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Retreating residential rents

Friday, June 27th 2008, 3:46PM 6 Comments

by Philip Macalister

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.
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Comments from our readers

On 27 June 2008 at 5:12 pm nevvy said:
The reason for the drop in rents is a seasonal factor.Its the northern spring and the time for the footloose to bolt from our winter.Larger (3, 4 or more bedroomed)flats feel the vacancies most as they mostly comprise groups of singles who go on their OEs around now.Tenant demand will pick up late December early January as per usual. As quasimodo the bellringer said,Do not be afraid.:}
On 27 June 2008 at 6:32 pm JD said:
HI,
I agree with rents dropping.In January we rented out a house at $600 per week. The house we also own next door of better quality has just been let for $550 and we had to allow 2 dogs. In our area in Jan on Trade Me there was 8 houses for rent. Today there is 58.
On 27 June 2008 at 7:41 pm Rick said:
I think that the rent movement is more to do with the economic downturn than most would like to acknowledge - I think that some of the rents have reached saturation point and now the tenants are speaking with their feet which is affecting the national average.

In support of that, we have just rented out one of our places in Hawke's Bay and had over 30 lots of people come through when we did the open home... and then 10 applied (both these numbers where a bit of surprise I can tell you) - FYI: our rents are loosely based on the tenancy stats so aren't high or low just median orientated.

The most interesting part was that the reason for moving was predominantly that rents had gone up to much at their current location.... I think this is more of a trend rather than a blip.

Landlords should be cautious of raising rents too much just because the hear others are doing so.

my 2 cents worth
On 27 June 2008 at 8:46 pm Spurner said:
It is being looked at over too short a period of time. Look out in Jan/Feb '09 for a large jump in rents.

Also, I notice the statistics used state that between Feb '08 and May '08, the average rent in Wellington decreased from $390pw to $270pw. This is ridiculous and they lose all credibility on this point alone, what planet are these guys from?
On 29 June 2008 at 7:48 pm Lea said:
A year ago we sold our own home and were desperate to rent a large house. With only one week to move there was not a lot available so we took a house at $550 week
Our landlord just put the rent up to $575, due to rising food & petrol costs we decided to look around. To our amazement there was plenty on offer - cheaper.
We have taken a slightly smaller house at $475. The family are moving overseas and can't sell in a flat market so we are the happy recipients.
On 1 July 2008 at 2:58 pm John said:
I put rent up in one apartment (not a box in the city, but up-market Parnell) when a couple left the flat and another couple replaced them (one person remained from the initial tenancy). I sent the 2 month advice of increasing rent to a set of 3 one-bedroom apartments a month ago. I had not raised the rent in the 2-3 years the tenants had been there. It possibly does not quite meet the typical rent for similar properties (considering carport, lawns and water are included). I did not want to lose tenants mid-winter. I may increase the rent in 6 months to coincide with the Feb influx of tenants.
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ICBC 5.65 3.85 3.95 3.89
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