- Insulation, negative gearing and capital gains may lead to mass selling off of our rental stock
- 70,000 rental properties may be uninhabitable by July as deadline approaches
We have all seen the headlines. Teachers forced to bunk in with their bosses, over 10,000 households waiting for public housing, up from 4530 the same time last year. We have even seen disturbing headlines such as ‘sex for rent’. Almost daily now, we see stories across New Zealand of people struggling to secure rental properties and rising rents forcing people out of their homes.
In the last 12 months, we have seen sky rocketing rents. In many parts of New Zealand rents increased by over 10%. Queues upon queues of desperate tenants, battling to try and secure a battered, run-down rental property and being forced to pay more. In one case I witnessed in Wellington, about a group of twenty tenants turned up to a viewing trying to secure a tiny one bedroom flat in which the bedroom so small, the double bed of the vacating tenant had to sit in the lounge. Although habitable, it was tired, dated and more akin to something out of Victorian Britain. The asking price? A bargain at $410 a week. There was no shortage of applicants.
The young solo parent who lived in the property was being forced to move because she could not keep up with the rent. As I left the property, I couldn’t help but feel a sense of nausea and concern as to where this rental shortage is heading. It is not just limited to the cities.
In Gisborne, a place where traditionally there has been no shortage of rental properties, I went into an office where the weekly rent had increased by 25% over four years with nearly half of that increase over the last 12 months. Surely it wasn’t meant to be like this?
Things were going to get better for renters under this Government, weren’t they?
Housing was Labour’s top priority in the run up to the election in 2017 with campaign promises such as.
- Crack down on property speculators with the removal of negative gearing
- Improved rights for tenants with introduction of new legislation to provide greater security of tenure
- Pass the Healthy Homes Guarantee Bill that raises the standard of rental properties
- Ban letting fees
- Create a level playing field for first home buyers
- And of course, the most famous pledge of them all. Kiwibuild! 100,000 houses to build across New Zealand over the next 10 years
So, half way through their first term, how are things panning out? Not good if you are a renter.
You think things are bad now? Well, you’d better breathe in New Zealand, as the rental squeeze could get worse. A lot, lot worse as thousands of rental properties may come onto the market for sale in the Autumn due to non-compliance with new insulation standards leading to an even greater shortage of rental properties.
Why have things gone so badly wrong?
There are a multitude of reasons which we will examine, but ultimately, one of the main reasons is that the vast majority of investors, whom own one or maybe two properties have found it just too hard with the prospect of having to invest thousands of dollars to make properties compliant leading to diminishing returns. Then, add on the prospect of the removal of negative gearing which leads to the inability to offset losses against landlords personal income leading to a tax break. Many landlords have decided to cash up and sell as the cost of owning a rental property becomes too expensive without the required return.
Why has it become so hard?
There is so much change around legislation and taxation that many small landlords simply no longer see property as a viable investment and have chosen to put their money elsewhere. This has led to an increase in sales to first home buyers, however the pool of tenants has remained the same leading to an even greater increase on demand for rental properties and in particular, three to four-bedroom housing. The basic rules of supply and demand has led to the inevitable increase in rents.
Increased rents would surely make landlords happier? Agreed, but even with the increase in rents, this will likely not cover the increase in expenses facing many landlords across the country.
Unfortunately, this Government may have drastically underestimated the potential consequences to some of their policies. It now seems ironic, that the people they were elected to help are being punished through some of these policies yet the big wealthy landlords, whom they promised to target are probably laughing all the way to the bank. Cashflow is king for those big landlords and many of the savvy long-term investors may not face the same debt to equity ratio and other operating expenses as a percentage to their income.
In defence of the current Government, not all the blame should fall on their shoulders. The previous Government has to take some of the blame as do many landlords, who it has to be said, have neglected their rental properties for years.
So, we try to break it down and examine why things have gone so desperately wrong and why things are only going to get worse before they get better.
1st July Insulation deadline
Back in 2016, legislation was passed that meant that every rental property in New Zealand would have to be insulated where it was practicable to do so. The deadline for completion is the 1st July 2019. That date is fast approaching and there could be as many as 75,000 properties that will soon become non-compliant and technically, unable to be rented.
The Housing Stocktake of New Zealand that was compiled last year estimated that there were approximately 580,000 dwellings being used in the private rental sector (PRS) and approximately 37% of the population were living in rental accommodation. Many of these properties were uninsulated. This gave landlords three years to get their properties compliant and insulated before the standards became mandatory.
Typically, many landlords were oblivious to this or simply just put it off and ignored it. We estimate that there is still approximately 10 to 15% of rental dwellings non-compliant and the insulation industry does not have the capacity to get the work complete. Best estimate is that 50,000 dwellings can be insulated a year according to one leading insulation provider. We believe that there could be as many as 75,000 non-compliant properties when the 1st July 2019 deadline strikes. Any landlord with a dwelling that is not insulated by 1st July 2019 could well face $4,000 exemplary damages through the Tenancy Tribunal and be issued a work order ensure that the work is done. Ignore that and you could face an extra $3,000 in exemplary damages.
Because many landlords have been slack or have left it too late, we believe that we will see a surge of rental properties put on the market for sale as the deadline approaches. The reality is that much of our rental stock is in poor condition and many landlords will not want to throw money anyway spending thousands to make a property compliant. This could be good news for first home buyers and savvy investors but bad news for tenants leading to an even greater shortage of rental stock.
Tenancy Compliance Investigation Team (TCIT)
These guys mean business and it appears that they are targeting Property Management companies up and down the country. Lots of companies have already been audited by the TCIT. Last year, Paul Davies Senior Operations Advisor TCIT warned Property Managers that that they were being targeted and it would be them they would be holding to account if landlords did not get properties insulated. No Property Management company wants to face $4,000 of exemplary damages and have the brand negatively portrayed across the media.
Therefore, the only real option they have is to walk away from the potential thousands of properties under management. Rather than manage the properties themselves, many landlords will again, probably choose to sell, as getting the property compliant will be too costly, too hard and too time consuming. Others will simply form a ‘black market’ of rental properties as many landlords will take the gamble of not getting caught out and prey on tenant’s naivety.
The Healthy Homes Guarantee Bill
This is a bill that we do support as the quality of rental properties in New Zealand is well below the acceptable standard that you would expect from a country of our stature. Literally hundreds of thousands of tenants up and down the country are living in cold, damp rental accommodation.
In our opinion, this bill is probably one of most radical changes to housing legislation that there has been in this country. Soon, standards will be set as to what the indoor temperature of a rental property must be achievable. This is likely to be 18 degree Celsius, as per guidelines set by the World Health Organisation. This means that tenants must have the ability to maintain the indoor temperature of their rental property to 18 degree Celsius regardless of what the weather conditions are outside. Failure to do so will lead to a breach of Landlords Responsibilities with a further $4,000 exemplary damages facing non-compliant landlords.
Nothing wrong with that, however this will likely lead to a further reduction in the rental stock.
Let’s take Dunedin as a prime example. Many of the student accommodation in the city is of an age and condition that would probably make if financially unsustainable to invest the tens of thousands of dollars that is required to make the property compliant.
A potential consequence of this is that the landlords simply do not do the work and leave the properties derelict, as again, to rent them out would be a breach of the RTA. Instead, many may just land bank and wait for developers to buy up the land that their properties sit on, leading to a greater shortage of rental stock. There could be streets of empty, boarded up derelict housing whilst the thousands of students scramble for what little rental stock there is. Investing in a good quality Dunedin student rental may not be a bad idea.
Attack on Negative Gearing
When we are demanding that the approximate 400,000 landlords across New Zealand invest thousands of their hard-earned dollars into their rental properties, the worst thing we can do hit them with a stick and remove the ability to offset rental losses against their own personal income. In many cases, landlords get a significant tax rebate. This rebate could be used to finance many of the much-needed improvements. Yet with this taken away from them, the financial return simply no longer stacks up. Approximately 90% of the landlords in New Zealand own only one or two rental properties. Therefore, this tax break is vital for the financial viability of their investment.
In my opinion, this is Labour’s biggest mistake. From the outset, they have said that the largest exponent of negative gearing is large property speculators. They could not be further from the truth. These landlords probably run their business as a profit and therefore only benefit from the rising rents.
How ironic it is that the biggest exponents and benefactors of this policy are the large landlords Labour set out to target. Increased rents by over 10% per annum means that they find themselves making more and more money.
The best thing that the coalition can do is park this policy until all properties comply with the Healthy Homes Guarantee Bill, or even better, remove it from the table completely. That, however, is unlikely to happen.
Proposed increase of tenant rights
The increasing debate around tenants’ rights has left many landlords feeling that they have been unfairly targeted with many believing that things have gone too far. I for one have no problem with some of the proposed changes such as pets, limiting rent increases to once a year and tighter legislation around Boarding Houses.
However, when you have to give a valid reason to end a tenancy or go to the Tenancy Tribunal to end a tenancy, then many feel as though property ownership rights have been taken away from them.
Landlords have already been hit unfairly with tenants no longer being liable for accidental damages after the infamous Osaki case. The proposed Residential Tenancies Amendment Bill No 2 does address this to some extent but it does not go far enough.
If a tenant is allowed to have a dog by right, and the dog damages the property, then the landlord should not have to spend a cent in repairs to damage caused by the tenant.
Tenants already have a multitude of rights; the main issue is that many do not know how to exercise them. If things go too far in the tenant’s favour, then many landlords again will weigh up their options and if it becomes too hard, many throw the towel in.
There are other factors as well such as the artificial shortage of land which seems absurd considering less than 5 million people live here and our country is not much smaller than Japan, yet they can accommodate 128 million people. Go figure!
Then, add on the cost of building and is it any wonder that Kiwibuild has been an absolute flop?
The proposed implementation of capital gain taxes will also have many investors nervous with the prospect of having to pay a proportion of the capital gain to the state in taxes.
Overall, however good their intentions are, all of these factors are leading us to a potential crisis point with rental accommodation and things will get worse before they get better.
I feel the coalition government are trying to rush too much policy through without taking stock and looking at the potential fallout. I for one agree with many of the things that they are doing such as making it compulsory for all rental properties to be insulated and the passing of the Healthy Homes Guarantee Bill.
However, the targeting of private rental sector landlords is short sighted and claiming that speculators are the biggest exponents of negative gearing is factually incorrect.
At a time when we need our landlords to invest in their properties attacking negative gearing is not the right solution and if anything, it is making matters worse. The potential for mass selling of our rental stock leading to increased rents is a realistic prospect.
Whether many on the left of the political equation like it or not, New Zealand needs a strong and professionally run private rental sector. Targeting them has simply backfired