Long-term renting is the new normal
Renting is becoming more common, yet Tenancy Services received fewer new tenancy bonds in the last year than 1998.
Through the last few months, the rental market has taken a breather and as we are now in the slowdown for winter, it might be a few more months before we see any noticeable changes in rental prices. Behind the scenes, the rental market has been changing quickly.
Looking at the latest rental data for June 2020, my interest was piqued by the reducing number of new bonds lodged despite the renting population in New Zealand growing substantially. In total, over the past 12 months, only 140,000 bonds were lodged with the Tenancy Services branch of the Ministry of Business, Innovation and Employment (MBIE), the fewest for a 12-month period since 1998.
Since 1998, New Zealand has gained more than a million people, and Tenancy Services now holds almost two and a half times the number of bonds as it did then, and an additional 100,000 since 2010. However, with these changes, the number of bonds lodged each year is decreasing, and showing no signs of slowing, as Figure 1 shows.
The increasing total number of bonds, and the reducing numbers of new bonds lodged implies a significant increase in the duration of each bond. As shown in Figure 2, the average duration of a bond has been increasing since the turn of the millennium, and the trend has accelerated over the past three years. Since 1998, the average duration of bonds has risen from 13 months, to 34 months in 2020. Not only does this trend leave us with less reliable data around the market rates for rent (as only rents for new tenancies are recorded in the bond data), it also shows that our rental market is changing, and changing quickly.
This trend shows that for a growing number of New Zealanders, renting for a year and moving on is becoming a thing of the past, as people move toward longer term renting. With the trend showing no signs of slowing, long-term renting is looking like it will be increasingly common over the next few years.
Long-term renters on the rise
This may indicate the emergence of a divide in the rental market with an emerging group of longer-term tenants. Young couples or individuals that may have purchased a home in the past will now rent for a number of years, and want a secure and stable rental accommodation. This also provides landlords with more certainty in their property investments, with the reduced transaction costs of seeking new tenants regularly. This follows what can be observed in other developed countries where long-term renting offers similar benefits to home ownership but without the required debt.
The rental market still contains a large group of renters that are students, seeking short-term rental accommodation while completing their studies. This group is suited to short-term renting, as many will expect to move or return to their hometowns once the study is completed. For this group, relatively short tenancies of one to two years is expected to continue.
There are a number of other trends that have occurred over the past two decades that can be linked to the increased period of renting before home ownership. One example is the age of first birth for mothers in New Zealand, increasing from 27.4 years old in 1998, to 29 years in 2018.
Long-term renting can also be very beneficial for landlords seeking a stable return from their property. Longer tenancies reduce the transaction cost of regularly seeking new tenants, and avoiding any time untenanted between tenants.
As renting changes, is legislation keeping up?
With an economic reset possibly around the corner, we will be seeing new legislation, and new spending to see New Zealand through the economic uncertainty and establish a platform for economic growth. Housing has been a significant issue across New Zealand over the past decade, and as such, monitoring changes in the recent months has been a hot topic. This crisis presents an opportunity to resolve housing issues, the question is will it be taken, or will we have to wait for the next crisis?