Rising rent and food prices impact households

Rents are rising at the fastest pace since 2008.

Average rents rose by 0.3 per cent last month, but in annual terms, rents are running 4 per cent higher than August last year.

This is adding pressure on many households’ budgets, says Satish Ranchhod, Westpac senior economist.

He says while August’s rise in rents is not a massive increase on its own, the winter month usually has more muted rental gains.

“Landlords have been highlighting strong increases in operating costs. Many are also grappling with increases in mortgage costs and the related fall in property values.”

Ranchhod says combined, these conditions point to the risk of bigger than usual rent increases as the country heads into the summer months when many rentals roll over with larger increases in rents.

Food costs rising

Adding to the pressure is the cost of food, which is also continuing to rise at a brisk pace.

Food products are up 8.3 per cent over the past year. In part, that’s been related to earlier poor growing conditions which have contributed to particularly large increase in the prices for some fresh produce.

However, the pressure on food prices has been widespread, with shortages of many items globally, as well as large increases in production costs including fuel, fertiliser and packaging materials.

Combined, rents and food prices account for about 30% of the consumer price index (CPI).

“The strong gains seen in these prices signal a sizeable squeeze on many households’ buying power,” says Ranchhod.

“That pressure will be particularly pronounced for those households on lower incomes, who tend to spend a larger share of their incomes on necessities.”

Ranchhod says the strength in the rent and food prices also indicates upside risk to the bank’s existing forecast for a 1.4% gain in CPI in the September quarter. The RBNZ is also forecasting a 1.4% gain.

“While inflation is likely to remain strong in the near term, annual inflation is set to trend down over the coming year. While prices for many goods (especially imports) are still rising, they are not rising at the same rapid pace as over the past year. And in the case of fuel, prices have dropped back in recent months.”

Falling house prices

“More importantly, signs of cooling domestic demand are mounting - including the soft housing market data, where the rot has set in.”

House prices fell by another 1.4% last month - the ninth monthly fall in a row. House prices have now fallen 9 per cent from their peak in November last year.

The drop in prices continues to be heavily centred on Wellington in Auckland.

Prices in the capital were down 3.6 per cent last month alone and have now fallen by a total of 17 per cent. Similarly, prices in Auckland have dropped 14 per cent since the November peak.

The drop in other regions has been much less stark, with prices ‘only’ down around 5 per cent from their earlier peaks.

Ranchhod expects demand will continue to cool over the coming months. That will help to dampen domestic inflation pressure, and in turn will cap the rise in interest rates from the RBNZ.

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