Gap between Auckland prices & rents not sustainable

Investment in Auckland’s heated housing market defies the traditional logic of investment, according to the latest NZ Housing & Construction Quarterly.

The report, by the Ministry of Business, Innovation & Employment (MBIE), said that changes in rental growth and house price growth tend to be closely related.

When prices grow faster than rents, it usually becomes less attractive to own an investment property – even when investors are looking for capital gains.

This is because an investor’s expectation of future prices should depend on their expectation of future cash flows, the report, the report said.

“A housing market with high house price growth but low rent growth is unsustainable.”

Yet, in Auckland, this logic was not currently being adhered to.

Auckland house price growth had consistently exceeded rental growth for years and, while house price growth in Auckland continued to rise, rental yields were falling, the report continued.

“This suggests the demand for investment properties is being driven by expected future price increases, rather than higher rental income.

“Ultimately, the gap between prices and rents must close; the key questions are how and when this will happen.”

The report also said that Auckland’s house price growth was more similar to Sydney, Melbourne or Brisbane, than it is to Wellington or Christchurch.

This was probably due to the economic similarities between Auckland and the three Australian cities: all have one million plus populations, large CBDs and play host to many internationally connected businesses.

“Larger cities tend to attract investment, talent and clusters of economic activity much more than smaller cities, which results in larger cities having healthier economies,” the report said.

“Auckland is increasingly displaying such characteristics.”

Repeat sales [where a property is bought and then resold within two years] in Auckland were also examined in the report. 

While the repeat sale rate averaged between 17% and 18% over the past three years, it has been much higher in the past.

For example, during the early 2000s housing boom, the rate of repeat sale was more than double the recent average. In 2004, it even reached 40%.

NOTE: Around the rest of the country, on average rents have been rising modestly by about 3% per annum. However, some regions - like Hastings, Wanganui, Upper and Lower Hutt - do have falling rents, while others - like Central Hawkes Bay - have seen big rent increases.