NZ residential rental market news, June 23

Rents rise across NZ, vendors are reducing asking prices, and Tony Alexander's busy week.

This week's TLDRs...

Kiwibank, Westpac: Housing market looks to be stabilising

Kiwibank economists expect positive developments in the Spring housing sales season. 
House prices are still declining but at a reduced rate, and sales activity is showing signs of stabilising. 
Wellington and Auckland experienced significant price contractions, while the South Island outperformed the North. 
Confidence and activity in the housing market are expected to increase during the warmer months. 
Three drivers of the housing market are declining interest rates, increasing demand/supply imbalance, and the end of the residential construction boom. 
Westpac economists are monitoring the labor market, inflation rate, and potential housing market rebound. 
Interest rates are expected to remain contractionary, limiting significant improvement in the housing market in the near term and leading to further declines in economic activity into 2024.
Read the article

Interest’s Gross Rental Yield report

Indicative rental yields for residential properties have increased between Q1 2022 and Q1 2023. 
However, the yields are still low, making it difficult for investors to generate a reasonable income. 
Yields are calculated using lower quartile selling prices and quarterly bond data. 
Rental yields have generally risen due to falling prices and increasing rents. 
National indicative yields for a three-bedroom house increased from 4.7% to 5.7%, and for a two-bedroom apartment/unit from 5.7% to 6.8%. 
Despite the improvements, the yields are still insufficient to provide investors with a reasonable income. 
Rental property purchases by investors have been declining steadily. 
The number of mortgage approvals for residential property investors decreased by 70% from Q1 2015 to Q1 2023. 
Investing in residential rental property for income returns may not be viable given the current market conditions, and alternative investment options or keeping money in the bank may be more favourable. 
Read the report

Core Logic Housing Chart Pack: House prices are up annually

Residential real estate is valued at $1.57 trillion. 

Property values fell by -10.2% nationally in the year to May, slightly less than previous periods. 
The upper quartile experienced the largest decline in values, with a -14% drop from peak. 
Property sales in May increased by 7.5% compared to the previous year, the first annual increase since May 2021. 
New listings in June decreased to 6,439 from 8,996 in the same period last year. 
The total stock on the market is 33,798, a 4.5% decrease from the previous year. 
First home buyers have a strong market share of 25%, especially in Auckland at 28%. Investors' market share is comparatively low at 20%. 
Rental growth nationally remains within the 3-4% range but is expected to accelerate due to low rental stock and increasing net migration. 
Gross rental yields have returned to 3% for the first time since March 2021, mainly due to falling property values. 
About 50% of existing mortgages in New Zealand will reprice onto (likely higher) mortgage rates over the next 12 months. 
Inflation seems to have peaked, and the Reserve Bank will assess the effects of the 5.5% OCR for this tightening cycle. 
Mortgage rates are close to or have already reached their peak.
Read the article
Read the report

Vendors are reducing asking prices to meet buyers

Sellers are becoming more realistic with their asking prices for homes. 
The gap between asking prices and selling prices is starting to narrow and it seems sellers are becoming more realistic with their asking prices for homes. 
Interest.co.nz has been comparing asking prices on Realestate.co.nz with REINZ's median sale prices since 2007. 
The difference between asking and selling prices reached a record low of $16,436 in November 2021. 
The market was exceptionally hot in 2021, with two months where selling prices exceeded asking prices. 
After prices peaked in November 2021, the gap between asking and selling prices increased rapidly. 
The gap between asking and selling prices ballooned to $139,636 by November 2022. 
Vendors are now adopting more realistic asking prices, leading to a decline in the gap. 
The gap between asking and selling prices is currently at $94,352 or 10.8%. 
The reduction in the gap is primarily due to vendors lowering their price expectations. 
Between May 2022 and May 2023, the average asking price declined by $90,526 (-9.4%), while the REINZ's median selling price declined by $60,000 (-7.1%). 
Read the article

Tribunal awards compensation for uninhabitable homes

A landlord in Auckland has been ordered to pay compensation to tenants after claiming their flood-damaged property was habitable and taking photos of a sleeping tenant as evidence. 
The rental property was affected by the Auckland floods, leading to the removal of floor coverings, cabinetry, and wall linings in the downstairs area. 
The tenants argued that the premises were uninhabitable and requested a 50% rent reduction. 
The landlord claimed that the affected area was habitable at times and presented a photo of a sleeping tenant as proof. 
The Tenancy Tribunal found it inappropriate for the landlord to take photos of a sleeping tenant and warned of potential exemplary damages. 
The tribunal determined that the downstairs area of the property remained uninhabitable after the flooding and had to be vacated. 
The rent was reduced by 10% from the date of the floods until the end of the tenancy. 
The tenants also proved allegations that the landlord had not installed smoke alarms or provided heating, resulting in a $2,500 exemplary damages payment. 
In another tribunal ruling, tenants were allowed to terminate their tenancy due to flooding that made the rental unfit to live in, including sewage overflow and mould growth. 
The property management company disagreed with the tenants' decision, arguing that the property was not officially deemed uninhabitable by the council. 
The tribunal found that the flood damage made the premises uninhabitable, justifying the tenants' termination of the tenancy with two days' notice. 
Assessments by the council and insurers play a role in determining habitability, but policies and guidelines vary among insurers. 
Read the article

Rents increase as supply decreased and demand increases nationwide

Auckland has become the most expensive region for renting in New Zealand, with a median weekly asking price of $660 in May. 
Asking rents in Auckland have increased by 10% (or $60 per week) compared to May of the previous year. 
The supply of rental properties advertised in Auckland has decreased by 35% annually, while demand has increased by 55%. 
The January floods and Cyclone Gabrielle caused widespread damage in Auckland, leading to an expected rise in rents due to supply issues. 
Approximately 2766 houses in Auckland were deemed unsafe and marked with yellow or red stickers by the council. 
Urban properties in Auckland, including apartments, townhouses, and units, reached record median weekly rental prices in May, with apartments at $570, units at $530, and townhouses at $700. 
Nationally, the median weekly asking rent reached a record high of $610 in May, representing a 6.1% increase compared to the previous year. 
The number of rental properties available nationwide in May decreased by 19% annually, while demand increased by 35%. 
Several factors contribute to the shortage of rental properties, including properties shifting from long-term to short-term rentals due to the collapse of tourism and migration during the COVID-19 pandemic. 
Some regions, such as Northland, Manawatū/Whanganui, and Nelson/Tasman, experienced an increase in the supply of rental properties. 
Wellington's rents remained unchanged at $650 in May, Canterbury saw an increase to $550, and Taranaki had the highest annual median rent rise at 14.8% ($620). Queenstown rents returned to pre-COVID levels with a median of $750 per week. 
Read the article

Renting vs buying 

OneRoof explores buying a first home in New Zealand, discussing the trade-off between saving for the future and enjoying the now. The article provides an example model that calculates the costs and benefits of home ownership over one, five, and ten years, and highlights the stability and long-term investment potential of owning a home, focusing on the potential for capital gains.  

This article reminded me of a past episode of the Cooking the Books podcast wherein Frances Cook does a good job of exploring this same dichotomy, backed up by some interesting research. I’ll link the episode below.
Read the article

Listen to the podcast

Almost 2/3rds of disaster weather claims remain unpaid

Just over a third of the estimated $3.18 billion worth of claims for weather events earlier this year in New Zealand have been paid out. 
The Insurance Council of New Zealand warns that some claims may take over a year to settle. 
The claims are evenly split between the Auckland flood and Cyclone Gabrielle, with over 100,000 claims in total. 
Insurers have paid out $1.08 billion of the estimated claims so far. 
The insurance industry is pleased with the progress, with 35% of claims settled by number and 34% by value. 
Insurers have hired extra staff and are working closely with councils and customers to aid in recovery. 
Residential insurance holders can seek free and independent advice on their claims through the New Zealand Claims Resolution Service. 
Read the article

A busy week for Tony Alexander:

What the recession could mean for NZ house prices

New Zealand entered a technical recession at the end of last year. 
Job loss worries are absent, unlike previous recessions. 
Economic shrinkage has been 0.7% and 0.1%, while job changes have been positive. 
High job security suggests retail spending will recover strongly when interest rates decrease and house prices rise. 
Delayed buyers in the housing market may become active once interest rates start falling. 
Buyers with strong deposits are likely to make moves before the housing market recovers fully. 
Young people may spend their unusable lump sums on offshore travel. 
Businesses may need to hoard staff during a cashflow compression period, leading to sacrifices in other areas. 
Some businesses may have to lay off staff to remain solvent, leading to a rise in the unemployment rate. 
The market for lifestyle properties and holiday homes may remain quiet until late in the housing recovery cycle. 
Immigration and delayed IRD assessments are factors influencing the economic landscape.
Read the article

Tony's View newsletter summary

The latest reading for FOMO in the NZ housing market is 9%, which is low and suggests people don't feel the need to hurry back into the market. 
The residential real estate market is turning, but there are factors like interest rates, tax and cost problems for investors, high consumer pessimism, and supply growth that prevent an immediate strong period. 
Market nervousness measures indicate that buyers still believe time is on their side, although this feeling is slowly easing off. 
The market is expected to pick up after the election, potentially when interest rates start to decrease. 
One factor to monitor alongside FOMO is the availability of listings, which can be tracked using data from real estate.co.nz. 
End-month stock of listings decreased by almost 13% from the peak in December, based on seasonally adjusted data. 
The ratio of sales to new listings shows that fresh listings are often properties that have not sold and are being relisted or shifted between agents. 
The sales-to-listings ratio had a rising trend from 2007 until the pandemic, experienced a surge during the pandemic frenzy, followed by a decline in prices and sales in late 2021. 
There was a false recovery in the sales-to-listings ratio in early 2022, which was disrupted by tightening monetary policy. 
The ratio is now trending back up, reaching 0.68 in the three months leading up to May, the highest reading since December 2021 when the credit crunch was significant. 
Media discussion is now firmly along the lines of the market bottoming out - but it's hard to see firm price rises approaching 10%+ p.a. until 2024 when interest rates will be tracking down. 
Read the newsletter

Monthly Investors Insight survey

Investors on average are increasingly thinking about selling their properties as interest rate pressures grow.  
A rising motivation for selling is concern about the loss of interest expense deductibility.  
Only 55% of investors plan keeping their property at least ten years or never selling. This is a record low and below the two-year average of 64%.  
Investors are growing increasingly concerned about rising insurance costs. 
Read the survey

Mortgages Advisors survey

Overall interest from investors is still low, according to mortgage broker comments. 
However, discussions about the market bottoming out and interest rates peaking have sparked some interest among certain investors. 
Some advisers have not noticed much difference in bank lending to investors despite the loan-to-value ratio (LVR) increasing from 60-65%. 
Deposit requirements have reduced to 35%, but higher test rates and high interest rates make investors hesitant to take on debt. 
Investors are eagerly awaiting the outcome of the election to see if there will be a change in government and potential changes to interest deductibility. 
There is now a lower deposit requirement for investors.  

The report also includes insights from mortgage advisors, grouped by region, which can be useful for adding context to the data.
Read the report

Regional Property Insights

April saw a 9% increase in nationwide sales, followed by a 3% rise in May after seasonal adjustments. 
Sales in the three months leading up to May were down 8% compared to the previous year, but seasonally adjusted figures indicate improvement. 
Some predict that rising sales and stable prices will attract more sellers, leading to an increase in available properties. 
However, stock levels have already dropped by nearly 13% from December to May. 
Historical patterns suggest that when sales increase, available stock decreases. 
This is particularly expected this time due to a strong labor market and a backlog of buyers who have been postponing purchases since early 2021. 

The Headlines for each region

Northland - Sales recovering
Auckland - Slow sales rise underway 
Bay of Plenty - Good sales bump up recently 
Waikato - Sales rising 
Gisborne - Some cyclone impact evident 
Hawke’s Bay - Listings falling away 
Manawatu-Whanganui - Weaker than average sales improvement 
Taranaki - Sales still very weak 
Wellington - Listings falling away 
Nelson, Tasman, Marlborough - Sales surge in Marlborough 
West Coast - Strong sales by historic terms 
Canterbury - Stocks not falling much yet 
Dunedin City/Otago - Fresh listings easing 
Queenstown - Lakes Uniquely strong sales upturn 
Southland - Ample stock to handle rising sales 
Read the report