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Photo: Rebecca Stevenson
Photo: Rebecca Stevenson

BusinessMarch 1, 2018

Pushing landlords out will only make renting more expensive

Photo: Rebecca Stevenson
Photo: Rebecca Stevenson

Rent Week 2018: With legislative changes set to increase costs for landlords, some smaller players may be forced out of the market. Property Investors’ Federation head Andrew King warns this won’t be good news for tenants.

There appears to be a generally low opinion of people who provide rental properties for tenants to live in. Greedy, uncaring, speculative, super wealthy and tax advantaged appears to sum up the view of rental property providers in New Zealand.

People see it as an easy way to make super profits, yet only 7% of the population actually own rental properties. So why is that? The answer is that it isn’t easy to provide a rental home for people in New Zealand, and unfortunately it’s getting even harder.

You might think who cares, they can afford it. But most can’t. Rental property owners are generally average New Zealanders looking to provide for their retirement. For example, the majority of rental property providers – around 90% – only own one (or possibly two) rentals, and they are not the multi-property owning multimillionaires people assume them to be.

They supply around 85% of the homes that tenants live in, but they are facing a large number of increased costs.

First rental property owners lost the ability to claim depreciation, a tax deduction available to all other businesses. Loan-to-value-ratio restrictions were introduced in 2016 (and then increased) to require a 40% deposit when buying a rental property. Then minimum standards (for insulation and smoke alarms) were established and the cost of insurance, rates and maintenance increased.

Photo: Rebecca Stevenson

Now we have additional costs coming through the Healthy Homes Guarantee Act, ring-fencing of tax losses and of course the potential for a capital gains tax. Is it any wonder some people are having to sell their rentals, and many are now unable to buy rentals they otherwise would have? Some may cheer these ‘fat cats’ being forced out, but is this going to help provide more rental properties or put a halt to rental price increases?

An average 2.1 people live in owner-occupied housing in New Zealand, but there is an average 3.9 people per rental property. Every time a rental property is sold to an owner-occupier, on average 1.8 tenants still need a home to rent.     

The NZ Property Investors’ Federation encourages rental property owners to provide good quality homes for tenants, but this comes at a cost which is reflected in the rental price. We supported minimum standard legislation as it improved the living standards of rentals, but did so in a practical and cost-effective manner.

Photo: Rebecca Stevenson

While we don’t know what the regulations under the newly-passed Healthy Homes legislation will be, we hope they will be well thought out, appropriate and cost-effective. That means cost-effective for tenants, as they are the ones who will ultimately pay for these improvements. As an example, the current insulation standards are only 5% more effective than the previous standards. However, to top-up the insulation to these new standards costs nearly the same as completely installing new insulation. Given a choice, would tenants choose to pay for this extra benefit?

Ring-fencing tax losses has just been announced. This means a rental property owner cannot use losses from a rental property against tax paid on other income (a practice that is available for other investments or businesses). This will add a little over $4,000 to the cost of providing the average rental property. It is already hard enough to provide a rental property to tenants now; this will make it extremely difficult.

This isn’t meant to be a cry for sympathy – instead, my intent with this article is to show that if it keeps getting harder to provide rental property then there will be fewer rental properties available, and rental prices will continue to climb. We are already seeing it happen.

For those who think that rent controls are needed to combat rising rental prices, think again. This is a solution that doesn’t address the problem, and rent control would actually exacerbate the problems that are currently causing rental prices to increase.

Rental property owners provide 85% of the homes for tenants. For this to continue, we need everyone to better understand how rental property works and have an honest and reasoned discussion on any proposed changes. At the end of the day, it is tenants who pay for these changes one way or another.

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