The Increasing Gap Between Rent And Wages

The property market has been a popular topic amongst budding entrepreneurs for at least the last quarter of a century. Gone are the days when a house was seen solely as a place of singular dwelling in order to raise a family. Whilst this is still the case, we can’t totally ignore the impact of the buy to let phenomenon. Low interest rates on bank savings and the uncertainty of pensions, have seen so many average investors seek to secure their financial futures. This in turn has caused a chain reaction which has led to the inevitable higher cost of rent for tenants.

As a landlord, your main concern will be investment property management as a way of ensuring your property works for you. You will no doubt want to ensure that your rents are collected on time and that the property is properly looked after. Having said this, you will also want to minimise your workload and not have to be checking on your investment every five minutes. You ideally would want to sit back and watch the money roll in.

With this in mind, the prospective investor will be wise to engage in the services of a rental manager. The rental manager is essentially the conduit between landlord and tenant. This practice serves to facilitate a smooth relationship between the two parties. In fact, in many private rentals these days, it is far more likely that rental agents will be the only point of contact from the point of view of the tenant. The tenant will typically liaise with the rental manager as the representative of the investment property management company which will have been entrusted by the landlord.

What’s actually happening in the market?

So, this brings us to the hot topic of the rents themselves. Rents have been increasing rapidly over the last few years. This is mostly down to the upward trend of inflation, but the problem has been compounded by the fact that wages have not been rising in line with that of inflation. This is a problem to families that have accommodation in the larger cities. Increasing rates for buy to let mortgages and higher insurance premiums have ultimately led to the landlords having no choice but to recoup some of these extra costs. This situation has obviously manifested itself in higher rents.

Another problem could be down to a landlord seeking rental appraisals. They may do this for one of two reasons or both. Firstly, they may need to secure extra financing on an existing buy to let mortgage or more worryingly for the tenant, use this appraisal to justify a further rental rise. This method is being used more and more with landlords securing the highest yield possible on their investment properties. This trend will only continue as more private individuals mostly using credit, actively purchase several properties for their investment portfolios. This is basically an attempt to ride out the low savings rates left remaining because of the banking crash over a decade ago.

The problem is that tenant families are left with very little choice but to pay these increasing rents. Buying a house is widely accepted to be out of the reach of most first-time buyers with house prices literally going through the roof. Even before an expensive mortgage is taken into consideration, a huge deposit will have to be sourced which for most will prove an impossible task especially whilst still having to pay rent. And it will be a rental cost that is increasingly harder to meet every month.

Whilst this may seem like nothing more than an initial annoyance, it will invariably lead to more profound consequences. With no other alternatives but to pay the rent to keep a roof over their heads, families will have to sacrifice other essential items. These could be anything from heating, electricity, water and even food. What we will be witnessing is an inversely proportional relationship between household budget and expenditure.

So, a tenant could ask his employer for a wage increase but there is no guarantee this request will be met with a favourable reception. One could even be putting his/her job at risk, particularly in areas of low employment.

What does this all mean for rent?

The consensus of many wise institutions is that monthly household expenditure should ideally not exceed 30% of gross income. However, in cities such as Auckland, we may see that this percentage has been surpassed and is most likely much higher. In fact, recent figures suggest that weekly rents in Auckland are increasing four times as fast as those of weekly wages.

There is no one reason for this upshift in rents. However, it has been observed that with the increase in net migration into the region, net wages have consequently been held at relatively low levels.  This may have also put some pressure on the requirement for affordable rents. With the nature of supply and demand, this has meant only one direction for rents.

We guess the question might be, ‘is there a solution to all of this’?  Well arguably there could be many approaches to take. One of those may involve enacting some sort of legislation to limit the ability of landlords to increase rent within a given timeframe. This however, may lead to hardship on the part of the landlords (and perhaps rental agents) as most will still have to live within the confines of increasing inflation.

With all of this in mind, it seems sensible that the only real solution would be for the government to commit to a program of increasing the country’s housing supply. Basic economic principles suggest that if there are much more housing options available for rent, then rents will certainly have to remain at equitable levels due to the increased competition. Whilst some may not agree with this approach (including its potential impact on the environment for example), it is an option which perhaps should be seriously considered. Only then will we know if this will be a viable long-term strategy as opposed to a stop gap.