Recent events are clearly starting to take a toll on property rents in Queenstown, which have fallen by 10% since the same time last year. There are also a few other pockets of weakness across the country, although so far most areas have seen rents hold up pretty well. The absence of tourists and the prospect of further job losses suggest that the risks to rents over the next 6-12 months are to the downside, but at least property investors can benefit from super-low mortgage rates.

The rental side of the property market has been in the news quite a bit over the past 1-2 weeks, especially Queenstown, where rents have clearly begun to fall. This Pulse takes a closer look at the figures and highlights how rental falls are not just contained to previous tourist hotspots, but also that other parts of the country are still seeing strong rental increases.

Annual % change in rents (Source: MBIE)
Annual % change in rents (Source: MBIE)

Indeed, according to MBIE’s data (based on bonds lodged), average rents for NZ as a whole were 4.8% higher in the three months to June than the previous year – that’s despite lockdown kicking in pretty much at the start of that three month period. The data showed a decline of 10% for Queenstown, as well as falls in other areas such as Masterton, Westland, and Waimakariri (see the first chart). But at the same time, many other areas are still buoyant, including Lower Hutt, Gisborne, and Dunedin. Interestingly, Southland District (which includes tourist areas such as Te Anau) has seen rents continue to rise too.

International % of total tourism (Source: MBIE)
International % of total tourism (Source: MBIE)

Given that international visitors account for about 65% of total tourism spending in Queenstown (see the second chart), it’s not surprising that the border closure will have hampered the economy and rental property demand. Supply also seems to be playing a role, however, with the number of new rental listings for the year-to-date at its highest level since 2014 (see the third chart). In Masterton, another of the areas where rents have fallen, a rise in supply also seems to have been a factor – new rental listings for the year to date are the highest since 2016.

New rental listings year to date (Source: CoreLogic)
New rental listings year to date (Source: CoreLogic)

Looking ahead, the recession and further increases in unemployment mean that weaker rental trends could spread to other parts of the country. Indeed, at the worst point of the GFC (mid-2009), national average rents fell by 0.5% on an annual basis, with more than half of the various districts/cities seeing rents decline. A repeat of that scenario would be good for tenants, but clearly very unwelcome for landlords.

NZ rental yields and mortgage rates (Source: CoreLogic)
NZ rental yields and mortgage rates (Source: CoreLogic)

However, at least property investors can look to capitalise on the most favourable financing environment for many years – as the fourth chart shows, not only are mortgage rates very low in their own right, but they’re now also down pretty much in line with gross rental yields. Although the strong capital gains of recent years may not be repeated over the next few years, that small gap between yields and mortgage rates suggests that making a day-to-day operating profit could be easier than before (provided of course that rents and yields don’t plummet).

Overall, the latest rental data is consistent with our house price figures showing that some areas of the country have weakened, but so far most have held up relatively well. However, there are still some key tests to come, most notably the end of the wage subsidy on 1st September.