip for investors. It can be particularly useful in markets like the present to offset some of the high costs such as interest rates.

It's still early days and unclear what is behind this fall in rents. One theory, which has a lot of credence, is the emergence of what I call the "accidental landlord."

These are people who have a house on the market – maybe because they are heading overseas, or maybe because they have moved into a new home – and they can't sell it for the price they expect.

Instead of accepting a lower price they put the house into what I call the "rental pool".

Discussions with real estate agents and property managers show there is growing evidence that more and more rentals are in the market. This increased supply can pull down demand, especially if kids decided it’s too expensive to flat and move home (something else we hear is happening).

Should investors be worried about this rental fall? Not yet, but it is worth watching and seeing what is happening.

The other thing is that landlords should be proactive to see what they can do to keep tenants and even increase rents. Often small little things make the difference between having a tenanted property and a vacant one.