Unforeseen consequences of a utopian vision

  • Rent roll values could fall as labour policies bite
  • industry survey shows concern around new government

“If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand

— American Economist Milton Friedman

Imagine a country where nobody is homeless. Imagine a country where nobody has any social issues such as drug addiction or alcohol abuse. Imagine a country where every child goes to school with shoes on their feet after eating a breakfast and then come home to a loving family where they get a warm healthy meal every evening. Imagine a country where everyone has a roof over their head and we all live happily in warm, dry and affordable homes.

This is the Utopian New Zealand being sold to us by our new Government. One cannot deny the good intentions that this Government genuinely has but, and there is a really big but, just how realistic is it and what will be the cost?

Good on them for having such aspirational ambitions however for every good intention there are undoubtedly unforeseen consequences. This was the theory of famous American Economist Milton Friedman. He said that you had to judge policies by their results and not their intentions, and he was also a critic of rent controls believing they caused a shortage of stock.

Not since the Savage Government of the 1930's has there been such a focus on housing and our industry is right in the firing line. Jacinda Arden's Government is about to make more changes to the Residential Tenancies Act giving more power to the tenant, enforcing improvements on hundreds of thousands of rental properties across the country, as well as undertaking a drive to build 100,000 social houses.

Information sourced from the newly published Housing Stocktake of New Zealand.

Information sourced from the newly published Housing Stocktake of New Zealand.

However, as REINZ CEO, Bindi Norwell wrote in her article published in The New Zealand Herald, who pays?

For many a landlord, it may prove to be too much. Some will be forced to sell whether it is through their own choice or the bank's. This is unfortunate as we now need landlords more than ever. 100,000 social houses will not appear overnight and as landlords leave, we are starting to see a shortage of stock and rising rents around the country.

What extra costs are landlords potentially facing?

  • Insulation of the property
  • Additional heating so the property can be maintained at 18-degrees celcius
  • Rental Warrant of Fitness Report every three years
  • Increasing interest rates
  • Meth Testing between tenancies
  • Increased insurance premiums
  • Increased management fees (Abolishment of Letting Fee)
  • Tax rebate removed from negatively geared property

What I do believe is this. The Utopian view of New Zealand sold to us by this Government is already developing unforeseen consequences which is hurting the people it was designed to protect.

Tax loopholes hurt mum and dads more than large scale investors

The closing of Tax loopholes around negative gearing will cause major issues to small Mum and Dad investors. The Labour website says that the biggest exponents of this loophole are large scale property speculators.

I for one disagree. For every rent roll that I see, on average 80% of clients own one property and around 90% own no more than two.

The people who it will hurt the most are Mum and Dad who purchased a second property to help save for their retirement. Most rental properties will run at a loss when you take away the costs associated with running a property. This leaves an investor paying money into the property and then being able to offset the loss against their own personal income.

Closing this will hurt many and some will undoubtedly look to sell before this is implemented which will cause more strain on the already overstretched rental market.

Many landlords are cash poor and only own one property. Typically you would be able to claim back approximately $7,000 of this loss through negative gearing. In proposed future changes this will end.

Many landlords are cash poor and only own one property. Typically you would be able to claim back approximately $7,000 of this loss through negative gearing.  In proposed future changes this will end.

Property management survey highlights concerns about Labour

Our Property Management survey highlighted the growing concern people in the industry had about left-leaning policies and the impact it would have on our industry. The survey was undertaken over a two month period between July and August 2017. As the election came closer, more and more respondents highlighted the prospect of a Labour Government would be the greatest issue facing the industry.

Out of 383 industry employee's surveyed, left wing policies made up three of the top five concerns

Out of 383 industry employee's surveyed, left wing policies made up three of the top five concerns.

The main issue was a concern about the increase in tenants exercising their rights and putting more demands on Property Managers. We have no problem with tenants doing this. In fact, I would encourage tenants to do so if they are genuinely being unfairly treated, but in some cases, we have seen tenants start to push the boundaries as to what is fair and reasonable. An example of this is a tenant trying extract $40,000 of compensation out of a company as he accused a Property Manager of verbally offering an extension to a renewal only to find out the property was going to be sold. No one wants to see tenants being neglected or mistreated and I for one believe in protecting tenants rights, but some will abuse this and push the boundaries.

This sentiment is also reflected in our survey as there has been an increase in Property Managers rating Tenants as being more demanding than Landlords.

Increased tenant rights has seen tenants putting more demands on Property Managers

Increased tenant rights has seen tenants putting more demands on Property Managers

Rent roll values set to drop

With the prospect of fewer landlords coming into the market, revenue being wiped out due to the removal of the letting fee and increase compliance costs starting to bite, all of this is starting to have a detrimental impact on the value of Property Management businesses. From our survey over 50% of Property Management businesses have less than 200 properties and these companies could find themselves struggling. Extra costs and lost revenue will impact on profits.

We are also seeing large Property Management companies who would usually be in the market to buy, wait and take stock of the situation. They do not want to invest so heavily in a rent roll if 30% of the landlords decide to sell in the first 12 months.

Industry results from the Net Promoter Score. We ask people who work in the industry whether they would recommend it as a career. 0-6 Detractors, 7-8 Passive, 9-10 Promoters. Results are down from the previous year. Potentially because of more demands being put on Property Managers

Industry results from the Net Promoter Score. We ask people who work in the industry whether they would recommend it as a career. 0-6 Detractors, 7-8 Passive, 9-10 Promoters. Results are down from the previous year. Potentially because of more demands being put on Property Managers

What is the solution?

Everybody is in agreement that we need more housing. What is important is the right type of houses are built.  Also, social housing should not mean a lifestyle choice, it should be a safety net for those in genuine need. There will be a risk that many people will take advantage of the Government's generosity and abuse the system. I can picture the scene now. A working family with two jobs paying $500 a week in a 1970's property sees a family claiming the benefit move into a brand new property paying a fraction of the rent as they are subsidised by the Government. They look at themselves and ask "Why are we bothering to work so hard?". Hard work must always be rewarded.

If there is one thing that I would criticise the National Government for over the last 9 years, they did not foresee the skill shortage required to build more houses and the need to get young people into apprenticeships.

Local Government has to take responsibility as well. I have lived in Wellington for three years now and the lack of construction of residential buildings is disturbing. Local Government also has to ensure that the right type of houses and apartments are being built. Not massive four bedroom plus properties, but three bedroom townhouses for young families.

Throwing up cheap property quickly without the infrastructure, schools, shops and entertainment has the potential to cause social issues. Growing up in the UK, I remember clearly the council estates in the 1980's were 'no-go areas' and lessons must be learnt from those mistakes.

Christchurch proves it is supply demand, not greedy landlords

If ever you needed proof that the issue is increasing the supply that controls prices then take a look at Christchurch. Since the earthquake, a massive build-up of residential property has taken place and Tenants are actually renegotiating rents down when it comes to renewal time. This is simply because there is so much choice available.

There are twice as many properties available in Christchurch compared to Wellington, even though the population is about the same. Yet due to an oversupply of property, rental prices are approximately 20% less. Although many residents would argue it has taken far too long, Christchurch is slowly getting it right and in a few years time, it will be a magnificent city. Wellington simply has to release more land for development of residential property ensuring the right type of property that is being built and infrastructure is in place to support the development.

PROPERTIES AVAILABLE ON TRADE ME

The information is taken from Trade Me figures as of the 16th February 2018

The graph provided from Trade Me shows that Christchurch and Canterbury have stable rents. Compare this to Wellington and other centres where rents are rising. This highlights the biggest issue is the lack of supply.

Where to from here?

Everyone agrees that more housing is the key, but when a Government starts to try and control the housing market and particularly renting, it can lead to unforeseen consequences such as a drop in rental supply leading to rising rents, hurting the individuals the laws were designed to help.

What the Government should do is work with local councils and the private sector and focus on getting more quality houses built in the right regions and the right size. Get the infrastructure right and encourage more young people to move into trades and out of University. We don't need one or two bedroom apartments or massive four bedroom properties, we need three bedroom properties with a combination of building up and out.

The Healthy Homes Guarantee Bill will improve the quality of rental housing stock and we have always supported this. But some of the proposed changes will only increase costs and rents. A Rental Warrant of Fitness is just another bureaucratic initiative that will add more cost to landlords and we have long argued we should adopt a European style energy efficiency certification for every residential property and not just rentals.

Other issues that lead to an impact on rental supply is short term lets such as Airbnb. I saw this firsthand whilst doing a recent job in Wanaka where there are hardly long-term tenancies available and rents had increased by over 10% in 12 months. Yet when you go to the Airbnb website, hundreds of properties sit there vacant.

It is time to start taxing Airbnb and an idea could be to introduce a Vacancy Tax which is similar to what was introduced in Vancouver when they had a similar issue with vacant properties leading to a shortage of stock and driving up rents. London also has a major problem with vacant properties and the Labour party in the UK have also proposed levies on vacant properties.

If the Government can pull off this ambitious plan, it has to do so with astute financial management. Driving our country into debt is not the solution. The previous Government did have its faults, but they did get us through all types of challenges and maintained a prudent balance sheet in the process.

As Ms Norwell asked from the outset, who pays? The answer is everyone who pays taxes will have to pay for the social policies undertaken by the Government. Landlords will be paying because of more costs. Tenants will pay as landlords will try and put some of the costs onto the tenants and subsequently the Taxpayer pays for the massive undertaking of such an ambitious social housing policy.

In conclusion it is clear that property management will have a key role to play maintaining the vital link between landlord and tenant. The impending changes in the housing market and regulations will pose issues for everyone in the industry. Knowledge and management skills will be essential in this new environment. Real-iQ stands ready to support you during this period of change.

As ever, we welcome your feedback.


labour-party-billboard

Lets ban this! The letting fee gone if Labour win

  • Letting fees days are numbered as radical reforms announced
  • Decision could obliterate small property management companies
  • Uberisation of property management inevitable

Who would have thought six weeks ago that we were facing the prospect of a change of government?

Lifeless Labour was limping to an election defeat with its worst poll rating in modern history and the prospect of a Labour lead government seemed like a huge improbability. Then all of a sudden, Andrew Little resigns and Jacindamania was born, replicating trends we have seen in the U.K. and Canada where there has been a huge swing to the left, particularly amongst younger voters. This has evolved due of inequality and the widening gap between the haves and the have nots, largely demonstrated in rising house prices.
A change of government is now a real possibility.

Housing was always going to be the main battle ground for this election with Ardern making no secret that she was taking the side of the tenants. In her campaign launch, Ms Ardern stipulated that ‘Climate change’ is the nuclear free moment of our generation. Here at Real iQ, we translate this as a statement of intent to improve the efficiency and quality of housing in New Zealand, particularly for the under privileged and vulnerable. Where better to start than targeting rental properties. No doubt we will also see the introduction of a capital gains tax in an attempt to reign in property speculators and control house prices.

Bye bye letting fee!

On Sunday September 3rd the Labour party made a major announcement with reforms to tenancy legislation in New Zealand. With nearly 50% of the country now renting, a change was inevitable. The Labour party announced the following.

  • 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 per year and require the formula for rental increases to be specified in the rental agreement.
  • Give tenants and landlords the ability to agree tenants on a fixed term lease of 12 months or more can make minor alterations.
  • Require all rentals to be warm, dry, and healthy for families to live in by passing the Healthy Homes Bill.
  • Give landlords access to grants of up to $2000 for upgrading insulation and heating.

Many of the proposals are progressive and will benefit the nation as a whole but one change could be catastrophic for many small to medium Property Management companies, and that was announcing the banning of the letting fee.

"Letting Agents charge the letting fee because they can"- Phil Twyford

Here at Real iQ, we have been warning that the days of the letting fee are numbered for over a year now when the former leader of the Green’s Metiria Turei submitted a reform bill that would remove letting fees. Also, earlier this year Housing Spokesperson for Labour Phil Twyford announced his disdain for the letting fee making the comment ‘Letting agents charge the letting fee simply because they can’. This was insulting and inaccurate as he implied that our industry was price gouging. Nothing could be further from the truth Mr Twyford.
By banning the fee, small companies will suffer the most.

Phil Twyford's comments that 'Letting Agents charge the fee because they can' is either grandstanding for votes or shows a lack of research and concern for the industry that it will impact.

As a percentage, their operating costs are generally higher than the larger operators and to many companies, the letting fee is the difference between being profitable and running at a loss.
Larger companies are in a more stronger position where they can absorb the costs and still retain a strong profit margin.
The obvious solution is to pass on the costs to the landlord. If the entire industry does this then there will be no problem. Landlords will absorb the costs and then demand rent increases and ultimately the tenants will eventually pay. However, trying to get an industry to agree to do this is highly unlikely, especially following some high-profile cases in front of the commerce commission that involved a number of large real estate operators.

Many smaller companies may sell

What we believe will happen is that the larger companies will absorb the costs putting pressure on smaller ones to follow suit to remain competitive. Once smaller companies do this they will be forced to review costs and this may result in job losses and outsourcing to remain profitable. The standard of service may drop as there is more pressure on Property Managers to manage more.

One positive aspect of the decision is that it will tidy up an industry where we already have too many companies competing over scraps.
At the start of the year, one of Real-iQ's predictions was that more properties would be managed by fewer companies and all the evidence is pointing in that direction. As more and more legislation is thrown at Property Management companies, with up to 15% of revenue being removed, many small to mid-size operators may decide that enough is enough and sell up. Who can blame them?

Automation and outstanding, the uberisation of property management

Innovative Property Management companies may see this as an opportunity to reform the industry by developing a low fee, low-cost model that relies on running the business lean with very few overheads.

Traditionally, maintenance is the one thing that has been outsourced. Other concepts such as Daily Reconciliation will head the same way. Potentially, overseas.

I am often asked my opinion on outsourcing, especially to overseas markets such as The Philippines. Although I can understand why a business owner may want to do this, I personally struggle with it. Real-iQ's vision has been to improve the industry in New Zealand through training and promoting it as a viable career option. Having your daily reconciliation run in Manilla may be creating jobs in The Philippines, but does little to promote the industry here.

However, I am not naïve enough to believe that this will not happen in some form or capacity and we are already starting to see the impact of it.

We believe that we will soon start to see a new budget form of Property Management where rent is entered into an interest-bearing account and is administered by a central hub without street presence. No office will be required for Property Managers as Tenancy Agreements will be signed digitally with remote tenant inductions taking place. The Property Managers will be mobile, working either from home or at low rent offices such as shared spaces, keeping overheads to a minimum.

Many tasks have already become automated and more will follow such as rent arrears, tenant selection, and inspection notification. The Property Manager will be managing in excess of 200 properties and will focus purely on letting, inspections and approving maintenance. All other tasks will be automated or outsourced. Chatbots will become the way landlords will communicate when they need assistance and eventually, artificial intelligence will predict when things will break down and need repairing.

For the rest, a new breed of Property Management must evolve, catering for the investor needs and helping them grow their portfolio. This service will become more personalised and will require a higher skill set offering pre-emptive service and unique insights to help investors make the right decisions to grow their wealth.

Never, have I seen so much change in our industry. It is hard to predict what will happen in the future but one thing is for sure, Real iQ will do our utmost to keep you informed.

Thanks for reading.