There has been quite a bit of media attention on increasing rental prices recently. This is a common occurrence at this time of the year, as many people are change their circumstances in the new year and University Students are coming back at the start of the new academic year. But does that mean we can all put our prices up?
The rental statistics shown below would suggest not. Rental prices during 2011 rose by 2.1%, which was broadly in line with general inflation which increased by 1.8%. However not all areas had increases.
Auckland rental prices have been the standout over the past year, with increase between 4.8% and 6.8%.
Hamilton, Tauranga, Lower Hutt, Christchurch and Invercargill had average rental increases, while the rest of the main centres saw rents stagnate or fall slightly over the past year.
In a perfect world, rents should really have increased by around 7% over the past year. That would have kept them up-to-date with inflation and the impact of removing building depreciation as a tax deduction.
However pricing for any business does not necessarily reflect industry cost increases. This is reflected in the fact that rents did not increase by 7% in any of the main areas, although Auckland came very close.
When considering the price of your rental property, the ability of tenants to afford an increase also has to be considered. The economies in different parts of the country can differ substantially, with some doing well and some struggling. If unemployment is high and wage increases low or non-existent in the area you have rental property, then you may not be able to increase your rental prices despite cost increases.
Another potentially key factor in rents not rising by 7% was the fact that mortgage interest rates, a large part of total expenses for many rental properties, is at historically low levels. This has reduced the impact of other cost increases and the depreciation effect. In fact many rental property owners may find their cashflow situation is actually improved over the past few years despite the negative impacts of general inflation and depreciation tax changes.
Many rental property owners will not feel the need to increase their rental prices because of steady or improved cashflows due to low interest rates; however this could be a mistake.
Mortgage interest rates do not look like they will increase any time soon, but they will increase at some point. This can happen quickly and if rental property owners put off rental price increases till interest rates actually start to rise, they may not be able to increase them sufficiently.
If rents increase suddenly, rather than gradually, many tenants will be caught out and respond by moving to cheaper properties, smaller properties or cheaper areas. This reduces demand for rental property at the same time that your largest expense is increasing.
I suspect that many rental property owners will not have realised the impact that the depreciation changes will have on their cashflow until they complete this year’s tax return. This may prompt them to increase their rental prices.
So even if your cashflow has improved over the last few years, it may still be prudent to examine your rental prices and adjust them upwards before you see your cashflows dropping.
|Year to Dec 11||Two years to Dec 11|
| Above average Rent increase |
| Average rent increases |
| Below average rent increases |