Rental inflation driven by wage inflation and relative supply and demand of houses

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The study covered the period from the final quarter of 2003 to the second quarter of 2022.
Photo: RNZ / Nate McKinnon

Wage inflation and relative supply and demand of houses are the main drivers of rental inflation in New Zealand, according to new research.

The report was released by the Housing Technical Working Group, a joint initiative by the Ministry of Housing and Urban Development, the Reserve Bank and the Treasury.

The study covered the period from the final quarter of 2003 to the second quarter of 2022, and found a 1 percent increase in income translated to a 1 percent increase in rents.

It also found a 1 percent increase in the average number of people in each home, which was an indicator of relative supply and demand, directly led to a 1.5 percent increase in rents, the report said.

However, Treasury chief economist Dominick Stephens said what was surprising was the little impact mortgage rates had on rents.

“We often hear people say things like – this interest rate change, or this tax change, or inflation will get passed through into rents,” he said.

“But actually, we’ve found very little evidence of that type of pass through to rents in this research.”

He said it was consistent with the Housing Technical Working Group’s previous research.

“[The previous research] found that if land is relatively restricted in supply, like it is in New Zealand, then financial changes like changes in interest rates or taxes will tend to get wrapped up in land prices rather than affecting rents so much,” Stephens said.

“What this really means is that the key driver of rents, the most important thing for bringing rents relative to incomes down in New Zealand, is the supply of dwellings, so building more houses.”

If a shortage of dwellings affected the housing market then it should be visible in rents as well as house prices “in roughly equal measure”, he said.

The research also found that during the study period, rents increased broadly in line with wages, but faster than inflation.

New tenancy rents increased by 83 percent, while average hourly earnings rose 87 percent.

In the same time period, consumer prices rose 54 percent, and house prices rose 267 percent.