Nestled quietly along the North Island’s eastern coastline is Tauranga, a city that’s home to New Zealand’s fastest-growing population and staggering house price growth.

It is part of the golden triangle along with Auckland and Hamilton. The three cities make up three sides of economic growth and residential development and it is predicted the combined trio will be home to 53% of the country’s population by 2031.

Although Tauranga is classed as one of the country’s smaller cities, by area it is the fifth most populous in New Zealand, with an urban population of 155,200 as at June last year, or roughly 3% of the national population.

Tauranga people rate their quality of life higher than those in other large New Zealand cities. Situated in the Bay of Plenty, Tauranga was named by Captain James Cook after the plentiful amounts of fish, sunshine and generous people.

Not only does Tauranga have a city hub, it also has some of the country’s favourite tourist beaches at Mount Maunganui and Papamoa.

There are about 260 kilometres of coastline in the Bay of Plenty, so secluded stretches of sand and sea are not hard to find.

Tauranga, arguably, also has one of the best climates in New Zealand— receiving an average of 2,200 hours of sunshine a year, ideal for residents exploring its forests, islands and thermal attractions.

While it is sunny for tourists, dark clouds hang over the property market. Prices and rents have skyrocketed in the past year, leaving many would-be investors out in the cold and renters struggling to find a home and then pay steeply rising rents.

Supply Major Problem

CoreLogic data shows house prices in the top 10 suburbs have increased from 28.6% to 32.7% in the year to November 1.

Pyes Pa had the steepest increase at 32.7%, with prices rising from $816,500 to $1,083,900, followed by Mount Maunganui at 31.9% and prices increasing from $1,066,550 to $1,407,200. Third and still within the 30% range are Ohauiti with prices lifting 31.8% from $813,200 to $1,071,900 and Bethlehem rising 31.2% from $875,950 to $1,148,900.

Eves Real Estate Cameron Road branch manager Craig Wilson says sales have been steady since the second quarter of last year—106 in May, 167 in June, and 161 in July before the lockdown when they dropped off to 106. Since then they have been steadily rising to 132 in September, 150 in October and a similar number in November. In November last year there were 214 sales.

Supply has been the major constraining factor, says Wilson. “We had the lowest number of listings on record up until the beginning of October.” Listings increased 60% at the beginning of that month when Tauranga came out of lockdown and Wilson expects a big surge in January/February when people are back from their holidays.

He puts the start of the listings surge late last year down to sellers’ confidence they will achieve high prices and concerns those prices may not last as tightened lending criteria has become a huge problem.

“Banks are now scrutinising people’s spending habits with a fine-tooth comb and making them jump through hoops to obtain a mortgage. It is particularly noticeable at the lower end of the market where there has been a much higher decline rate for mortgages than seen for years,” says Wilson. “For people buying at the $1.5-3 million higher end of the market, it is not so much of a problem. Some banks are also using debt-to-income ratios and this is adding to buyers’ difficulties in getting finance.”

He says the spectre of falling house price growth is beginning to worry Tauranga sellers. “However, people forget prices have soared—30% over the past year—so a 10% drop will only bring them back slightly. It will take a catastrophic event offshore to really knock house prices off their perch.”

While there have been fewer buyers attending open homes and auctions, Wilson says investors are still in the market but are tending to want newer properties and are prepared to spend more. “They want Healthy Homes compliant houses and investors with older properties are tending to sell them to release capital to buy newer houses. Many of the older properties are being snapped up by first home buyers.”

The most popular suburbs for buyers are Bethlehem, Matua, Otumoetai and Pyes Pa, although under-valued areas, such as Gate Pa, Greerton and Parkvale, have popped up on investors’ radars. These areas are 1960s subdivisions with older three and four-bedroom standalone houses, always popular with investors and owner-occupiers. It is also still possible to buy 800-1,000m2 sections in the older subdivisions.

Wilson expects the new bi-partisan agreement between National and Labour allowing three houses of three stories each to be developed on sections without resource could change the face of Tauranga. Ninety-one percent of the city’s properties are stand-alone houses on large sections. He says it has stirred up developers looking for opportunities to landbank property.

Adding to the ramifications of higher density is a plan change promoted by Tauranga City Council to allow properties of more than six stories each to be built mainly along Te Papa Peninsula, which runs from Greerton, snaking around the racecourse, to the Avenues. Wilson says developers might be able to get five to six units on a 900-1,000m2 section.

Planners believe the city is spreading too far and there is not the infrastructure to support it. “There is going to have to be some intensification but whether it will be prolific is not an easy question to answer,” says Wilson.

Rental Squeeze

Because of the squeeze on housing supply, rental agencies are continually dealing with people desperate to find a home, but with fewer than 200 properties on the market most months and a population of 155,000 there are just not enough to go around.

Property managers are run off their feet dealing with the numerous applications they get for every property advertised, says Berlinda Barnard, Inspire Property Management Tauranga manager.

“It is not uncommon to have 25 to 70 and even up to 90 applications on an advertised rental, depending on where it is, from renters across a range of demographics, including families and young professionals to older people.

“Most renters will take a property anywhere because of the extreme shortage. There are people who have been looking for nine months,” says Barnard, and have few options. Demand has been exacerbated by people moving from Wellington and Auckland to Tauranga for work. “They have jobs and need a house.”

She says existing tenants are staying put and not moving because the rental market is so tight. “If they give up their rental there is no guarantee they will be able to get another just because of the sheer shortage.”

Landlords are also putting strict criteria on their properties and in general would rather rent to families or young professionals. “They are not so keen on flatting situations and 80% will not let their properties to tenants with pets,” says Barnard. Three to four bedroom houses with two bathrooms are the most popular for renters, but most older houses have only one bathroom, which seems to put many tenants off.

Rents have been rising steadily since the beginning of the year, according to Barnard. Three bedroom houses are renting for $600-$660 a week and four bedroom properties $675 a week. “Every time a property comes to the market the rent goes up. There seems to be no limit to increasing rents.”

She attempts to get landlords to steer the middle range of rents, but when rentals around landlords’ properties are fetching $675 a week, they expect the same. “Tauranga rents are now at the same level as Auckland and it is difficult to see how all renters can pay these prices.”

Barnard, surprisingly, says WINZ beneficiaries are those who can afford the bigger rents because the Government gives them a rent subsidy. Tenants, who have high income jobs, are the only others who can afford some of the higher priced properties and families on average wages are pushed out of the market. It is tragic and wrong.

“Investors are still buying rentals but tending towards newer or new properties. It is easier to get bank finance for new properties rather than existing houses and they are willing to pay a higher price for them.”

She is adding one or two new properties a week to her rental book. “They are appealing because they don’t have any maintenance issues for the first few years and attract the higher rents while existing properties often come with problems and have mainly lower rents.”

Rethink By Investors

Many investors—particularly smaller investors with one or two properties—are mulling over whether they can afford to stay in the market, with tighter bank lending and tax requirements, says Julie Tolley, Tauranga Property Investors’ Association president.

“Most are talking to their accountants and pondering whether they should cash up and invest in commercial property or shares. For the majority rent rises will not cover the extra tax they will have to pay with the Government’s phasing out of mortgage interest as a deductible expense against rental income. Basically, investors are reassessing their goals and what they need to do to stay in the residential property market.”

A few association members have been investing in residential property for 45 years and have seen cycles come and go. “They know how to make the dollars work and are not so much worried about tightened lending by banks and new tax rules. They do, however, feel they are being hammered by the Government with continual attacks on them through changing legislation over tenants’ rights and Healthy Homes Standards. It is the worst they have ever seen it,” says Tolley.

“It has been relentless for four years. It seems people have a fixation on ‘evil landlords’ especially if they own more than one rental property. The majority of landlords are hardworking and decent and many phoned for advice during the lockdowns over concerns about their tenants’ wellbeing. They were wanting to find ways to help them.”

She says some investors are veering towards new builds of three to four bedrooms with two bathrooms, mainly around Papamoa, Pyes Pa and Omokoroa, but it is not as easy as it sounds, as there are increased requirements around lending, increasing materials and labour shortages and significant delays in getting new houses finished in some cases. “Those problems are not going to be solved any time soon.”

For local investors the whole of Tauranga is popular considering how difficult it is to find deals. “Eight years ago, there were certain areas investors would not look at but as house prices have soared they will look anywhere to get good cashflow so they can keep investing,” says Tolley. “Unfortunately, investors are having to accept rental returns in the 3-4% range. Anybody getting a 5% return is extremely fortunate.”