Spreading the fear of rising rents
People who are forever claiming that rents will rise probably have a vested interest, writes Justin Kean.
OPINION: I am forever bemused by media coverage on the housing market that relies on industry spokespeople – people who, it turns out, represent the interests of those who own all the rental houses.
Below are three headlines that are rolled out every now and then, that are biased, that tend to miss the point and often only tell half the story.
‘Rents will rise significantly in Auckland due to Auckland not having enough houses’
Commentators point to the lack of supply coming online as a sure-fire ticket to significant rental increases.
In fact, the Auckland housing market has been undersupplied for the past 20 years. But this ignores several facts about the Auckland market that are not immediately obvious.
First, the number of investment properties has grown significantly over the same period. Between 2001 and 2013, for example, the total number of rental houses in Auckland increased 32.2 per cent while the total number of dwellings only increased 19.9 per cent.
At the same time, rents in Auckland rose at the pedestrian pace of 3.3 per cent per annum – hardly a crisis.
Second, the rental market is a largely homogeneous market. Rental properties are commodities and, unlike properties for sale, tenants will seldom pay too much for quality. You often don’t go for gold taps and high-end kitchens when you are ‘‘just renting’’.
The market is competitive and landlords are largely ‘‘price takers’’. They struggle to raise rents because their prospective tenant will simply compare their house to the one down the road which is a bit cheaper.
‘Capital gains tax and other regulations will raise rents’
Many self-interested commentators decry any attempt to make the market better for renters through regulation.
‘‘Any costs’’, they say, ‘‘will be passed on to tenants in the form of increased rents.’’ This might make for a good headline; however, economics 101 tells us otherwise.
When a tax or charge is introduced to a market, the incidence of that tax is shared by both the buyers and sellers in that market. Where the market is a commoditised market, such as the residential rental market, the vast majority of such charges are absorbed by landlords, and this is perhaps the real reason behind their complaints.
This also ignores the notinsignificant issue of providing homes that do not harm the health and life chances of their occupants.
I have lived in rental houses that were of such poor quality they should have been illegal, and the awful truth is that they were not.
If you supply any other basic staple from food, to clothing, to consumer products in any other market, you are subject to minimum standards and punitive fines when you do not comply.
How is it that this is not the case in a market integral to human survival?
Especially when we know that things like insulation, double glazing and building WoFs save lives.
‘Higher prices mean rents must rise to justify the investment’
The story goes that if you invested $500,000, you would expect a certain return – say, 5 per cent per year. Now that the same house is worth $1 million, you will need the same rate of return. So rents will increase from $25,000 a year to $50,000 a year.
This is where the commentator for landlords cries poor for not being able to generate enough cash from their million-dollar property to even pay the rates which, hilariously, have doubled in line with the value of the house.
Again, market fundamentals fail the argument, or the other way round.
The reason prices have increased is because of the huge capital gains being made by investors in that market.
It turns out that the silent accumulation of capital value is more than enough to encourage investors to continue to enter the market, thus keeping values high and not impacting rents at all.
You see, rents are determined by the supply and demand of stock, not what the capital value of the asset is worth in the open market.
So next time you see someone from the residential investors’ forum ‘‘getting the message out there’’, just apply a little bit of scepticism to your reading of the article.
❚ Justin Kean is an asset manager in Auckland. He was formerly head of research at JLL.