Wellington

As a Wellington Investor I have more historic data - which may provide insight into other regions

If you are interested in any NZ city, this post may be useful since I break out data for the Wellington region in ways that could be applied to other cities.

My breakout for Wellington region

• Wellington city

• Wellington CBD

• Wellington non-CBD, ie feeder suburbs

  • Feeder suburbs (cities in name only) of Lower Hutt, Upper Hutt and Porirua

  • Rural or lifestyle block suburbs, Kapiti and Wairarapa

Wellington markets are in the process of change at present. Sales stock is approaching normal after oversupply for 18 months. Rental stock is high and rents are falling, but even this is changing. This post looks under the covers at each of these areas in the Wellington region

Overview

Inventory

Sales inventory rose to extreme heights last year because of apartment blocks being completed and flooding the market at a time when immigration was also constrained. Wellington is small compared to Auckland so it did not take many apartments to change the situation. The new rentals look to be absorbing into the market well, probably because migration is now utilising inventory.

From this chart, I could forecast that inventory is heading to a new low, the thick black line is snaking lower every week. The normal seasonal increase in supply in November will be interesting. Note most charts - in this blog - are updated weekly so if you return you will find the current state. If you have arrived later than August 2023, then comments are historic but the chart will be current.

However let’s look deeper first.

Rental inventory is higher than in any previous year for the last 18 months - BUT, Inventory is heading down, most likely due to immigration. This year oversupply has moved from 1650/1000 at the January peak or 65% oversupply to 1190/850 or 40% oversupply in July.

Rents

So what is this doing to rents? The following chart needs to be read carefully; each line represents Geometric Mean rents throughout Wellington for each year. So looking from the bottom for say March, then in 2018, rents were $429pw, by 2022 they were $557pw and this year about the same at $560.

So rents this year dropped below last year until May 2023. June data is not available yet but the chart will get updated when it is.

So this looks like the market is following typical seasonal and market trends. We know from earlier work that rents rise with Household Income on the whole but vary a little if demand and supply get too unequal - about 2.5% of all rentals being advertised at any time is when equilibrium is met. See my earlier post here. Wellington inventory is currently sitting around 3%, ie high, so oversupply is holding rents down to less than last year for most months so far this year.

Sub-cities and areas

Is the same supply demand trend showing throughout Wellington or are some areas different? I keep details of the “Districts” posted by Trademe to help me understand the distribution. Now the detail gets extreme so thank you if you have followed so far.

Wellington, its CBD and Suburbs

Wellington City extends from Miramar to Tawa, excluding Porirua and Lower Hutt. This is three sets of data, I invested in the inner city based on a simple criteria - is it inside the green belt and walkable to the centre? So my data breaks the CBD (or walking area) out from the rest of “Wellington City”.

Sales Inventory

A section focussed on Sales activity

City is the area Trademe calls Wellington:Wellington, ie Wellington City. Compared to the regional sales inventory above, the City is well down into stock levels similar to 2021. Oversupply in 2022 has returned to strong normal.

I’ve grouped the suburban cities together to get a view of how the feeder suburbs perform. Oversupply in the Suburbs is also entering normal territory but a bit later than the City.

Lastly I have combined Wairarapa and Kapiti as Wellington rural/lifestyle suburbs and its clear these areas are even further behind with significant current oversupply. Note they were later getting into oversupply in 2022. At 850 homes they make a significant contribution to the Wellington Region oversupply.

Unfortunately I do not collect separate Sales inventory for the CBD.

The clear indication is that Sales inventories are returning to normal, very quickly. The closer to the city the quicker, suggesting the CBD will be much more into normal territory with supply = demand.

Rental Inventory

Just a reminder, this section is about Rentals.

Notice the similarity to Sales, demand for rentals has almost returned from oversupply to normal with just 150 homes more than 2017 - 2021.

The CBD is also returning to normal, just 50 homes more than experienced in 2020 and 2021.

Actually reaching normal the level of rentals being offered outside the CBD is high, but unlikely to be driving rents down anymore.

Suburban rentals are likely to be the last to fill by migrants, they typically take city rentals first. This observation matches the chart above, with equilibrium barely starting to return.

Rental Inventory Balance

Recall that 2.5% is where demand = supply for an area. The following chart compares inventory to total rental stock at each point in time. Note: Stock for the CBD can grow much quicker than the rest of the city due to apartment growth.

Turnover in the CBD is quite high at around 3% vacancy rate in 2020 to 2022 but since then around 4.5%, lifting the Regional inventory to 3% since 2022. Note the CBD is only part of a continuous area, ie some people may choose to live outside the CBD if CBD prices rise too far, potentially increasing the inventory rate at the expense of alternative areas in the city.

To get the chart above I had to find the number of rental properties in the area I call the CBD (Walking distance to work or within the green belt). I rented in the CBD in 1996, it was clear that it was changing, but there is now five times the number of rental properties in 2023. This created a new set of numbers that surprised me - for your information:

Lower Hutt Detail

Lower Hutt is effectively a dormitory suburb with most workers travelling for work into “the city” ie Wellington CBD. I keep good stats on Lower Hutt, Upper Hutt, Porirua, Wairarapa and Kapiti, so while the data for Lower Hutt is included in the Regional analysis above I thought it worthwhile breaking it out more.

As for Wellington City - Sales Inventory;

Sales inventory is still quite high but slowly reducing towards balance. I expect balance to return by the end of the year.

Rental Inventory

Lower Hutt rental inventory is in a similar state to Wellington Suburban, reducing towards equilibrium. Again we could see equilibrium by the end of the year.

Concluding comments

Wellington, like most regions in NZ is recovering from the property price bubble, but a bit further ahead than other cities. The market is reacting in the way you would expect, reducing supply to match demand. The problem could become that demand rises suddenly on the back of immigration. Immigration impacts appear to be underway already.

Wellington rental prices are not growing at all at present, but this is unique to Wellington, although was also an issue for Auckland last year. Note that the press make a lot of the trademe quotes that prices on trademe are rising, but that is asking prices, actual prices tenants pay are those published by MBIE and reported here.

It would seem to be a good time for investors to return to the market, by the end of the year the current trend of market demand growing to meet market supply is likely to reduce competition and return to slow price growth.