Rent prices are linked to income, not house prices

Previously I’ve written about the hidden costs of home ownership, that housing is not the dream, so called property gurus, and false housing stories. Anyone would think that I am against home ownership.

I am not against home ownership. I am for maths and facts.

So that brings me to today’s short post based on a common misconception of current and wannabe landlords.

Rent prices are linked to income, not house prices

There is the narrative in the news that I have seen repeated over and over by landlords anytime there is an increase in the cost of home ownership that they will just pass on the cost to the renter.

Large increase in insurance or rates? “I’ll just increase the rent by just as much”.

Letting agents now charging fees to the landlord instead of the tenant? “I’ll just increase the rent then”.

Large repair bill? “I can increase the rents to cover that”.

Andrew King of the Property investors federation is just one who continues to spin that narative.

This is the type of thinking that gets people into financial trouble. If you buy a rental property thinking you can increase the rent whenever costs increase, then you will not be pleasantly surprised.

People can only pay what they can pay. They can’t pay any more than that. Renters don’t care how much your house cost or how much costs are increasing. All they care about is how much they can afford.

And with house prices and housing costs increasing much faster than incomes, renters can’t afford what most landlords want. So landlords have no choice to charge what the market will allow them, which in this current environment tends to be less than the cost of ownership.

This is because owning a house has become so ridiculously expensive in this country, that if you were to charge rent to a point where you were to have positive cashflow, then you would not have any tenants. The rent would be too high. As a result we have far too many properties purchased in the last 5 years that have negative cashflow.

Home owners are relying on the capital gains party to continue.

In the meantime, renters get to enjoy living for much cheaper than the home owner.

Just a basic search on trade me and it is clear to see how much cheaper it is to rent than own at current prices.

Here is the first property I found when I searched rentals in Auckland City.

A 4 bedroom house in Mt Roskill renting for $800 per week. As it turns out this same house is also for sale for $1,125,000.

If someone were to buy it for that price their weekly costs, assuming a 30 year 4% mortgage (very conservative) with a 20% deposit would be:

  • Mortgage interest: $687

  • Rates: $51

  • Insurance: $27

  • Repairs and maintenance: $190

    • I won’t include the cost of not being able to use the $225,000 house deposit in a investment account, as we will make the assumption that any increase in house price will match investment returns and they balance each other out.

Total weekly cost of ownership - $955.

This house costs $155 a week cheaper to rent than it does to own. An extra $8,060 in the renters pocket per year.

The owner wouldn’t be able to rent this place out for $955 a week because no one would rent it out at that price.

This is just the first house on the search. I can assure you that the majority of houses are like this at current house prices.

If you can find a house today that rents for more than the cost of ownership in the main cities I would love for you to send me the link. It is that rare.

House prices have got out of control and recent landlords will be in negative cashflow, especially in the main cities.

So please don’t go in thinking that tenants will pay whatever price you need to cover your costs. Renters don’t care.They will only pay what they can afford, which is generally less than the cost of your house at today’s house prices.

The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here