ERES Conference Edinburgh 2012

1. ERES Conference Edinburgh 2012 The Rise and Rise of the Private Rented Sector: insights from supply and demand system modelling in New ZealandProf Glen Bramley(Heriot-Watt University, Edinburgh, UKContact: g.bramley@hw.ac.uk; +44 (0)131 451 4605)with Prof Chris Leishman (Glasgow University)and David Watkins (Heriot-Watt University)

2. 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

3. 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

4. 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

5. 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

6. Formal Model Structure

7. Formal model contd.

8. 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% 1991-2006 • 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

9. NZ Rent Level Model (1)

10. 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?)

11. Stock share supply NZ (1)

12. 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 • 2nd 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

13. within-sample predictions (1)

14. Rent Level Model 2a

15. NZ Rent Change Model (2b) Pred & Actual Rent ChangeAuckland City (below)

16. 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

17. Private Lettings Supply NZ (2)

18. 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

19. 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

20. NZ Sensitivity Tests

21. 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..

22. 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