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Emma Vitz Rent (1)

MoneyJuly 20, 2021

Here’s how much the cost of renting has increased since 1993

Emma Vitz Rent (1)

Analyst Emma Vitz turns her gaze to renting data, discovering that New Zealanders are spending twice as much as they did 30 years ago to live in increasingly squalid houses. 

Renting in New Zealand is often considered a temporary stopgap on the way to home ownership. Some see it as an uncomfortable phase that young people put up with for a couple of years while they save for their deposit, along with two-minute noodles for dinner and wearing a sweatshirt to bed to avoid turning on the heater.

But the reality is that in 2018, 35.5% of New Zealanders did not own their own home, a number that has been increasing since the 1980s. Renting is no longer exclusively the domain of younger people. Over 31% of those aged 65 or older do not own their own home, and this percentage has increased for every age group since 2006.

(Graphic: Emma Vitz)

With this in mind, I wanted to have a look at how the affordability of rentals has changed over time. Once again, I took the common financial rule of allocating 30% of your gross income to housing and calculated how much a household would need to earn to afford the average rental going back to 1993. 

The prices were inflated to current dollars using the consumer price index in order to make them comparable to 2021 figures. I used rental data from Tenancy Services. This data includes all rentals in New Zealand, from studio apartments to large family homes. I assumed that the average would represent a mid-sized home in New Zealand.

Across New Zealand as a whole, the cost of renting has almost doubled in today’s dollars since 1993. In 1993, an income of $45,856 in today’s dollars was required to afford the average rental. Today, that figure is $84,059. In relative terms, Northland has seen the highest increase in rental prices with an increase of 108% in current dollars. Other regions like the Bay of Plenty and Marlborough have seen sharp increases as well. 

(Graphic: Emma Vitz)

Given that more and more people are renting for longer, and that rent prices have increased substantially over time, we might expect the quality of rentals to improve.

However, the Wellbeing statistics show that housing quality differs substantially between renters and those who own their own home.

(Graphic: Emma Vitz)

In 2018, 36% of renters said their house was always or often too cold, compared to only 15% of those who owned their own home. Similarly, 49% of renters said their house was sometimes or always damp, compared to 27% of owners. Of the 47% of renters who said their house was mouldy, 56% said the mould was larger than an A4 piece of paper. This compared with 30% of owner-occupiers having a mouldy house, of which 37% said the mould was larger than an A4 piece of paper. 

These numbers are an indictment of the overall housing quality in New Zealand, but they also show that renters are more likely to experience the worst of these conditions. And these renters are not exclusively students who can look back and laugh about the time a whole window fell off its hinges in the middle of the night, letting the howling Wellington wind in (it happened to me). Increasingly, they are families and even retired individuals, for whom renting is the only long-term option. 

Emma Vitz is an actuarial analyst for Finity Consulting. The opinions expressed in this story are her own and do not represent those of her employer.


Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.

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Image: The Spinoff/Getty Images
Image: The Spinoff/Getty Images

MoneyJuly 13, 2021

Bernard Hickey: Taihoa on the rate hike fears

Image: The Spinoff/Getty Images
Image: The Spinoff/Getty Images

A bunch of people are warning of big interest rate hikes that could upset the housing market. Bernard Hickey shows why those fears aren’t justified.

This story was originally published in Bernard Hickey’s email newsletter The Kākā and is republished with permission.

There’s been some chatter in recent weeks that somehow borrowers have geared themselves up to the eyeballs and couldn’t handle much of an increase in mortgage rates, especially if they come quicker and go higher than expected because of some sort of wild and extended inflation outbreak.

Bank economists and markets here in Aotearoa now expect the Reserve Bank to start hiking the OCR from 0.25% as early as November to about 2.0% over the next couple of years. That, in theory, would push one- and two-year mortgage rates up from around 2% now to over 4%, which would double interest costs. The assumption is this would destroy borrowers and cause some sort of crisis in the housing market and the economy.

Nothing could be further from the truth.

Borrowers currently pay around 6% of their disposable income to service their loans and a doubling would still leave that percentage well below the peak of servicing costs seen in 2008 and 2009, when interest rates rose over 10%. The below Reserve Bank chart shows this, with the red line being the servicing costs.

Also, banks check the ability of borrowers to handle interest rate rises, and the average serviceability threshold is now around 6.3%. That means the bank won’t lend to you if you can’t handle a mortgage rate of 6.3% or above, as the ASB chart below from this research shows. Even then, most borrowers have even more leeway. They may spend less on other items, including international travel (!), but they’ll be able to service their mortgage without any problems.

But what about going under water?

On the home equity front, there is also no burning platform. Only the most recent buyers in the last six months or so would have less than 20% equity, and even then that risk for a few is quickly dissolving as prices keep rising. Banks have wound back their lending above 80% dramatically since the introduction of LVR controls in 2013. The collective LVR of the housing market is barely 20%, as this ASB chart shows.

Thankfully for the economy and the Reserve Bank, it has been screwing down the amount of leverage in the housing market since 2013 and there is now little risk of some sort of crisis overwhelming the housing market or the economy. It may not feel like it for those trying to get into the market who realise they need deposits of over $150,000 and loans of over $600,000, but that is because they are last in. They won’t be able to get a loan if they can’t service a 6% mortgage rate, and they haven’t been able to get in for a long time. If they did with parental help, then the banks can extract cash from parents, who are also well able to afford.

If the Reserve Bank had not introduced LVRs and the banks were using 2% as their affordability thresholds then we would have a problem. But house prices would also average over $2.5m, rather than the $900,000 they currently do.

Also question the fast and big rate hike hypothesis

One argument made by those worried about rate hikes is that many borrowers who are currently on shorter-term fixed-rate deals or are floating will all rush out and fix for two-, three- and five-year deals. That “rush to the exits” would in turn push up mortgage rates even more than the OCR hikes for those longer-term interest rates as banks rush to hedge their positions in the wholesale swaps markets in a sort of brutal feedback loop that turns into an upward spiral in long-term rates.

Currently over 75% of borrowers are on floating or fixed for less than a year, so that could happen if everyone thought interest rates were going to sprint over 5% in the next year or so.

Hold your horses e hoa

But many who have been in the market for more than the last five years will be wary of making that big jump into a more expensive three- or five-year deal, given many did that in 2010 and 2014, and were forced only a year or two later to have to break their fixed contracts with big fees when interest rates came back down again.

Those thinking about that fixing decision also need to understand that all those talking in New Zealand circles about massive inflationary pressures and very fast rate hikes are very out of line with what is happening overseas right now. The Reserve Bank of Australia and the US Federal Reserve are not expected to hike until 2023 an overseas, longer-term wholesale interest rates have actually been falling in recent months.

The delta variant of Covid-19 is starting fresh waves of infections across Europe and the United States, forcing fresh lockdowns. Also, China quietly announced an easing of monetary policy late on Friday because of an apparent slowing of its economy, which we’ll get more information on later this week. And last night European Central Bank President Christine Lagarde signalled in an interview that more loosening might be required after the ECB’s current QE programme ends.

My view: Don’t be so sure about quick and big rate hikes that last for years.

And just if you are wondering if New Zealand’s economists really are that hawkish, here’s the latest from the NZIER’s shadow board:


Follow When the Facts Change, Bernard Hickey’s essential weekly guide to the intersection of economics, politics and business on Apple Podcasts, Spotify or your favourite podcast provider.

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