Labour leader Jacinda Ardern announced a set of new terms for residential tenancies yesterday, and was immediately – and predictably – told this would badly affect landlords and would have the opposite effect on New Zealand’s housing crisis to that she intended.
The Labour policy is along the lines of what is the norm in Germany, where tenants enjoy long-term occupancy, and also follows the thinking of AHURI – the Australian Housing & Urban Research Institute – in a paper written 5 years ago, How can secure occupancy in rental housing be improved in Australia?
Below: First the Labour policy, then some adverse comments, followed by the AHURI view.
A quick note: I’d thought of paying more attention than I usually do to election policy announcements, then thought better of it. For starters, I have more than enough to write about already. Second, a high proportion of wishlist & splurge electioneering has been vote-buying which can mostly be dismissed – or, if it does eventuate, watched extra-critically. This one, though, is a policy which will affect a large investor sector. If it follows the AHURI line of thinking it ought to be beneficial all round.
A family constantly on the move
To deliver her policy, Ms Ardern said down with a family who’d moved 4 times in 3 years, whose children had to move schools, and whose attempts to save to buy their own home had been set back.
“About 50% of Kiwis now rent their home, but too often their living situation is precarious,” Ms Ardern said.
Her promise: “A Labour Government will strengthen renters’ rights so everyone can have more stability. Not only will Labour increase the notice period for ending a tenancy, we’ll also end letting fees, limit rent increases to one/year, make all homes warm, dry & safe to live in, and much more.
“And for landlords who need to move on tenants who are breaching their agreement, we’ll make sure the tenancy tribunal is properly resourced, and that issues like anti-social behaviour are much clearer in the law.
“It’s about making renting fairer & more stable for both tenants & landlords – and is part of our comprehensive plan to fix the housing crisis.”
Policy: Making life better for renters
“For most people, renting used to be a short stage of their life before they bought a house and started a family. Now, it is becoming the norm. 3 out of 4 people under 40 years old rent, compared to one in 2 in 1991. Among older New Zealanders, the home ownership rate has fallen from over 90% in 1991 to 75% today. All up, half of New Zealanders now live in rental properties.”
Ms Ardern said renters’ rights were still designed around the assumption renting is a short-term arrangement for people without children and that renters will move frequently, rather than set down roots in their community.
- Increase 42-day notice periods for landlords to 90 days to give tenants more time to find somewhere else to live
- Abolish “no-cause” terminations of tenancies
- Retain the ability of landlords to get rid of tenants who are in breach of the tenancy agreement with 90 days’ notice, or more quickly by order of the Tenancy Tribunal
- Limit rent increases to once/year (the law currently limits it to once every 6 months) and require the formula for rental increases to be specified in the rental agreement
- Give tenants & landlords the ability to agree tenants on a fixed-term lease of 12 months or more can make minor alterations, like putting up shelves, if they pay double bond and on the basis the property is returned to the state it was in at the start of the tenancy
- Ban letting fees
- Require all rentals to be warm, dry & healthy for families to live in by passing the Healthy Homes Bill, introduced as a members’ bill by Ms Ardern’s predecessor as Labour leader, Andrew Little, and in the committee stage when the parliamentary term ended in August, and
- Give landlords access to grants of up to $2000 for upgrading insulation & heating.
Ms Ardern said notice periods would be used where a landlord required the home to live in or had sold the property, the tenant had breached the agreement such as anti-social behaviour, failure to pay rent or causing damage to the property; or the landlord didn’t want to continue a fixed-term tenancy past its expiry: “This will mean landlords are still able to give notice to evict bad tenants. Landlords will still be able to go to the Tenancy Tribunal to ask for evictions or other remedies in the event of breaches of tenancy agreements.
“Most landlords operate with integrity and seek to provide decent accommodation at a fair price. These reforms will not affect them. What they will do is stop exploitative behaviour by a minority that is blemishing the reputation of landlords as a whole.”
Property Institute: It will worsen housing crisis
Property Institute chief executive Ashley Church said: “Labour’s new housing rental policies will scare existing landlords out of the rental market and will make the current housing crisis even worse – particularly in Auckland.
“The timing of these proposals couldn’t be worse. Auckland is currently in the grip of a serious housing shortage which affects both buyers & renters – and anything which deters investors from providing housing can only succeed in compounding that problem.
“If you’re an existing landlord, the deck is already stacked against you. The market has flattened, loan:value ratio (LVR) restrictions mean your equity position is worse, and bank credit rationing means that it’s now much harder for you to borrow money to do renovations & improve your position.
“Now Labour is telling you that, if elected, they’ll take away your right to terminate a tenancy and they’ll regulate the circumstances under which you can increase rents to make them comply with some as-yet-undefined Big Brother formula.”
Mr Church said these moves would come on top of a capital gains tax, pending a report from a yet-to-be-formed tax working group: “It doesn’t take a rocket scientist to recognise that Labour are already committed to a capital gains tax and that their tax working party will be made up of others who share that worldview. So, if you’re a property investor, the very clear message is ‘We’re going to get you’.
“That might make for good politics – but it risks doing long-term damage to the property market by scaring off mum & dad investors who are currently putting a roof over people’s heads.”
Mr Church said private investment was the key to solving the housing crisis and providing incentives to get people building new homes was the way to overcome the supply issue: “But no one is going to do that if they’re worried that they’re going to be regulated & taxed to death. Existing landlords will abandon the market and people who might otherwise have invested will stay away. Which means the State – which is just you & I as taxpayers – will be left holding the bag.”
First National chief also makes lopsided call
First National Real Estate chief executive Bob Brereton said Labour’s proposals to change tenants’ rights “will severely, and negatively, impact on a landlord’s ability to protect their investment and will result in increased rents for tenants.
“The pledge to outlaw letting fees is a good example of a poorly thought-out policy with an unintended consequence: Letting fees are charged by professional property management companies to cover the costs associated with securing the right tenant. They then act as advocates for both the landlord & tenant to ensure comfort, safety & protection of the investment. If you remove letting fees, many management companies will be forced to increase management fees to compensate. This will simply force up rents.”
He was also concerned about the proposal to remove the right to end a tenancy, with 90 days’ notice, without cause: “This is simply ludicrous. There are many reasons why landlords might want vacant possession of a property, and infringing on these is a direct challenge to private property rights.
“A similar proposal to increase the provision to end a tenancy after 42 days, in certain circumstances, to 90 days will have a significant impact on property values. The 42-day provision is used, particularly, when a landlord sells a property and the buyer requires vacant possession or where the landlord needs to move back into it urgently, so this provision could impact on a landlord’s ability to sell.”
Brereton says regulating rent rises a no-no
Mr Brereton said one of the biggest challenge of Labour’s policy was the proposal to regulate market rentals by passing legislation to cap the amount by which rent can be increased. His example:
“A landlord buys a house, putting up say $200,000 of their own cash or equity, to provide a home for someone without one. They borrow $450,000 for the purchase at 5% interest and, paying only interest, it costs them $22,500 in interest, another $2000 for rates and $1500 for insurance ($26,000/year). This means they have to rent the property for $500/week, just to cover costs. Add in a 5% return on their equity and its $692. Anything less than that and you are just providing social housing.”
Overall, he said: “This risks being ‘the straw that breaks the camel’s back’. Landlords are facing negative returns, flat prices & the threat of a capital gains tax. If interest rates go up, as predicted, it would only take a small move in a flat market to convince many landlords to get out of the market.”
Australian research indicates similar issues left to fester
AHURI – the Australian Housing & Urban Research Institute – introduced a paper published in May 2012 this way: “More Australians are renting for longer periods, yet do not enjoy the benefits of secure occupancy. Changes to improve the security of occupancy in the Australian private rental system can be informed by international experiences.”
The paper was based on research conducted by Professor Kath Hulse at the AHURI Swinburne-Monash Research Centre, and Associate Professor Vivienne Milligan & Dr Hazel Easthope at the AHURI UNSW-UWS Research Centre. They examined the provisions for secure occupancy across rental systems in Australia & other similarly developed countries, and considered the potential to adapt these provisions to Australia.
- Secure occupancy is important in creating a home, regardless of tenure, and is a foundation for many aspects of wellbeing
- The Australian private rental sector is characterised by relatively insecure occupancy compared to either social rental or home ownership
- International experience demonstrates that it is possible to have a large private rental sector with smallscale investors & higher levels of secure occupancy for tenants. Changes to the regulatory framework and policy settings are required to achieve this.
This study argued that secure occupancy is linked to whether households are able to:
- participate effectively in rental markets
- access & remain in adequate, affordable & appropriate housing with protection of their rights as consumers & citizens
- receive support from governments or other social service agencies if & when necessary to obtain &/or sustain a tenancy
- exercise a degree of control over their housing circumstances and make a home, to the extent that they wish to do so.
Provisions for secure occupancy are stronger where rental systems are large, such as in Germany, the Netherlands & Austria, where, respectively, 60%, 43% & 30% of households rent. All of these might be categorised as integrated systems, with more uniform policy & regulatory approaches to rental housing.
While the latter 2 prioritise the social rental sector, the German system relies mainly on a private rental system. In these countries, secure occupancy in rental housing has been supported by supply subsidies. By contrast, other jurisdictions (Scotland, Flanders, Ontario, New Jersey & Australia) tend to have highly differentiated systems with strong security in social housing and relatively insecure occupancy in the private rental sector.
Largescale investment & professional management
Countries with large social renting sectors (the Netherlands, Austria, Scotland & Ireland) or higher corporate/institutional investment (Austria, the Netherlands, New Jersey, Ontario & Germany) also have a stronger tradition of professionalised management than in Australia.
This enables investor risks to be pooled and decisions about occupancy for individual households to be made at arm’s-length from decisions about investment.
Germany provides an interesting example, where, although there is larger-scale investment, most landlords are smallscale but are investing for the longer term, enabling more secure occupancy for tenants.
Legal provisions for secure tenure
There is a range of lease types across the countries studied. The typical practice in Australia of offering short-term fixed leases followed by month-to-month arrangements was only found elsewhere in Scotland & Ontario. New Jersey also has month-to-month arrangements, though these renew automatically unless a notice to terminate is given by either party. Other countries have the practice of longer-term or unlimited lease terms.
Of the jurisdictions studied, only Scotland compares with Australia in terms of having short-term tenancies that can be terminated readily without grounds. Even jurisdictions like Ontario & New Jersey have specified grounds for ending a private sector tenancy.
Supporting lease terms that meet the long-term needs of householders
Some jurisdictions have also been better at assisting people to personalise their dwelling and use the property according to their wishes, and so improve their autonomy. In the German private rental market, the standard lease provides capacity to personalise or even renovate the house and facilitates access to people with disabilities. These are only found in other jurisdictions on a lease-by-lease basis.
Links: Labour policy: renters
Ahuri, 14 May 2012: How can secure occupancy in rental housing be improved in Australia?
Attribution: Labour policy & release, Property Institute & First National releases, AHURI research paper.