Why Rents Will Go Up in 2025

Five reasons rents are on the rise

Rental prices are on the rise this year with economists expecting at least a 5% rise over 2024. That’s on top of rental prices already reaching an all-time high according to Trade Me’s latest Rental Price Index. Data from other sources confirms this. So, what is pushing rents up?

Population growth and interest rates are key to pushing rents upwards, but there are multiple factors at play. Read on to explore the immigration, construction challenges, financial burdens on landlords, and the impact of recent policy reforms that are pushing rents beyond record highs.

Like in any market there will be winners and losers. Those with investment property and little-to-no mortgage are the obvious winners. It looks like tenants (renters) will be in for a tough year, but so might some landlords due to rising costs. Let’s take a closer look at the year ahead so you can make better investment decisions going forward, with the caveat that nobody is a fortune-teller, so take what any expert says with a grain of salt!  

1. Immigration Wave: High Rental Demand

New Zealand has witnessed a substantial increase in net migration, with a net gain of 129,000 people in the past year alone. That equates to a 2.5% boost to our population, a huge increase. As we pointed out in a previous article on house prices, high immigration puts immediate pressure on an already strained housing and rental market.

Going back to Economics 101, economist Tony Alexander says simple supply and demand mean rental prices will go up. “If demand rises while supply falls then prices definitely go higher than would otherwise have been the case.” That’s exactly what’s happening in New Zealand. Demand for accommodation is soaring with the new people who have flooded into the country.

2. Building Blues: The Housing Shortage Dilemma

In a healthy market of any kind, supply balances with demand.

This is not the case with the New Zealand property market, as the supply of housing is slowing down. In the year ended September 2023, Stats NZ reports that the number of new dwellings consented was down 20% compared to the previous year. New Zealand can’t seem to build enough houses — ensuring rents rise.

The nation grapples with a persistent housing shortage, and the slow pace of new construction projects exacerbates the problem. As demand outstrips supply, the imbalance further intensifies, creating a perfect storm for rising rents.

Consider the existing housing shortage as a foundational issue. New Zealand faces a shortage in houses, a challenge that has persisted over the years. The slow progress in constructing new homes fails to address the current shortfall and hampers efforts to keep pace with the expanding population. Consequently, the mismatch between supply and demand continues to drive rental prices upwards.

This issue has persisted despite the best efforts of successive different Governments, as solutions from politicians of any colour just seem to make matters worse (remember KiwiBuild?). There is increasing acceptance the root cause is over-regulation restricting housing supply, zoning restrictions, planning costs, and other construction compliance costs. However, there’s no immediate fix on the horizon.

‍Learn more: why do cities become so unaffordable?

3. The Ongoing Financial Strain on Landlords

Rising rents are tough on renters but they also reflect higher costs for landlords. Rising council rates, increased insurance premiums and higher mortgage interest rates have all shot up over recent years. This puts a squeeze on landlords’ profit margins. The costs are everywhere:

• Dwelling insurances costs soared by 21.2% year-on-year, according to the most recent data. Insurance Council of New Zealand chief executive Tim Grafton put the rise in home, car, and contents insurance down to three factors: high construction costs, insurers needing to recoup losses from the series of severe weather events in the North Island earlier in the year, and rising reinsurance costs.
• We’re all surely aware of how interest rates have increased to combat inflation, and while there’s light at the end of the tunnel as interest rates are expected to moderate by the end of the year, many people with a mortgage are still coming off low fixed term rates and face doubling or tripling of their mortgage interest bill.
• Many councils are contemplating rate hikes of 10% to meet increasing costs, and most councils have proposed or already started some of the largest rate hikes in decades. One source suggests Wellington residents face hikes of 15-20%, after average yearly increases over the last three years of over 10%. In Hamilton, ratepayers are facing even more: an eye-watering rates increase of 25.5% this year!

Such significant increases in outgoings sees landlords with little choice. Property owners must offset these increased costs by adjusting rental prices, as business owners, they are left with little choice but to transfer these burdens to tenants.

4. Policy Ping-Pong: Changing Rental Laws

Our previous government implemented multiple policies aimed at the housing market. They aimed to give renters more stability and tried to cool the housing market. These policies included limiting rent increases to once a year, more stringent healthy homes rules, extending landlords' notice periods to 90 days, and banning letting fees. While the intention behind these policy reforms is clear – fostering a more stable and secure renting environment – adding red tape and increased risks to landlords was probably always going to result in landlords looking to recoup more from tenants.

Another major factor was the government’s decision to remove interest-deductibility. Previously, the cost of doing business was able to be deducted (like in all other industries). The decision to remove that again put upwards pressure on the cost of being a landlord. 

In a positive development, the new government will begin the reintroduction of interest deductibility from 1 April 2024 (starting at 80%, moving to 100% in 2025).

“The interest deduction denial was unlikely to achieve a great deal more than an increase in rents. It was a bad law, and there are good reasons for it to be gone,” writes Alison Pavlovich, a senior lecturer in the School of Accounting and Commercial Law, at University of Wellington.

This change means that investors will be able to deduct 80% of their interest costs from rental income, offering some relief from financial pressures.

In any case, it now costs landlords more to do business than it did five or so years ago. Landlords have more regulation to comply with, especially more stringent healthy homes standards, and these costs are just one more thing that underpin sustained upward pressure on rents.

5. Rents in This Country Always Go Up

MBIE publishes accurate data on New Zealand average rents. Tenancy Services is responsible for collecting details of bonds that tenants provide to landlords when renting a property through their department. This data paints a clear picture.

Over the last 30 years rents in this country have hardly taken a backward step. Rents did plateau (go sideways) for a year or so, during the 1997 Asian financial crisis, then again just after the 2008/09 Global Financial Crisis, but otherwise, they have marched steadily upwards at an annual growth rate between 4.5 to 5.0 percent. In other words, rents have consistently increased in New Zealand, with barely an exception.

Any regular reader of this website will already have thought “past performance doesn’t guarantee future returns”, or “just because rents have risen consistently over the last 30 years doesn’t mean they will do it again”, but, when considering all the other data available to us about immigration, housing shortages, cost pressures on landlords, and so on, expecting another five percent rent increase this year seems quite reasonable.

The Bottom Line: New Zealand Rental Prices Will Rise

It seems clear: rents will march up this year. This is underpinned by a massive increase in inward migration, housing shortages, construction issues, and ongoing financial pressures facing landlords. This has created a challenging environment for both renters and landlords alike. Recent policy reforms, including the removal of interest deductibility, only made it worse.

While there is good news with the reintroduction of interest deductibility, and hopefully lower interest rates, the impact on rental prices remains to be seen and probably won’t be visible this year. Nor will policy changes fix current the mismatch between housing supply and demand anytime soon.

This poses both a challenge and an opportunity for investors and renters. Reading the tea leaves and seeing higher rents ahead, it maybe the right time to act. That might mean as a tenant negotiating a year-long tenancy agreement at a low rate, or taking the plunge to buy a rental property, or just keeping up with trends until you’re ready to do one of those things. Knowing the market means you can better plan your future.

Those in a position to invest in property can still find some great deals. If you get in touch, it would be our pleasure to discuss your situation and explore what opportunities might suit your unique circumstances.