New Zealand rents too low: Federation

NZPIF president Andrew King said: “The conclusion that the magazine came to is wrong. It is not that house prices are too high, it is more that rental prices in New Zealand are too low.”

Compared to rental income, Kiwi houses were ranked second-most expensive in the world, 66 per cent overvalued. Compared to disposable incomes, houses were 22 per cent overvalued.

The magazine used median house and rental prices plus an assumed rental return to come to its conclusion.

According to the Real Estate Institute, New Zealand’s median house price for July 2012 was $361,000. According to the Government Bond Centre, the New Zealand median rental price was $340 per week.

The NZPIF said that using those figures, if New Zealand house prices were 66% over valued compared to rental prices then the magazine was saying NZ house prices should be $217,500, not $361,000.

At a rental price of $340pw and an average value of $217,500, the magazine assumed rental property should be making an 8.1% gross return. But the NZPIF says neither of those assumptions is correct.

King said: “They are using the median rental price figure to estimate the relative value of the whole NZ property market. But rental properties only make up around a third of all properties in NZ and they are not representative of the entire property market. In general, NZ tenants prefer a lower quality rental property in order to save money on rent. Because of this, the average value of rental property in New Zealand is lower than the average price of all properties.”

King said that The Economist had assumed rental prices were at the right level but the NZPIF believed they were too low.

A study it carried out showed it costs $4284 more to own the average house in New Zealand than it does to rent it. That does not take into account the deposit needed, or the fact that interest rates are at historic lows.

King said: “At this point in the economic cycle the cost of renting the average New Zealand home should be about the same as owning it. If this assumption is correct, then rental prices should be some $80 per week higher than they actually are. So if you are going to use rental prices as a means of judging housing affordability, then a realistic rental price needs to be used.

“At the end of the day, NZ house prices are not too high compared to rental prices as The Economist has suggested, it is NZ rental prices that are too low. When a realistic rental price and expected return are used, Property prices appear to be about where they should be. The conclusion should be that rents need to rise rather than property is over valued.”

Comments from our readers

On 4 September 2012 at 12:19 pm Leith Gunn said:

I agree you should look at rental "type" property, not across the board but you cant look at property values then set "fair" rents!The market sets rents, as values increase the yield falls till a correction in values occurs.Assets must generate income, capital gain is a bonus!

On 10 September 2012 at 11:36 pm Peter Lewis said:

Based on my own experience as a Landlord in the Auckland market, I would say that the link between property prices and rents/incomes has become broken.
Tracking back 20 years, my original IP has increased in (paper) value 400%. However, the rent I can charge for it has only just doubled.
In relation to average incomes, the rent is probably about the same percentage. However, in relation to the value of the property it is fallen from 10% per annum to 4.5%.
Rent levels are just a symptom. The real problem is the income/property price relationship.

New Zealand rents too low: Federation

Data used by The Economist magazine to claim New Zealand house prices are significantly overvalued is flawed, says the New Zealand Property Investors Federation.

Friday, August 31st 2012, 12:00AM 2 Comments

Comments from our readers

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