Can tenants afford 6%pa increase in rents?

[jporteous]

Hi

Over the past month I have heard Westpac quoted as saying that rents need to rise 6%pa over the next five years to justify property investment returns. As shown below in the NZ Herald article they believe that strong wage growth can support this lift.

My question is what indicators/trends can I look up to give more confidence in this forecasted lift in rents. For example, is there a rough benchmark of % of wage that tenants can afford to pay for rent?? If so where is this benchmark found - esp by region.

Thanks Jon

Expect rent rise, tenants warned
"But the bank (Westpac) reckons they could rise 6 per cent annually for the next five years, partly driven by strong wage growth meaning people could afford higher rents." NZ Herald Saturday December 08, 2007

[jporteous]

Hi

Further on this discussion. If Westpac is hinting that investors need to start seeing higher returns i.e 8%+ in the future how will this effect our future property values?

For example, I have owned a block of six flats in Christchurch for the past few years. The annual rent is $98,000 and last month my valuer used a capitalisation rate of 7% to value the property at $1,400,000.

If my rent goes up by 30% my annual rent will be $128,000 which from cashflow basis is great. At a capitalisation rate of 7% this would lift the value to roughly $1.8m. However, if the industry in future values property at 8% or greater my property is only worth $1.6m or less. The lesser amount obviously limits my future borrowing capacity.

Thanks Jon

[alhoon]

http://www.stats.govt.nz/products-and-services/hot-off-the-press/labour-cost-index-salary-and-wages/labour-cost-index-salary-and-wage-rates-sep07qtr-hotp.htm

Statistics NZ has heaps of good info
By the looks of it the answer is No.
But then do these stats allow for inflation. The rise in wages is around 3.2% and growing, if you chuck inflation into the mix is he saying that wages would need to go up by around 9%. Inflation around 3%

The other way this could happen is number of people pre-dwelling could increase so you end up with more income per house.

Loved looking at all those stats.
Let us know what you make of it all.

Allan

[Tucker]

Who said rents have to increase back to the yields we use to get. It is normal to have yields of 2 - 4% in Australia, they never went back to the yields of the old. Have to get use to lower yields here.

[xris]

Who said rents have to increase back to the yields we use to get. It is normal to have yields of 2 - 4% in Australia, they never went back to the yields of the old. Have to get use to lower yields here.

This is an intertesting point, one that I have often thought about as well.

xris

[Monid]

It basically depends on how much of a premium investors and more importantly home owners are willing to pay for the luxury of owning a property.

Unless the market has an ongoing expectation of significant capital gains it tends to float around the rental yield because otherwise investors can't make money (so won't buy) and home owners would be better off renting (so won't buy)

If we have a market with minimal capital gains or better yet some drops then people will be willing to pay less for properties because they will no longer be willing to count on high capital gains. As such, especially given the interest rates I think the yields will head back upwards. Whether they will regain the yields of yesteryear is however an open question.

Cheers
David

[Tucker]

I think rents and yields will increase but not back to the returns we saw a few years ago.

[jporteous]

Statistics NZ has heaps of good info
By the looks of it the answer is No.
But then do these stats allow for inflation.

Allan

Hi

Thanks for the link. I checked with Stats NZ and unfortunately wages are not effected by inflation. Therefore if the current trend remains we will only see an increase of 3.1%.

Thanks Jon

[alhoon]

The graph shows an upward trend from 2000 and flattens off a bit in 2006, if the unemployment rate stays low it could continue up more.

Allan

[Bodmin]

My experience

I am in the process of reletting one of our houses and put the rent up by over 10% after the last increase when it was let in May last year. This was based on research on what others were letting similar places for. None of the potential tenants has complained about the rent and we have a good selection to choose from.

Cheers.

[alhoon]

Hi Paul,
I use the DBH web site to work out our prices, all our houses are new or fully reno-ed so I go for the upper limits.
Just wondering how you findings compared to the DBH’s.

Cheers
Allan

[Bodmin]

I use DBH in conjunction with Trademe and other sites to determine the rent. I tend to put my rents between the median and upper quartile. The problem with the DBH site is it is a rolling 6 month average and so is not as good at picking changes. So i tend to start from there and then see what is happening currently.

Cheers

[cube]

Given that, in the past 40-50 years, there have been some property value peaks and troughs - what has happened to yields through those times?

If they have returned to previous highs, what structural economic changes have there been to make this cycle be any different?

As property becomes less favourable as an investment, and first home buyers can re-enter the market, then yields should rise on the back of lower house prices (for newly purchased properties), but rents may stay static, or fall, if there are less tenants.

Until prices fall enough, that is, to make the yield attractive again - it will depend on how much of a bath investors take on the downside and what alternative investments are available that will dictate at what point investors have enough confidence to re-enter the market.

(But don't forget the 100,000 immigrants that are due to arrive any day now!).

cube

[67910241]

I struggle to understand why

the rents, which have been growing by less than 6% per annum for the last few years of great prosperity, low unemployment, light to moderate inflationary pressure on the consumer wallet and positive net migration figures would start growing at a significantly higher sustained rate when the economic prosperity and even employment forecasts may start being challenged by global instability, slow loss of business and consumer confidence, higher inflation of essential goods (petrol, food) competing for the same after-tax income, and a migration flow that might become net-negative any month now. Do the current or wannabe landlords see their tenants' wages growing at a much faster rate than the tenants would imagine?

[tricky]

Yes.
I do.