Thursday, 7 January 2016

A January tradition - complaints about rising rents

Looking back at last January, I wrote a post on rising rents in Auckland as it was dominating local news. This January, we see the same complaints. What's going on? Pretty much the same story as last year. Here's what I said then:
A simple market diagram helps explain why rents are increasing in Auckland (see below). House price inflation is high - and the cost of the house (e.g. mortgage repayments, council rates which are linked to increasing house values, and insurances which are similarly linked to increasing house values) is the greatest contributor to the costs of landlords. So, because landlords' costs have increased the supply curve shifts up and to the left from S0 to S1 (which we refer to as a decrease in supply - at each and every level of rent, landlords are willing to supply fewer properties to prospective tenants). On the other side of the market, demand has increased from D0 to D1 - largely because of greatly increased immigration (although there are a large number of students looking for accommodation at the start of the new year, there is probably a similar number of students whose rental contracts are expiring). So, a decreased supply and an increased demand leads the market (in the diagram below) to move from the equilibrium E0 to the new equilibrium E1, where the equilibrium rent is higher (R1 rather than R0). Note that because supply and demand have both shifted, the effect of these changes on the number of rental properties available is ambiguous (it could have increased, decreased, or stayed the same, depending on the relative size of the shifts in supply and demand) - though on my diagram the quantity of rental properties has increased slightly from Q0 to Q1.

The Herald article basically lays out similar issues to last year:
It [Auckland Property Investors Association] said landlords were also being forced to increase rents to cover mortgage repayments, higher council rates and the other costs that came with owning a house.
So decreased supply (from S0 to S1). And:
...this month's expected influx of tenants coming to the city for new jobs, or a new year of study, pushed up demand.
So increased demand (from D0 to D1). The predicable result? Increased rents (from R0 to R1).

Is there something special about January that leads to these stories popping up at this time of year? Possibly in areas that have high student populations. See for example this graph of rents in Wellington and Dunedin from Herald Insights:

However, the general pattern of rent increases is much less seasonal:

I suggest you have a play with the graphs on the Herald Insights page. Perhaps the most surprising thing is that Hamilton doesn't exhibit the same strong seasonality in rents as Wellington and Dunedin. That seems difficult to explain.

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