Accidental landlords and rent

There is a popular story going around that rental growth has slowed because of rising numbers of “accidental landlords”.  These are people who brought a new house to move into – but haven’t been able to sell the old house, and so have become landlords.

Now, given that we are supposedly in a position of housing “under-supply” this argument holds little water with me.

Think of it this way – say the housing stock is fixed (which it pretty much is at the moment).  When someone buys a new house they are buying a house, cool.  Now the other house would normally be sold – but it isn’t it is rented.  As a result, we know that the “supply” of rented houses goes up – that seems to be the argument for the rent story.

However, the housing stock is fixed – implying that there is now one less “owned home” out there.  As a result, there should be another household looking to rent, increasing demand for rental property.

Given this I can’t see how more people becoming landlords with a fixed housing stock actually influences the level of rents.  Off the top of my head four theories of what is going on are:

  1. Accidental landlords are less interested in maximising profit – and so put downward pressure on the rental price,
  2. Lower interest rates have lowered the cost to property owners.  As property owners follow a “markup” rule of thumb this has reduced the rents they charge,
  3. Rents are set on house prices (rule of thumb) which are falling,
  4. The value of keeping a tenant during a recession is higher – leading to lower rents being charged.

Only the first theory supports the “accidental landlord” argument – and I find it one of the least convincing …

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  • Dave

    I have been watching (1) in action in Christchurch. You see a property on the market to sell for six months to a year, then the owner gives up and it appears on the rental market. The accidental landlords often start by setting a rent that will cover their mortgage. The property then sits vacant for weeks if not months, gradually reducing the rent until it clears. This has resulted in a record number of vacant rental properties in Christchurch, which has reduced rents considerably. I hear the market is not quite so loose in Auckland but rents there have been almost static since 2008.

    Your (2) and (3) are non-starters, look at the trends of house prices and interest rates vs. rents over the last decade. Rents only rise roughly in line with wage inflation. If people can’t afford the rent they go back to live with Mum&Dad, or start couch-surfing. (4) is a factor but landlords hate to reduce rent for a sitting tenant. We have had a token 2% increase in the last 3 years which given wage inflation is as good as a reduction.

  • Hi Dave,

    Thanks for the interesting comments.

    I have actually heard the effective interest rates are a strong explanatory variable for rental changes in the past – it would be interesting to have a look over the data with it. If that was the case we should see growth slow even more rapidly heading forward – which seems a bit difficult to believe 🙂