Vacancy Rates and Political Promises

Will Supply or Demand drive rents after the election?

The unique information I collect for subscribers is the vacancy rates for rental properties, these are an important indicator of market forces. New Zealand has become desperately short of rental housing, both Private in the last year and Social in the last 3 decades. My data started with one measure in December 2008, this post reviews the changes in vacancy rates and the impact of the next government.

It is important to understand vacancy rates. My data covers Private rentals only and is obtained by recording listings on Trademe every week. We are lucky in NZ that almost all homes coming up for rent are advertised on Trademe. Context; there are now just over 407,000 private rentals with active bonds, up from 280,000 in early 2009. There are 7,300 vacancies in September 2023, down from 13,000 in 2009.

My NZ collected data excludes all social rentals where the supplier is a community service or Kainga Ora, these properties number almost 80,000 for KO (The Spinoff recently published a great chart reproduced below). That means Trademe probably covers in excess of 80% of the rental stock. The Australian data I found also excludes social housing.

I also found a similar set of vacancy rates published by the USA Census bureaux, but their data is based on a census like visit and interview. This is very likely to over-count, because they count all social housing, including family social housing. However the trend is identical.

Comparison between USA, Australia and NZ

The New Zealand balance looks likely to be 2.5% as you can see it hovered around that from 2016 to 2022. Vacancy rates are considered too low in the USA, yet they have 3 times our vacancy rates, most likely due to counting social housing and second homes.

NZ in Depth

The Christchurch Earthquake occurred in 2011, a severe shortage of rental properties began immediately. Shortly after the earthquake a major rebuilding programme began, resulting in the shortage being resolved by mid 2014. However, once started it is difficult to stop a government programme so it continued until prices for rentals plummeted due to oversupply by December 2016.

Notice prices went up quickly from 2011 to 2014, then down to 2016 then up again, accelerating as supply became more constrained. The key which denotes each year and is in December price order, helps to see this clearly. Where is 2023 going to finish??

Notice how rents stopped rising once demand equalled supply in 2014-15

Supply may now be behind demand in Christchurch in 2023 with a vacancy rate of just 1.9%, but mean prices in July at $488pw are amongst the lowest priced NZ Cities. Note that the Mean City rental charts on this page are accurate and up to date because when I update a chart, any previous copy of it is also updated. The changes in Christchurch created my view that balance is reached in NZ if 2.5% of Active bonds are being advertised for rent on Trademe.

NZ data shows oversupply of rentals in Auckland in response to a building boom from 2017 to mid 2022. Migration in 2023 changed all that as noted in my March post here, spare capacity got used almost immediately immigration was opened up and balance appears to be reached in March at 2.6%. Rents are now in the same range as other cities when compared to Household Incomes - see the chart at the end of this post.

So What for the Future? Political promises

To save you reading the detail, the conclusion is both political sides will increase demand more than supply, so it is a good time to buy.

We are in an election so I think it is appropriate to estimate the impact of housing and immigration policies of the two main parties and their main support. This is intended to be politically neutral, apologies if something looks a bit bias, it will be my limited writing ability to blame. Italics identifies quotes from policy pages, my comments are subset bulleted.

National

• Increase the number of Social Housing places, and support Community Housing Providers to grow

  • No numbers, I guess this is political gobbledegook. I ignore the CHP’s, it will take them 3 years to build the developers skillset to build houses at scale.

• Put families in emergency housing motels and cars at the front of the queue for social housing.

  • No change in housing numbers in this promise, just priorities

• Clean up Kāinga Ora by introducing consultation requirements for new developments, directing it to evict unruly tenants, ensuring it improves services for tenants, and driving efficiencies to lower the time and cost of building new state houses.

  • Lots here, consulting requirements will put a handbrake on building. Evicting bad tenants so they become private rental tenants could reduce supply if impacted landlords leave the market. Lowering the time and cost may improve production, but from my market knowledge of KO development, they are well on the way with increasing the speed to market for new houses.

• Delivering Better Social Housing is part of National’s plan to build more houses, take pressure off rents and end New Zealand’s housing crisis.

  • Still no sign of numbers

• Restoring Interest Deductibility. Reducing the bright line test to 2 years

  • I have no lead on the potential impact of either of these proposals, I expect that restoring ID will increase supply but cannot estimate numbers. The bright line test is unlikely to have much of an impact on supply, capital gains taxes have always been in place.

• Migration is not a single subject but this pops out from their promises; “Competitive immigration settings to attract more overseas nurses and midwives”,

  • this will definitely increase demand, I have recently spent a lot of time in hospital and the fantastic nurses are about 90% immigrants - with families they will require a home each and here are some numbers; “offering up to 1000 qualified overseas nurses and midwives relocation grants”. I expect that their education boosting effort will have a similar impact.

On balance these plans will increase demand sharply, but have little impact on supply, making opportunities for landlords. Act policies appear to be similar or have no impact on demand.

Labour

• If re-elected, we’ll deliver another 6,000 public homes by 2027

  • They have delivered about 6000 and since KO had to start from scratch with zero development resource in 2017, 6000 in 3 years is probably the current build rate.

• will direct officials to deepen our partnership with Community Housing Providers to help deliver even more public homes

  • Not sure what this means, but it is most unlikely to increase supply since as above for National, CHPs will need to build development teams first.

• will set a goal to increase the percentage of new public housing builds with universal design from 15% to 25%. Labour will commit to delivering 20% universal design by 2027

  • A little more concrete version of National’s “Lowering the time and cost may improve production” but very unlikely to change supply

• Migration “will introduce a new 10-year multiple entry visa for parents and grandparents of new Kiwis”

  • This will definitely increase migration, potentially huge, I guess with 100,000 pa coming now expect that to increase a lot

• Migration “Encourage dental clinics to hire workers from overseas” and “Increase overseas recruitment of senior medical workers”

  • This will definitely increase migration

• Greens - “Limit rent increases to three percent or less per year”

  • Unlikely to be agreed, but also unlikely to have an impact, the policy has the 3% being reviewed annually, rents rise with Household income so such a clause may even have zero impact.

• Greens - “Landlord register”

  • again unlikely to be agreed, but also most unlikely to change supply or demand

• Greens - “Build 35,000 new public houses over five years” or say 21,000 over 3 years to compare with Labour’s plan of 6000

  • Joke material, KO do not have the resource to increase development 3.5 times and that quantity would exceed demand. Lowering prices in the private market by building unused houses. Not gonna happen.

On balance these plans will increase supply, but also increase demand a lot more.

Political conclusion

My interpretation of both political groups is that the demand increase will far exceed supply so expect the current shortage of available homes for rent to get worse. Australia has reached just 1.4% inventory rate, we are down to 1.9%, and heading lower. Increased demand and minimal supply increases will result in higher prices for both rents and most likely houses.

Addenda

The Rents/Household Income chart is repeated to assist readers to understand my strong point that prices are driven by a small number of factors which are key in this order:

1. Rents rise with Household Income - consistently over 20+ years for every region.

2. Rents rise further if supply is constrained (BoP now)

3. Rents rise more if migration increases demand to eat up supply (Auckland now)

4. Rents rise less or fall during overbuilds (Canterbury 2015-2020)

A big detail, today I have reached 800 subscribers. Nice to see readership growing consistently.