More Kiwis set to rent for life

Auckland is set to lead the country in rental property growth over the next decade as steep house prices continue to push home ownership rates down.

But that won't necessarily translate to huge profits for landlords, especially if skyrocketing house prices push yields lower.

With only 62 per cent of the country's houses expected to be owned by their occupiers in 2016 - just 58 per cent in Auckland - it seems that the Kiwi dream of owning a home is being steadily supplanted by the reality of life as a renter.

At present, about 68 per cent of homes are owned by the occupiers.

"We've seen that trend ongoing since 1991, so for 15 years it [home ownership] has been declining," said Professor Bob Hargreaves of Massey University's property group.

The Centre for Housing Research projects the number of rented homes in Auckland to increase by 31 per cent over the next decade - from around 179,000 to 234,000 in 2016 - while owned homes will increase by only 13 per cent to 328,100.

Auckland will dominate growth in the rental market, but the trend will be observed around the country, with a 26 per cent increase in rentals expected nationwide against a 6 per cent increase in owned households.

Currently Auckland's rental property market is like a still, disquieting eye of the storm, surrounded by a swirl of activity.

The Herald on Sunday compared rental prices from July 2001 and July 2006 to see what has happened to rents during the property boom.

Over a period when the consumer price index rose 14 per cent, rents in one- and three-bedroom homes in Auckland increased between 14 and 56 per cent - with the exception of the central city.

If you've rented in the inner city, Parnell, Grafton or Newton in the past few years, the law of supply and demand has worked in your favour. The glut of apartments - many built for the influx of Asian students that never arrived - has held rents fairly static. Real Estate Institute figures show the median rent for a one-bedroom place rose just 1 per cent between 2001 and 2006, while the average three-bedroom rent took a 2 per cent tumble.

But outside central Auckland the market looks very different. Most Auckland suburbs have seen increases of 20-40 per cent over the past five years.

The top-performing suburbs have been on the North Shore - with rents up from $165 to $255 a week for one-bedroom in East Coast Bays and from $270 to $420 for three bedrooms in Birkenhead - and in fast-developing eastern suburbs such as Howick.

Nationwide, rents have increased by roughly a third over the same period.

Wellington central endured a similar fate to Auckland central, but many provincial centres posted huge increases.

Hargreaves said that was because they had been playing catch-up. The property boom started later outside Auckland and Wellington and rents tagged along behind.

Taupo led the way in price rises for single bedroom accommodation, increasing 75 per cent from $100 per week in 2001 to $175 this year. For three-bedroom properties, Whakatane was out in front, with rents jumping 66 per cent from $175 to $290.

Real Estate Institute president Howard Morley said provincial rental markets were more capricious because rents and capital growth were vulnerable to sudden changes in migration or something like a company shifting out of town.

But while rents have increased significantly in many parts of the country, they have generally failed to keep pace with house price rises.

For landlords, that has meant yields (income as a percentage of the property's value), have declined. But no one is writing property off as an investment option. Landlords have still profited from capital gains, just as regular homeowners have - although making a profit that way leaves them dependent on a lasting boom.

"In the recent property boom, the capital gain has been so great that it was hard to lose," said Hargreaves.

"So even if you're making a negative return in terms of rent, you've still got that 15-20 per cent annual rate of increase in the property value. It's been great for property investors up until now."

According to Massey University's quarterly residential rentals update, between 2001 and 2003 low mortgage interest rates meant owning property was relatively more affordable than renting. But the tables turned in 2004, and since then renting has clawed back its relative affordability as increases in house prices have outpaced rent rises and mortgage interest rates have climbed.

But Real Estate Institute president Howard Morley said it was impossible to forecast whether people would be better off renting than buying in the future, because the market was unpredictable.

"You'd certainly save some money paying $350 or $400 a week as against paying the interest on a $500,000 house - if you want to work those sums, certainly renting's cheaper.

"But with the growth in the capital gains or value appreciation of real estate in the last four years you would have been better to have borrowed everything and bought the house."