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Frank Newman

High rise rents and housing costs

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New legislation banning the charging of a letting fee has past its final reading in Parliament. From 12 December it will be unlawful for a property manager to charge a letting fee. Just to recap, currently a property manger may charge a letting fee of up to one week’s rent to cover their time and costs involved in processing tenancy application forms and preparing the tenancy agreements. A landlord is not able to charge the fee if they DIY manage their property so for the 50 or 60% who self manage their rentals, the change will have no impact whatsoever.

Housing and Urban Development Minister Phil Twyford estimated letting fees were costing tenants “up to” $47 million a year, saying letting fees were “unfair” and had “no economic rationale”.

He said it was unfair because the property manager is acting on behalf of the landlord who has engaged the property manager to do the work for them. The argument is that it is the landlord’s choice to use a property manager so it should be they who incurs the cost.

The “no economic rationale” argument is on the lines that there is no relationship between the letting fee charged and the time and cost involved in processing a tenancy application, which is probably about the same regardless of the weekly rent.

Opponents of the change say it is “fair” that the tenant should pay the letting fee because it is their application that is being processed, and tenants have a choice of renting a property via a property manager rather than directly from the landlord. They also argue that rents will increase as a result – the NZ Property Investors Federation says that could be as much as $10 a week.

I see the logic in the Minister’s points – especially that the landlord should be paying for the service because they have engaged a third party to manage the property. However, I disagree with those who say the change will not increase rents.

Property managers make between 15% to 20% of their total income from letting fees. I doubt many can afford to lose such a significant slice of their income and remain viable. They will therefore have to recover it elsewhere. Most property managers work hard for what they receive and the truth is that some tenants are extremely difficult to deal with, which is why many landlords pass the job onto them in the first place.

The question is, how will property managers recover the income that will disappear on 12 December? They will have to charge landlords more. In simple terms, a property manager charging 8.5% of the gross rentals would need to charge 10%.

Some landlords will accept that as just another cost to bear. Some will take the view that the management cost has become too high and they will manage the property themselves. Others will ask their property manager to increase the rent to recover the cost.

In my view, abolishing the letting fee will be one of a number of factors that contribute to rising rents. Landlords are already increasing rents to cover the cost of insulation and intend to do so again when the Healthy Homes legislation introduces new heating and ventilation standards.

It seems like the rental market is going through a government-driven price transition at present. As the legislative changes kick in landlords will increase rents – and tenants will have little choice but to accept it, unless of course they win “Lotto” – as did the Auckland couple who “won” a KiwiBuild home.

The PM and Housing Minister literally made a song and dance about the handover of the first KiwiBuild home. It was quite a media event with Dave Dobbyn singing Welcome Home, toothy smiles, uplifting speeches, and self-congratulations all around.

And the lucky winners of the home were a lovely young couple – she is about to graduate as a doctor and he is an expert in online marketing. She likened being drawn from the ballot to winning Lotto, while he took to Facebook to discuss the immediate capital gain they would make, which is reported to be about $70k.

This really points to the absurdity of the KiwiBuild scheme. It will not help a low income household at all – even “cost” price is too great, so those who are not on a wage on a par with a student doctor and IT expert will have to continue to rent and pay more as rents rise, thanks to all of the new rental-housing related regulations that the Government is bringing in.

To recap, the cost of the KiwiBuild homes will be $650,000 (including GST) for a three-bedroom house, $600,000 for a two-bedroom one, and $500,000 for a one-bedroom place in Auckland and Queenstown; and $500,000 for houses built elsewhere. To be eligible for a KiwiBuild home, a buyer must:

  • Be a first-home buyer or “second chancer” (being those who have previously owned a home but are through adverse circumstance are in a position similar to the first home buyer);
  • Be a New Zealand citizen or resident;
  • Intend to own and live in the home for at least three years;
  • Have an income below $120,000 if a sole purchaser or $180,000 for a couple.

The income thresholds are so high that around 90% of all income earners and almost 100% of first home buyers will be eligible for a KiwiBuild home.

Ironically the three years that the homes must be kept is two years less than the five-year timeframe for the Brightline test, which treats gains on the resale of rental properties or second homes and baches as income for tax purposes. Five years was set on the presumption that those who sell within that period are deemed to have purchased with the intention of resale, and therefore should be taxed. From this one can conclude that the government does not mind people buying a KiwiBuild home with a short-term (and tax free) profit motive in mind. Buying a KiwiBuild home at cost, and selling it three years later, will be a nice earner, as the lucky chap who won the KiwiBuild home alluded to on Facebook.

The Minister acknowledges that keeping the costs within the KiwiBuild cap will be a challenge, the major ones being: “land availability, workforce constraints, consenting time frames, development and build times, and growth capacity constraints”.

Of course, these are the very same “challenges” that all developers and builders have faced for many years now and have caused housing costs to skyrocket. 

In truth, the “housing crisis” is really a land and building cost crisis. If it were described as such then the focus of attention could be directed at a practical solution rather than a political one.

To reduce land and building costs the Housing Minister needs to tackle the issues that are causing the private sector to increase land and building costs. Here’s what he could do:

  • Cut local council red tape and make planning rules more permissive. The uncertainties attached to giving council staff discretion add to the costs, create delays, and increase risk. That risk must be compensated via higher profit margins, forcing banks to be more cautious about development lending.
  • Bring back on-the-job apprenticeships and require fit and able unemployed people to do labouring work. If that’s not enough to deal with the labour shortage then allow all builders to hire migrant workers to do the job, at remuneration levels of their choosing. Is that really any different from buying cheap goods from China?
  • Get rid of the over-protective health and safety regulations which are adding tens of thousands of dollars to jobs.

I have come to the view that the Resource Management Act has become so captured by council planning staff that the planning role should be removed from local councils entirely. The new Ministry of Housing and Urban Development would seem like the appropriate vehicle to take over the job. While this still leaves planning in the hands of legions of planners, most with a self-serving pro-regulation world view, which is a problem in itself, at least central government could exercise greater influence to bridle their excesses. Under the current regime, central government has virtually no control over councils and I think it is fair to say that local councils have lost control of their planning staff.

While the new government is proposing to change the RMA (yes, yet more changes) those changes will do nothing to address its fundamental problems. It is more likely the changes will make it even more costly and more time consuming for applicants than it already is.

The simple truth is that the free market would be able to deliver affordable housing if local council planning rules were ‘enabling’ rather than ‘disabling’. Engaging with councils over consenting issues has become a nightmare – even obtaining a building consent takes months rather than weeks, and in many cases home builders find they also have to obtain resource consents because council planners have lowered the threshold bar on issues like vegetation clearance, earthworks, building height, building site, and “reflective” colours.

KiwiBuild will not make houses affordable for low income people.  KiwiBuild is a political distraction. It’s nonsense. The new Government has done nothing to address the regulatory issues and restrictive local council planning rules that have caused land and building costs to become the problem that they are. Until they do, housing costs will continue to remain ridiculously high and out of the reach of most people – except those lucky enough to have a KiwiBuild windfall and make a tidy $70k.

What KiwiBuild will do is buy the government five years or so during which time it can say it is doing something to correct a problem created by the previous government.