Will rents rise as interest rates go up?

A number of people recently have asked me whether rents will get pushed up as a result of the Reserve Bank raising interest rates over the next couple of years.

On the face of it one would think an increase in the cost of supplying rental accommodation will lead to higher rents, as is expected to happen as a result of the March 23 tax change announcement.

The pace of growth in rents has increased recently according to a variety of sources. I use the new rents data series from MBIE which show that in the year to July average rents on newly let properties around NZ were ahead 5.6% from a year earlier. Six months earlier the annual change was 5% and a year ago 4.8%.

But as the following graph shows, we have had rents growth stronger than 5.6% on many occasions in the past. Since 1992 when inflation has averaged 2% for New Zealand, growth in rents has averaged 4.4%. Wages have grown about 3% per annum. So, growth in rents has steadily exceeded growth in wages.

A few days after the government announced tax changes affecting residential property investors, I ran a survey inviting feedback from investors. About 3,500 replied and the three key learnings were these.

32% of respondents said they would hold back from buying a property because of the changes. This is obviously something the government wants to happen, as expressed in their requirement for the Reserve Bank to report on how it will help the government achieve its housing policy of suppressing investor demand for existing properties. In that regard things are working out according to my monthly survey of real estate agents with REINZ, and the survey of mortgage brokers with www.mortgages.co.nz, plus my monthly Spending Plans Survey.

In the six months to February, on average a net 37% of real estate agents were seeing more investor buyers. Now a net 41% are seeing fewer. In the six months to February a net 19% of mortgage brokers were seeing more enquiries from investors. Now, a net 56% are receiving fewer enquiries.

In the same six-month period, a net 11% of respondents in my Spending Plans Survey said they planned buying an investment property. That now sits at a net 4% planning to sell.

The second key result from my late-March survey of investors was 25% saying they would sell a property in the coming year which they had not previously been planning to sell. Beyond some spit the dummy anecdotes there is zero statistical evidence that this has happened. But then again, this has yet to become a stated government policy – but it probably will eventually.

The third key survey result was 74% of investors saying they plan to raise their rents more than they had been thinking. A quick glance at the first graph on the previous page tells us that there is no statistical evidence as yet that this is occurring.

It would seem logical to expect that if the cost of running a business goes up (property renting) then the selling price would rise. And it would seem especially reasonable to expect this in an environment of rental property shortages.

Rents are rising at an above average pace, but you couldn’t rule out that some of this is simply a catch-up after rents were frozen for six months over April – September last year.

But what about now that interest rates are going up? Surely these two factors together must cause a lift in the pace of growth in rents. Logic says yes. But have rising interest rates in the past caused rents to go up? Let’s see.

To answer the question, I have taken a look at the annual change in average NZ rents since 1994 using MBIE data, and annual changes in interest rates. The results are presented in the large graph here.

The blue line shows annual % rent changes and is measured on the left-hand side. The orange line shows interest rate changes in nominal terms and is measured on the right-hand side.

Our economy went into recession over 1997/98 and 2008-09. On both those occasions the severity of the situation produced declines in both interest rates and rents. But if you strip away those scenarios and look at more normal times, you’d be hard-pressed to say that interest rate changes have much impact at all.

Interest rates rose from 2004 through into 2008. But the pace of growth in rents, while above average, was less than 2002 into 2004.

Rising interest rates over 2014 were followed by a small lift in the pace of rents growth. When interest rates went down again rents growth slowed. Falling interest rates from 2018 to recently failed to produce a slowing in the pace of rents growth.

Statistically – speaking, you’d be hard-pressed to say much about how fast rents will rise given a change in the average level of interest rates up or down.