Landlords planning to raise rents due to tenancy overhaul may struggle

Monday, 27 August 2018

Housing Minister Phil Twyford wants to make life better for renters.

ANALYSIS: The New Zealand Property Investors Federation released a survey about this time last year, which showed that about three-quarters of members would raise their rents if Labour got the chance to introduce its planned tenancy reforms.

On Monday, those reforms took another step towards becoming reality.

But if you're a renter worried about a big rent increase, you may not need to worry as much as you think.

At first glance, the argument that rents will rise makes sense.

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Many landlords operate on extremely tight margins. If they bought a house recently in one of the main centres, there's every chance that the rent they get from tenants does not even cover all their expenses.

If they don't make solid capital gains, the investment loses money.

In that sort of environment, you'd expect anything that made landlording a more expensive or difficult business, such as the proposed longer notice periods or the removal of their ability to expel tenants without reason, would lead to rises in rents.

But when you dig a bit deeper, it's not so clear.

Compare the rental property market over the past five years with the for-sale market.

House prices have shot ahead 55 per cent nationally in the past five years. By contrast, rents are up 25 per cent according to the Ministry of Business, Innovation and Employment.

Many landlords operate on tight margins.

Wages are up 13 per cent.

House prices rose because of increased demand and lack of supply, as rents do - but they also leapt ahead because of a dramatic fall in interest rates. It now costs about half as much to service $500,000 in mortgage debt than it did 10 years ago.

It's that affordability question that keeps a lid on rents. Rents don't rise as fast because there's a limit to what tenants can afford to pay.

Housing and Transport Minister Phil Twyford has revealed proposed rental law changes.

They might share houses more often or move to cheaper areas, but they can't come up with money that they do not have. If landlords try to charge more than tenants earn, they risk having properties left empty.

'We saw that in Wellington, when the student allowance went up, rents went up by exactly that amount. It's not a cost-plus exercise where the cost of owning goes up so they can put the rent up,' economist Shamubeel Eaqub said.

The move to annual rent rises may mean the increases are sharper when they happen, not necessarily a benefit for tenants.

Eaqub said the proposals were a long-overdue rewrite of outdated laws, needed now that so many adult New Zealanders were renting.

Gareth Kiernan, of Infometrics, said it could be expected that the changes would put some investors off, which would take some rental stock out of the market.

That would put pressure on rent prices – but those houses would then be sold to owner-occupiers, probably first-home buyers, who would then no longer be renters needing them, reducing demand.

He said while there might be temporary increases in rent as a result, it was unlikely to be sustained.

For any dramatic increase in rents to be sustainable, New Zealanders would also need to start earning a lot more. At this stage, there's little sign that's happening.