School of the Built Environment The Rise and Rise of the Private Rented Sector: insights from supply and demand system modelling in New Zealand Prof Glen Bramley (Heriot-Watt University, Edinburgh, UK Contact: +44 (0) ) with Prof Chris Leishman (Glasgow University) and David Watkins (Heriot-Watt ERES Conference Edinburgh 2012

School of the Built Environment Overview of Paper Striking increase in PRS in UK, NZ and other countries - need to understand and model change in wider market context Selective literature review Theory and expected determinants on demand and supply sides Formal model structure New Zealand background & context Local pooled c-s models for rent level and stock share Regional annual panel model for new let rents (level & change) and lettings flow (+ turnover) Simulations for NZ using HNZC model - baseline predicted trajectory - impacts of variant scenarios Conclusions

School of the Built Environment Literature Relatively little recent lit on fundamental relationships between rental & owner markets – classic US material from 1980s-90s Quite a lot on deregulation impacts, on specific aspects of market behaviour (search, time on market, size of landlord) Somewhat puzzling differences between major countries e.g.Germany vs UK/US/Australasia in significance of security & regulation Focus on changing roles of sector in housing different groups including those in potential need

School of the Built Environment Theory & Drivers of Demand Demand decomposed into: household formation, tenure choice, quantity/quality of housing services - PR demand is +ve rel to hhd form but –ve rel to choice/ability to buy Affordability & ‘user cost’ of OO imp – prices, int rates, cap apprec? Potential mobility & mobile groups imp for PRS Increase in PRS demand reflects (some) demog change (e.g. singles), int migrn, HE, fiscal factors (marg), decl social lets, but unaffordability of OO a key factor How to model demand: stocks vs flows; quantity or rent (inverted demand); geographical scale (sub-region) & spillovers Demand may have increased, but so may supply, so rents might not rise so much; rents may also be slow to adjust

School of the Built Environment Theory & drivers of supply Regulatory regime (UK regulated to 1989, NZ not) Given deregulation, rents should impact +ve on supply Opportunity/user cost based on price, interest rates, running costs should be –ve Potential capital gain, probably based on recent past, expected +ve Cyclical effects, esp ‘involuntary landlords’ (owners unable to sell) Overall new build supply (but most supply is from tenure switching) Particular house types e.g. flats, terraces Tax regime (not big changes in periods studied) Wealth distribution (potential investors with spare capital) Alternative investment returns, eg. stock market, pensions

School of the Built Environment Formal Model Structure

School of the Built Environment Formal model contd.

School of the Built Environment New Zealand – Context & rationale NZ PRS always larger than UK, despite OO dominance, but reflecting small SRS as well as l. t. deregulation PRS grew from 20% to 29% PRS main option for low income households in potential need; affordability & security issues Relatively good data, including 5 yr censuses with rent & income data, and quarterly/annual data on rents & numbers of new lets (Rental Bond system) Descriptive analyses show large recent and expected rise in ‘intermediate’ renters and better off renters NZ saw big economic changes in 1980s/90s, with much widened inequalities 2 distinct pairs of models (a) pooled census C-S of LA’s (4 periods); (b) annual time series panel of 15 regions x 19 years

School of the Built Environment NZ Rent Level Model (1)

School of the Built Environment Demand (Rent) findings NZ (1) Supply (PRS %) has moderate –ve effect (low partly due to substituteability between areas); Unaffordability of OO +ve Household growth rate +ve; Vacancies –ve not signif Flats strong +ve Working hhds –ve; Higher (degree) qualifs +ve Unexpected results for younger & small hhds (-ve) (reverse causation?) Turnover +ve; cities dummy –ve (quality?)

School of the Built Environment Stock share supply NZ (1)

School of the Built Environment NZ Supply findings (1) Strong persistence in stock share (0.83 after 5 years) Rent level sig +ve (elas 0.31 stock) House prices sig –ve (elas -0.15); also mort in rates (-0.12) Recent price growth weak +ve (stock, 5 yr) New build (dwg growth) –ve (stock mod) but sig 2 nd homes & 2-bed dwg marginal +ve Ethnic minorities sig +ve (demand effect?) Some concerns that specification of this model is not ideal Simulations based on this show surprisingly large growth in sector

School of the Built Environment within-sample predictions (1)

School of the Built Environment Rent Level Model 2a

School of the Built Environment NZ Rent Change Model (2b) Pred & Actual Rent Change Auckland City (below)

School of the Built Environment Results of Model 2 Rents Modified model based on subregional annual panel data – new let rents, with flows approach to supply (lettings, turnover) Current active market, better estimate of economic & financial effects, spatial spillovers & lags Strong effect from lagged rent Lettings supply –ve Mortgage cost +ve, unemployment –ve, qualifs +ve Demographic growth +ve Dwelling size effects different State housing +ve – unexpected, but Auckland proxy Partial adjustment formulation may be better Time series drivers predominate

School of the Built Environment Private Lettings Supply NZ (2)

School of the Built Environment Supply Results Model 2 Model is for flow of lettings, with endogenous rents and turnover Rents +ve but relatively low elasticity Stock share and turnover +ve as expected Spatial effect (-) implies substitutability Vacancies +ve New build strongly +ve (unlike model 1) Recent house price growth –ve not signif Turnover function reflects mortgage int rate (-ve), 2-bed (+) vacancy rate (+) high qualifications (+), younger households (+), Maori/Pacific (-) Stock change can be inferred from lettings & turnover predictions

School of the Built Environment Baseline scenarios NZ Using Model 2 Rise in PRS share continues Corresponding falls in OO and State housing Prices more volatile than rents Rents pretty flat in future

School of the Built Environment NZ Sensitivity Tests

School of the Built Environment Comments on NZ sensitivities Poorer economic performance would reduce PRS % in long run, while reducing rents a bit (altho’ affordy worse), & vice versa Worse recession would have bigger short run effect but smaller persistent long run effects, in same directions Adverse financial conditions would increase PRS % & raise rents slightly; vice versa for favourable financials Low supply of new build would have modest effects, reducing PRS %, & vice versa, with minor effect on rents - however current model suspect for low impact of supply on prices..

School of the Built Environment Conclusions Revival & growth of PRS a big story in many countries, but not adequately understood or modelled yet Possible to develop reasonable demand (rent) & supply models at sub- regional scale, with mainly plausible effects Explaining rise is easy, but relative importance of factors not clear a priori In NZ (like England) both demand and supply shifted out, meaning bigger sector accompanied by only modestly higher rents; timing different Demand side factors of affordability (inc credit rationing), mobility, income levels, declining SRS (UK) are supported; also demographic growth (but household type effects less clear) Supply side factors include rents as expected (moderate elasticities), but role of house price level & change less clear, with limited support for capital appreciation motive; new supply and house types are generally significant; difficult to capture wealth effects but alternative investment opportunities probably important Future prospects are probably for more growth in sector with only moderate rent rises Composition of sector broadening as scale increases