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Generation Rent And The Shifting

With house prices rising slower than rent in some areas, the gap between mortgage and rent is decreasing, writes Guy Mordaunt.

By: Guy Mordaunt

1 January 2022

Generation rent was coined a few years ago to describe the increasing gap between renting and getting on the property ladder.

While it’s a sweeping generalisation to suggest that everyone renting is there because they have no other option, it certainly captures most people renting in New Zealand.

It’s long been the quintessential Kiwi dream to own a slice of Aotearoa. The idea of a large number of people renting all their lives is a new concept. In Europe this is nothing new, and rental properties pass through generations.

It’s down to numbers. When looking at the difference between renting and paying a mortgage, there’s often no difference. The problems are saving and accumulating enough money to put down a 20% deposit and a lack of new builds.

Based on the average rent, house price, interest rates, inflation and legislation, it may even be more expensive to rent a property in NZ than owning one and servicing a mortgage. It begs the question: will generation rent be the likely scenario, or will new initiatives such as Build to Rent be the answer?

The numbers don’t lie. The national averages are:

• House price $772,024 • Average rent $457

• Average household income $106,600.00

• Fixed Interest 2.79%

• 20% Deposit (based on average) $155,000 (approx).

Source: MBIE Regional Economic Activity app – August 2021

Renting—based on the national average of $457 per week, a typical rental property would cost roughly $24,000 in rent per year. Although many regular expenses such as rates and house insurance don’t apply, tenants still pay for water (in many locations), power, gas, internet and contents insurance. A rough estimate sees a tenant typically spend an additional $5,000 on utilities each year. The average tenant pays around $30,000 annually.

Ownership—based on the national house average of $772,024, the cost to service the mortgage (principal) and interest per week would be $584. (Loan spread out over 30 years). If you were looking to service the interest only, the weekly cost drops to $331. In addition to servicing the mortgage, the typical costs for insurance, rates and utilities would be roughly $10,000. To own a property based on the national average would cost around $40,000 per year.

Granted, interest rates are at an all time low currently. However, when you drill down further and compare towns, cities and regions, it can be far closer. In many areas, the average house price is climbing slower than the rent, and the gap between servicing a mortgage and paying rent is getting smaller.

An example of this is Gisborne, where the average house price is $478,000, and the average rent is $363 per week. Using the current interest rates would cost $362 per week to service a mortgage. That’s principle and interest. It’s cheaper to own a property than to rent in Gisborne.

Since June 2019, the rental pool increased by 13,770 across NZ. The increase from June 2021 to the previous year is 5,637.

Net migration was provisionally estimated at 6,600 in the year ended March 2021 compared with 91,900 in March 2020, a drop of 85,400. Even with the significant reduction in net migration to NZ (Covid 19-related border and travel restrictions), the number of people entering the country and staying still outnumbered the number of rental properties entering the market.

This raises an interesting question that ultimately challenges the assumption that Generation Rent will be a long-term realisation. A current national rental inflation rate of 9% per year coupled with a growing supply and demand issue results in an almost mathematical certainty that renting will be more expensive in many areas than owning.

This isn’t sustainable. The country needs to look at alternative ways to make it easier for people to get on the first step of the property ladder and ways to meet the growing demand for new homes.

As the Managing Director of Property Brokers, Guy Mordaunt is passionate about this industry and innovation - focused on implementing solutions that improve operations, customer experience, and business profitability. He is a staunch believer in people, property and working smarter.

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