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SocietyMarch 20, 2017

More New Zealanders are renting, and renting for longer. The rule book needs to keep up

Photo: Getty Images.
Photo: Getty Images.

Higher hurdles to home-owning have led to more and longer home rentals. Currently the medium and long-term rights are with the landlord, writes property market expert and Massey emeritus professor Bob Hargreaves.

New Zealand families typically aspire to own their own homes. But the path to home ownership has become increasingly difficult in recent years, with would-be first-home buyers facing daunting deposit and mortgage demands. Periods for which accommodation is rented while saving to buy a house are growing longer and more and more New Zealanders are simply unable to achieve home ownership in the foreseeable future.

The slippage in home ownership rates and increases in the rental housing population has been going on for some time. In 1991, 26.2% of households rented. More recent data from the census show that from 2006 to 2013 the percentage of rentals in the total New Zealand housing stock increased from 33.1% to 35.2%. This trend is expected to continue.

Concentrations of rental housing are found in low income towns and suburbs and cities such as Gisborne. Area boards in Auckland with more than 50% rental housing in the 2013 census were Otara-Papatoetoe, Magere-Otahuhu, and Waitemata, which contains a large number of central city apartments. Conversely, areas with a low percentage of rental housing are found in more affluent suburbs and in many rural areas.

Rental housing comprises a series of sub-markets.

Social housing is mainly looked after by central government and to a lesser extent local government and other providers such as the Salvation Army and certain iwi. Housing New Zealand has around 68,000 state houses, mostly with income related rents set at 25% of income. The government also provides rental subsidies to private sector renters by way of the Accommodation Supplement, projected to cost around $2 billion annually.

The private sector dominates the rental accommodation business in New Zealand with 453,135 rental dwellings in 2013, more than 83% of the market overall. Most owners are “Mum and Dad” landlords and may only own one or two rental properties. Some employ professional property managers but cost savings and profitability are enhanced with self-management and a DIY approach to repairs and maintenance.

Professional investors own multiple properties, usually employ property managers and are constantly looking to increase their rental portfolio by financially leveraging off their equity. A major player in the global on line rental market is Airbnb with some 19,000 private sector residential properties on its books in New Zealand. These are predominantly houses where the property owner rents rooms on a short term basis.

The types of property being rented by the private sector range from a room in a building, to an apartment, or flat, or house. The typical rental property, however, is a standalone house in the suburbs. Most rental accommodation is not purpose built and consists of a secondhand house, originally owner occupied. This is because the high cost of building new rental accommodation makes secondhand housing a more attractive option for investors. Rental accommodation is usually traded on the basis of gross income divided into the selling price (gross yield). Of course the potential for future capital gain comes into the equation and gross yields in Invercargill need to be higher than gross yields in Auckland to achieve comparable overall investment returns.

Over the 11-year period 2006-2016 rents increased at a much slower rate than house prices but faster than wages. For example, nationally house prices were up 67%, wages 33% and rents 53%. The situation in Auckland is more difficult for tenants with house prices up over the same period by 115%, rents up 45% and wages 33%. The limiting factor here is the tenants’ ability to pay, given salaries and wages have only risen at about the rate of inflation. A common strategy to make rents more affordable is for tenants to increase the occupancy rate but this risks crowding and may be in breach of the tenancy agreement. Over the last two years there has been additional demand pressure on rents due to very high net migration numbers with the national median rent up to $400 per week, an 11% increase year on year.

New Zealand is fortunate to have a transparent private sector rental market. Up to date rental information for the main residential property types (at a suburban level) is publically available on the Ministry of Business Innovation and Employment web site. Landlords are required to lodge bond money with MBIE and this gets around problems that might occur if bond money was held by landlords. Landlord/tenant disputes can be adjudicated at the Tenancy Tribunal.

Overall the residential rental market operates reasonably well but there are still a number of issues that need to be addressed in a market where households are staying in the rental market for longer than in the past. Under the residential tenancy legislation a landlord can reclaim a house with only 42 days notice to the tenant. This may be less likely to worry young people who are flatting and move frequently but in a tight rental market it can be disruptive to a family with school aged children who may want to stay part of the local community.

Then there is the question of property rights. Currently the medium and long-term rights are with the landlord. If the tenant is given more long-term security of tenure then can this be done without taking away property rights and value from the landlord? The British experience of “tied” properties with tenants having inter-generational property rights shows such properties sell at a discount compared to properties free of such obligations.

Rental subsidies also present something of a dilemma for policy makers because past experience shows subsidies such as the accommodation supplement are mostly captured by the landlord (not the tenant) and become capitalised into the value of rental housing. It would take a brave government to make major changes to the current system. Perhaps in the unlikely event of a serious oversupply of rental houses changes might be contemplated.

Further work also needs to be done on the idea of a rental house warrant of fitness scheme, currently opposed by the rental property owners’ group on the grounds of cost. The linkage between cold damp housing and various illnesses is now firmly established. Money spent on heat pumps and insulation provides obvious benefits to the tenant but at a cost to the landlord, who may not be able to increase the rent.

This post is part of Rent Week, our week-long series about why the experience of renting a home in NZ is so terrible, and whether anything can be done to fix it. Read the entire series here.

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