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New Zealand property prices 61% overvalued compared to rental prices

A recent report by the OECD claimed that NZ property prices were 61% over valued when compared to rental prices. However another way to look at this statistic is that rental prices in New Zealand are too cheap.

This view is backed up by looking at the cost of renting compared to the cost of home ownership. If the cost of renting is close to the cost of home ownership, then most people would choose home ownership over renting. However if home ownership costs are significantly higher than renting, then tenants don't have a viable option to renting, making it easier for rental property owners to increase their rental prices.

An NZPIF study conducted in April 2014. Showed that renting the average NZ property was $175pw cheaper to rent than it was to buy. On top of this, a home owner would need to come up with a sizeable deposit.

In order for a home owner to buy the average NZ home, they would need an $86,000 deposit. Their mortgage, at an interest rate of 6%, would cost $26,700 on a 25 year P&I basis. Once insurance, rates and maintenance costs are included, the total cost of owning the average NZ home would be around $32,500 a year or $625pw.

Amazingly, a tenant would currently be able to live in this property for just $450pw.

Even if the home owner only paid the interest cost on the mortgage, they would still pay $110pw more than the tenant. Admittedly the tenant wouldn't get any future capital gain, but most people just don't think that far into the future. Then there is always the deposit they would have to come up with as well.

A possible reason for low rental prices is that many landlords manage the property themselves but don't have time to do a proper job. I've just spoken to a reporter who has a friend paying $450pw for their home in Auckland. The very similar house next door to them recently sold for just over $1m. That's a 2.3% yield. That property should really be renting for anything up to $800pw. The tenants said they would happily pay much more but they're hardly going to say this to their landlord.

Another possible reason for rental prices currently being low is low interest rates. Many rental owners could be paying nearly half the amount of interest they were paying in 2008, causing them to forget about market rental levels. This is why many tenants are not moving from their rental properties.

The problem with this is that interest rates are on the rise and it may not be so easy to raise their rents as quickly as they would like to cover the extra mortgage costs. Moving their rents up at an earlier stage would have provided extra funds to offset increased costs.

This years budget had $672m of extra spending towards families and children. A majority of those recipients will be tenants, which will help make rental price increases a little bit easier.



Tags: federation reports

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