CORRECTED-Personal finance editor Amanda Morrall looks at NZ's rental market and what tenants can do about rents

CORRECTED-Personal finance editor Amanda Morrall looks at NZ's rental market and what tenants can do about rents

(This article initially reported that an IMF report had estimated rents were up to 43% overvalued in New Zealand. This is incorrect. The IMF report said house prices were 43% over-valued relative to rents, which implies either house prices are too high or rents are too low, or both. apologises for the incorrect report and has withdrawn the substance of the article. We thank our readers and commenters for pointing this out.)

This article is republished as a report on the relative attractiveness of renting versus buying.

For young couples aged 25-29 looking to get into the housing market, mortgages are starting to look more attractive than rents. (Check out our rent ratio charts here)

Outside of Auckland and a few other commercial or scenic hotspots in New Zealand, rents are starting to match with housing affordability criteria. (Check out our new rent or buy section here). 

Assuming you have saved up enough for a 20% deposit on a house (which many couples would have through KiwiSaver if they got into at the start of it), 

With landlords dominating the housing market, it stands to reason that renters have not been a rowdy or particularly vocal bunch.

But with rising food and petrol prices, one has to ask how much longer renters will continue to withstand over-valuations before they start demanding lower rents or else move.

How much should you pay?

One's ability to pay rent, is obviously dependent on income.

While there are no official guidelines in New Zealand for how much of your after tax income should go to rent, the U.S. Department of Housing & Urban Development, suggest 30% is prudent.

Kevin Reilly, the coordinator for the Tenancy Protection Association, said that 30% figure was broadly in line with what most renters in New Zealand currently pay, but suggests the margins are changing quickly.

In Palmerston North, where rents on two-bedroom houses are up to NZ$800 per week, it is "not uncommon" for people to channeling 50% of income on rents.

The threshold is more than most can properly afford and as a result, fix-term leases are being broken when the moment of blown budgets dawns and credit sharks come calling, he says.

At the moment, 92% of tenancy applications are initiated by private landlords.  

If renters are under financial stress, the officials signs of it aren't all that well marked.

Rental arrears

Allan Galloway, manager service centre group at the DBH, said applications by landlords on rental arrears haven't changed much since 2007.

In the year from April 2007 to March 2008, there were 35,607 applications on rental arrears. That grew by about 3,000, from April 2008-March 2009 (the heart of the financial crisis) then progressively slid back toward the 2007 level.

A more pronounced sign of renter's distress is evidence in the applications of trying to get out of fixed term tenancies. The numbers have shot up from 312 in April 2007 to March 2008, up to 440 the following year, then 362 and 465 for the most recent year ending March 2011.

Galloway doesn't read much into those figures, attributing the spike in the fixed-term break rate to the earthquake in Christchurch.

"The market is deciding what the rent is,'' he suggests.

So what's the rental market worth?

Given allowances for unprofitable rental property offset against income tax and other structures favourable to landlords, it's difficult to know.

Active bonds held with the DBH (as of end of April) numbered 464,475, worth more than NZ$337 million. 

Galloway says that fact that more overall bonds are being lodged than refunded in recent years suggest the residential tenancy market is expanding. But for how long?

Buying cheaper than renting

Due to a softening in the property market, low interest rates, and cuts to income tax the gap between buying and renting has narrowed considerably.

For the first time since began collecting data on the house to rent ratio, housing affordability this month won out over renting, albeit for a small and well defined segment of the population. It does however depend on interest rates being at record lows.

For couples 25-29 on a average wage, with 20% deposit already saved and looking to buy a first-time home priced in the first quartile of the market, housing is more attractive than ever.(Check out our rent ratio charts here)

Outside of Auckland and a few other commercial or scenic hotspots in New Zealand, rents are starting to transect with housing affordability criteria. (Check out our new rent or buy section here). 

How to dig deeper

The nature of home ownership mandates a certain level of financial education when it comes to property values, mortgage servicing, insurances, and if it's a property investment, the expected rate of return. 

Whereas renters, at least those who have never bought a home, tend to choose a property on a set of practical considerations, usually relating to work, family, schools and in big cities, transportation. Income to rent ratio isn't often a calculation that comes top of the list even if it is a latent motivator. 

The naive assumption that neighborhoods are fairly priced according to market value needs to be questioned more closely.

The Department of Building and Housing is a good place for renters to begin their search.

In addition to the latest rental market analysis as well as a breakdown by neigbhorhood of rents with median, lower quartile and upper quartile rents.

Maynard said tenants entering lease negotiations or else renewing them should be prepared. Because tenants who simply submit to rental dictations that would appear to have less and less basis in reality, only serve to contribute to the problem.

Maynard suggest it is in the interest of landlords (particularly those looking for long-term, low hassle tenants who aren't going to be a investment liability) to listen.

"In a way, it's counterproductive to charge excessive increases because you could lose a good tenant. It pays to be flexible."

Short of major policy changes that even the playing field for property investors and renters, Reilly isn't optimistic. In fact, his pessimism is so engrained, he's given up on his children ever owning their own home.

"The most valuable asset they'll ever own is a car...affordable housing just doesn't make the radar screen in New Zealand. There's just this perception of every body being well housed. New Zealand is the land that time forgot.''

Get informed:

Find out how much rents are going for in your neigbhorhood before you sign a lease through the Department of Building and Housing's website.

The latest market analysis reports produced by the DBH:

Consumer Report magazine's primer for landlords and renters:

How often can my landlord increase my rent?

Rent increases cannot be less than six months apart and can only be made after the landlord has provided 60 days' notice.

Is there a maximum rent a landlord can charge?

No, levels vary according to demand and there are no restrictions on the amount by which rent may be increased.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Where on earth did you find an $800/week 2-bedroom place in Palmy?? $360 is the most expensive on trademe or The DBH link in your article has $250ish-280 as the upper quartile.

More facts, less sensationalism please.

Indeed $800/week in Palmerston North? That is remodelled 3+ bedroom homes in Remuera and Epsom money.