Tenancy changes ahead

By the end of the year, the new coalition government is likely to have introduced a number of changes to the Residential Tenancies Act intended to “fix” the rental market.

The Minister of Housing said he wanted to introduce laws that, “bring the best out in people, and encourage their better side. And that’s why modernising the tenancy laws will be about a set of rules that work for landlords and tenants – and encourage for instance longer term tenancies, which are good for families and good for landlords.”

The Minister’s proposed changes will do nothing to “fix” the rental market. The most likely outcome is that it will make it worse for tenants.  In summary the changes are:

  1. An end to letting fees that are charged to tenants,
  2. A requirement that rents can be raised only once a year instead of every six months,
  3. A requirement to include a formula in every tenancy agreement to show how rent rises will be calculated, and
  4. An end to no-reason terminations.

Tenancy Services describes the letting fee as, “a fee charged by a letting agent or solicitor to grant or assign a tenancy. Letting fees are allowed under tenancy law…but only letting agents or a landlord’s solicitor are allowed to charge this fee.”

Property managers treat the payment as a fee to cover the costs of processing (vetting) tenancy applications. It is usually one week’s rent plus GST, payable by the tenant at the beginning of a tenancy.

As a general guide, letting fees account for between 15% and 20% of a property manager’s income – inspection fees, and a percentage of the gross rental income and repair work make up the balance (although not all managers charge for inspections and managing repairs).

It’s a big chunk of income that a property manager will want to recover from the landlord, either by charging them the letting fee or increasing their management fee. Landlords in turn will want to recover it, from the tenant by increasing the rent!

The irony is landlords who are self-managing their property are not able to charge a letting fee, so tenants can avoid it by renting directly from the landlord. This is of course less of an option when there is a shortage of housing.

On the second and third matters, I doubt that limiting rent increases to once a year instead of twice a year is of any significance. My experience is that landlords tend not to increase the rent if they are happy with their tenant, and if anything, many landlords (and some property managers) are slow to react to market increases. Requiring a rental increase “formula” to be included in every tenancy agreement is bizarre and is likely to be detrimental to tenants.

Firstly it will result in rent reviews being scheduled annually. Secondly, the formula could be anything imaginable and may even include inflation adjustment and ratchet clauses (meaning  rents can never fall) as is typical in commercial leases. The formula could also link rent to local authority rate increases and the market value of a property. So the rental increase formula could include, say, 5% of a house value increase, plus the increase in rates and insurance costs – subject to a ratchet clause. Is this really what the new government wants?

The last on the list of changes is an end to no-reason terminations. In other words, landlords and property managers will have to give a reason why the tenancy is being terminated. This presumably is to stop landlords from getting around the limitation on rental increases by terminating a tenancy so they can increase the rent within 12 months. It’s an odd way to approach this problem. A better way is to say that the 12 month rental increase applies to the property not the tenancy.

If they really want to “fix” the housing market they would turn their attention to the real ‘villain’ which is the shortage of housing. In spite of all the rhetoric, the KiwiBuild programme will not fix the shortage because it does nothing to solve the excessive regulation that is strangling supply. One only needs to talk to property developers to hear their horror stories of obstacles and delays.

A developer confided to me recently that the greatest cost they faced on a straight forward project was the holding cost. He waited five years for council approval and was clearly frustrated at the stuffing around. Not only did the delays add considerable cost to the sale price of the land, but the regulatory uncertainties involved in development meant the banks refused to finance it. He instead fronted up with his own capital, making it unavailable for other projects. He said that was the norm and smaller builders typically self-funded minor single property projects rather than using equity and bank finance to undertake multi-unit construction. No wonder there is a housing shortage, rising house prices and rising rents!

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