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What Drives Rental Prices?

What Drives Rental Prices?

There are a diverse range of market drivers for rental prices, writes Milton Weir, and landlords should understand them.

By: Milton Weir

30 November 2019

Recently I purchased a new property which came with an associated rental appraisal from the real estate company’s in-house property management team. It was a nice bit of marketing, but not much else. I have always struggled with real estate companies providing rental appraisals for properties their agents are selling because of the lack of independence.

Had I been a novice who wanted to rent the property I was buying, the letter provided me with very little information about the rental market and what might influence the rent on that property.

Now, if you were to ask tenants what drives rents, they would probably reply that property managers drive rents up. That’s not the case at all. But then being in the property management business I would say that wouldn’t I? The reality is that most property managers try to get the highest rent they can for a rental property – because that’s what their client – the landlord – generally wants. But it’s not property managers who drive up rents. Market forces are the biggest drivers of rent.

‘It’s often harder to rent a property in the winter than in the summer, and as a result the rent will often be lower for properties available in the winter months’

Rent Drivers

A lot of landlords, particularly private landlords, underestimate the time of year when renting their properties.

It’s often harder to rent a property in the winter than in the summer, and as a result the rent will often be lower for properties available in the winter months and correspondingly higher in the summer.

Another major contributor and one we are experiencing right across New Zealand at present is an imbalance in supply and demand. Presently rental supply is at an all-time low and demand at an all-time high. That means for every available rental property there are more and more tenants interested in renting it, which results in increased rent. I was in Dunedin last week visiting one of the Property scouts franchises. A nice Dunedin rental property which when advertised last year attracted only moderate interest, this year had sixteen different groups of potential tenants at its first viewing. And that doesn’t even take into account the tenants who submitted applications without even bothering to check the property out!

Landlords, rightly or wrongly (rightly in my view) feel that they have taken a pasting recently and a lot have decided that it’s all too hard, so they’ve sold up and headed for greener pastures. The Osaki case made it difficult to claim for tenant damage and some consider that the recent changes to address this don’t go far enough. Add to that the recent legislative changes and the result is that a lot of landlords have been pushed over the brink. Less landlords means less rentals which equates to higher rents. It’s not all bad news though, recent Reserve Bank figures indicate that investors are slowly returning to the market. But new investors tend to have higher mortgage liabilities and as a result they want higher rents and so it goes on. The reality is, as long as we have a rental shortage in New Zealand, rents will stay high and continue to increase. It’s the way of the world and the business of renting properties is no different to any other business – supply and demand is inevitably what sets the price.