Is this man the biggest threat to the Property Management industry?

  • Wellington City Council set to become a Property Management company if Mayor Justin Lester is re-elected

  • A bold new initiative to control rents or an attack on free enterprise as Lester looks to control the market

Lets put our cards on the table before we start. Wellington is the city I call home. I have lived here for five years with my family and we absolutely love the place. Yes, it has its pitfalls. The city feels like its crumbling as building after building is closed due to earthquake risk. The infrastructure and road network no longer feels as though it is fit for purpose and trying to get across the city can be an absolute nightmare. However, we live in a fantastic beautiful and vibrant city with plenty to see and do. The views are stunning, the harbour is picturesque and there is no shortage of great walks, vibrant coffee culture and some amazing craft beers. 

Wellington, however, has a big, big problem.

Mayor of Wellington, Justin Lester is proposing a radical solution for the Capital's rental crisis.

A perfect storm for rent increases

Rents have skyrocketed in the city with one councillor stating that Wellington will become a 'ghetto for the middle class' if rents continue to rise. And rise they have to unprecedented levels that widen the gap between the haves and have nots. According to Homes.co.nz, the capital has surpassed Auckland for rents with median rent sitting at $658 per week whilst Auckland is now at $627 per week. The situation we have now was entirely predictable and anybody with a basic understanding of economics could foresee what was going to happen.

Nearly two years ago on December 2017, I spoke at an investment seminar in Wellington saying that we were creating a 'perfect storm' for rent increases in the capital. I argued that the following would cause rents to increase by 10% over the next 12 months.

  • An anti-landlord Government making changes to legislation and taxation in an attempt to force landlords to sell properties and subsequently reducing stock.
  • Letting fees being put on to landlords who will in turn increase rents.
  • First-year student fee's being wiped meaning more people heading to the universities putting a greater demand on rental accommodation.
  • A Labour-led Government traditionally leads to an increase in governmental jobs putting further demand on rents and house prices in the capital.
  • A lack of building activity within the residential sector and a shortage of tradespeople leading to an increase in costs for people wanting to build.
  • Legislation forcing landlords to invest in their rental properties with the inception of the Healthy Homes Guarantee Bill.
  • An estimated increase in the population of about 65,000 over the next 30 years, contributing to demand outstripping supply.

There is no satisfaction in gloating and saying 'I told you so' as it was so obvious that this was going to happen. Anyone with a grasp of reality could have predicted this. A new government came to power with a philosophy that everyone would live in affordable, warm and dry homes. The subsequent outcome has lead to a shortage of stock and forced rents to increase to dangerously high levels. 

Milton Friedman would probably turn in his grave if he saw what Mayor of Wellington, Justin Lester was proposing

The public sector looks to control the market. Will it work?

In February 2018 I wrote an article about the unforeseen consequences that this well-intentioned ideology would have. I quoted the famous American economist Milton Friedman who famously once said - ‘If you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand.’

Clearly, Justin Lester, the Mayor of Wellington doesn't share Milton's views as the public sector is threatening to intervene in the private rental market. If Lester is re-elected as Mayor, the Wellington City Council are poised to become the first public sector Property Management company for private landlords and it will not be used as social housing. It will be renting properties on the open market in an attempt to control rents in the city. 

A trial for future changes in legislation?

It is a bold, ambitious and in our opinion, a highly controversial plan.

What the Mayor is proposing is that private landlords lease their properties to the council for a period of 10 years at market rent. The council would then sub-lease the properties on the open market at a reduced rate in an attempt to control the market. The council will have a clause written into the agreement that the rents will only increase in line with inflation for the duration of the tenancy. One suspects that this Labour based council will guarantee the lease to the tenants for a period of 10 years but they will also give the tenants the ability to give notice so tenants feel as though they have security and flexibility. Great news if you are a tenant.

This could be the blueprint for radical reform to the Residential Tenancies Act as Lester and his council could be acting as a guinea pig for the Labour-led coalition as they struggle to get a handle on the housing crisis in New Zealand. 

If they can pull it off, and it’s a very big if, other councils may follow suit which would be a major threat to Property Management companies across the country.

There are over 10,000 bonds lodged a year in the capital with rents increasing annually by approximately 10%. Inflation is growing at 1.5%

Thousands of properties required to make a difference

What will it take to make the idea work?

The council would have to sign up literally thousands of rental properties to be in a position where they can influence the market. Also, will ratepayers be happy about subsidising a giant public property management company?

The costs of running such as beast would be substantial. 

If you subsidised rents by $50 per week and let's say the council have 2,500 properties, that is a bill of $6,500,000 that the ratepayers have to pick up. And this is based on achieving 100% occupancy with no defaults on rent.

Then you would have the operational costs of running such a project. Let’s say you have 30 staff working on the project as well as all the typical expenses, I doubt you’d get much change on $10,000,000 per annum.

For this to have any impact on the rental market, we have to work out how many properties the council would have to manage to make an impact on rents. Let's look at how many rental properties there are in Wellington and to do this, we have to look at statistics from the Tenancy Services.

Wellington city has a population of about 216,000. This excludes the wider region which has a population of nearly half a million. We have collected a list of bonds lodged in Wellington over the last 12 months from statistics on the Tenancy Services website. From the period of August 2018 to July 2019, over 10,000 bonds have been lodged across the city with median rents increasing by 9.6% over the same period. With annual inflation running at a stagnant 1.5%, you can see the predicament facing the city. Increases by this amount are unsustainable.

Bonds Lodged Wellington, August 2018 to July 2019: Over 10,000

If the average length of a tenancy is about 2.5 years this would mean that Wellington would have approximately 25,000 to 30,000 rental properties owned by the private rental sector. For the Council to have any influence on the rental market, it would need to have secured at least 10% of these properties to have any influence on the market. That would mean 2,500 to 3,000 rental properties would be acquired by around 2,000 private landlords. 

If they can pull this off, expect to see Justin Lester walking up on stage at REINZ and LPMA Award ceremonies in 2020 taking out the Business Development Manager of the Year award!!

What could the impact be for the Property Management industry?

If, and it is a very big if, the council are successful, Property Management companies may find themselves at risk, and not just in Wellington as other councils may replicate this initiative. Why would you pay 8 to 10% for your property to be managed when the council will do it for free for 10 years and guarantee the rent. Think about it! If you are a landlord with no intention of selling for at least the next 10 years, on the surface, it looks like a no brainer. I simply give the council my property, they pay me market rent for 10 years and I do nothing other than pay for the odd bit of maintenance.

But is it the state's job to compete with the private sector? Surely this is an attack on free enterprise. One could even argue it is a step towards socialism. The state taking over the running of a sector that has been dominated by private Property Management companies is a scary thought.

Running a business is far from easy and the prospect of trying to compete with a giant subsidised Property Management company offering a free service for landlords is a daunting prospect for many business owners across the capital.

As an industry, we have been constantly under attack and now it appears that we are being blamed for over-inflated rental prices. The reality is basic economics along with added costs have driven up rents and this idea feels like the left-wing of the political spectrum is clutching at straws.

Why stop at rentals? 

The council could become a giant real estate company, buy properties off vendors at market price and on-sell them at a reduced rate in an attempt to control house prices. All this subsidised by the Wellington ratepayers of course. We could have a Wellington City Council petrol station company, subsidising petrol or how about a Wellington City Council power company, offering reduced power prices for tenants. The list goes on and on.

Increase supply and remove red tape

If the Wellington City Council really wants to help, then the focus should be on increasing the city's supply and making sure that the right type of properties are being built. New Zealand desperately needs three-bedroom housing and plenty of it. All across New Zealand, with the exemption of Christchurch, we have seen the wrong types of properties being built. Ironically, Christchurch is the one city in New Zealand that is relatively affordable and that is purely down to supply meeting demand. 

Look at the apartment market in Auckland, it is saturated with one and two-bedroom apartments, there is no shortage of property there. If it isn’t apartments, then its four-bedroom McMansions in the suburbs that have been built. We need to look at future demographics and build what our population needs. Plenty of compact three-bedroom housing close to the city with strong infrastructure to keep people moving is the key to any city’s success.

Instead of trying to control rents, why not subsidise landlords to install solar power?

Rather than subsidising rents, why not reduce the cost of obtaining consents or subsidise landlords to put solar power on rental properties to reduce the operational costs for tenants. It is in nobodies interest other than a handful of greedy landlords to have over-inflated rents in any of our cities and towns. If people have no disposable income, the economy will grind to halt and we will find ourselves staring down the barrel of a recession. 

So my advice to Mr Lester is to learn from your mistakes. At the last election, he campaigned on introducing the Rental Warrant of Fitness and look at how that turned out? You could count the landlords who used it on one hand.

As demonstrated, the cost of operating such a beast will be extensive and who is going to train them on how to do it? If the council acquired a flood of properties, someone has to do the basic donkey work that a Property Manager does day in day out. Who foots the bill if a property is trashed or damaged? And do ratepayers really feel happy that their hard-earned income is spent in such a frivolous way?

Yet again, this is an example of an idea thrown up out of desperation without proper consultation with industry experts. But hey, they know best, don’t they? Just look at the success of the Warrant of Fitness.

One understands the motives and we wholeheartedly agree that rents increasing at such a rate will have damaging consequences for the region as a whole. This idea, however, will not work. Increasing the supply and improving the current rental stock is the only thing that will work. 

 


Think the rental squeeze is bad? Well breathe in as it could get worse

    • Insulation, negative gearing and capital gains may lead to mass selling off of our rental stock
    • 70,000 rental properties may be uninhabitable by July as deadline approaches

We have all seen the headlines. Teachers forced to bunk in with their bosses, over 10,000 households waiting for public housing, up from 4530 the same time last year. We have even seen disturbing headlines such as ‘sex for rent’. Almost daily now, we see stories across New Zealand of people struggling to secure rental properties and rising rents forcing people out of their homes.

In the last 12 months, we have seen sky rocketing rents. In many parts of New Zealand rents increased by over 10%. Queues upon queues of desperate tenants, battling to try and secure a battered, run-down rental property and being forced to pay more. In one case I witnessed in Wellington, about a group of twenty tenants turned up to a viewing trying to secure a tiny one bedroom flat in which the bedroom so small, the double bed of the vacating tenant had to sit in the lounge. Although habitable, it was tired, dated and more akin to something out of Victorian Britain. The asking price? A bargain at $410 a week. There was no shortage of applicants.

The young solo parent who lived in the property was being forced to move because she could not keep up with the rent. As I left the property, I couldn’t help but feel a sense of nausea and concern as to where this rental shortage is heading. It is not just limited to the cities.

In Gisborne, a place where traditionally there has been no shortage of rental properties, I went into an office where the weekly rent had increased by 25% over four years with nearly half of that increase over the last 12 months. Surely it wasn’t meant to be like this?

Things were going to get better for renters under this Government, weren’t they?

Housing was Labour’s top priority in the run up to the election in 2017 with campaign promises such as.

      • Crack down on property speculators with the removal of negative gearing
      • Improved rights for tenants with introduction of new legislation to provide greater security of tenure
      • Pass the Healthy Homes Guarantee Bill that raises the standard of rental properties
      • Ban letting fees
      • Create a level playing field for first home buyers
      • And of course, the most famous pledge of them all. Kiwibuild! 100,000 houses to build across New Zealand over the next 10 years

So, half way through their first term, how are things panning out? Not good if you are a renter.

You think things are bad now? Well, you’d better breathe in New Zealand, as the rental squeeze could get worse. A lot, lot worse as thousands of rental properties may come onto the market for sale in the Autumn due to non-compliance with new insulation standards leading to an even greater shortage of rental properties.

Why have things gone so badly wrong?

There are a multitude of reasons which we will examine, but ultimately, one of the main reasons is that the vast majority of investors, whom own one or maybe two properties have found it just too hard with the prospect of having to invest thousands of dollars to make properties compliant leading to diminishing returns. Then, add on the prospect of the removal of negative gearing which leads to the inability to offset losses against landlords personal income leading to a tax break. Many landlords have decided to cash up and sell as the cost of owning a rental property becomes too expensive without the required return.

Why has it become so hard?

There is so much change around legislation and taxation that many small landlords simply no longer see property as a viable investment and have chosen to put their money elsewhere. This has led to an increase in sales to first home buyers, however the pool of tenants has remained the same leading to an even greater increase on demand for rental properties and in particular, three to four-bedroom housing. The basic rules of supply and demand has led to the inevitable increase in rents.

Increased rents would surely make landlords happier? Agreed, but even with the increase in rents, this will likely not cover the increase in expenses facing many landlords across the country.

Unfortunately, this Government may have drastically underestimated the potential consequences to some of their policies. It now seems ironic, that the people they were elected to help are being punished through some of these policies yet the big wealthy landlords, whom they promised to target are probably laughing all the way to the bank. Cashflow is king for those big landlords and many of the savvy long-term investors may not face the same debt to equity ratio and other operating expenses as a percentage to their income.

In defence of the current Government, not all the blame should fall on their shoulders. The previous Government has to take some of the blame as do many landlords, who it has to be said, have neglected their rental properties for years.

So, we try to break it down and examine why things have gone so desperately wrong and why things are only going to get worse before they get better.

1st July Insulation deadline

Back in 2016, legislation was passed that meant that every rental property in New Zealand would have to be insulated where it was practicable to do so. The deadline for completion is the 1st July 2019. That date is fast approaching and there could be as many as 75,000 properties that will soon become non-compliant and technically, unable to be rented.

The Housing Stocktake of New Zealand that was compiled last year estimated that there were approximately 580,000 dwellings being used in the private rental sector (PRS) and approximately 37% of the population were living in rental accommodation. Many of these properties were uninsulated. This gave landlords three years to get their properties compliant and insulated before the standards became mandatory.

Typically, many landlords were oblivious to this or simply just put it off and ignored it. We estimate that there is still approximately 10 to 15% of rental dwellings non-compliant and the insulation industry does not have the capacity to get the work complete. Best estimate is that 50,000 dwellings can be insulated a year according to one leading insulation provider. We believe that there could be as many as 75,000 non-compliant properties when the 1st July 2019 deadline strikes. Any landlord with a dwelling that is not insulated by 1st July 2019 could well face $4,000 exemplary damages through the Tenancy Tribunal and be issued a work order ensure that the work is done. Ignore that and you could face an extra $3,000 in exemplary damages.

Because many landlords have been slack or have left it too late, we believe that we will see a surge of rental properties put on the market for sale as the deadline approaches. The reality is that much of our rental stock is in poor condition and many landlords will not want to throw money anyway spending thousands to make a property compliant. This could be good news for first home buyers and savvy investors but bad news for tenants leading to an even greater shortage of rental stock.

Tenancy Compliance Investigation Team (TCIT)

These guys mean business and it appears that they are targeting Property Management companies up and down the country. Lots of companies have already been audited by the TCIT. Last year, Paul Davies Senior Operations Advisor TCIT warned Property Managers that that they were being targeted and it would be them they would be holding to account if landlords did not get properties insulated. No Property Management company wants to face $4,000 of exemplary damages and have the brand negatively portrayed across the media.

Therefore, the only real option they have is to walk away from the potential thousands of properties under management. Rather than manage the properties themselves, many landlords will again, probably choose to sell, as getting the property compliant will be too costly, too hard and too time consuming. Others will simply form a ‘black market’ of rental properties as many landlords will take the gamble of not getting caught out and prey on tenant’s naivety.

The Healthy Homes Guarantee Bill

This is a bill that we do support as the quality of rental properties in New Zealand is well below the acceptable standard that you would expect from a country of our stature. Literally hundreds of thousands of tenants up and down the country are living in cold, damp rental accommodation.

In our opinion, this bill is probably one of most radical changes to housing legislation that there has been in this country. Soon, standards will be set as to what the indoor temperature of a rental property must be achievable. This is likely to be 18 degree Celsius, as per guidelines set by the World Health Organisation. This means that tenants must have the ability to maintain the indoor temperature of their rental property to 18 degree Celsius regardless of what the weather conditions are outside. Failure to do so will lead to a breach of Landlords Responsibilities with a further $4,000 exemplary damages facing non-compliant landlords.

Nothing wrong with that, however this will likely lead to a further reduction in the rental stock.

Let’s take Dunedin as a prime example. Many of the student accommodation in the city is of an age and condition that would probably make if financially unsustainable to invest the tens of thousands of dollars that is required to make the property compliant.

A potential consequence of this is that the landlords simply do not do the work and leave the properties derelict, as again, to rent them out would be a breach of the RTA. Instead, many may just land bank and wait for developers to buy up the land that their properties sit on, leading to a greater shortage of rental stock. There could be streets of empty, boarded up derelict housing whilst the thousands of students scramble for what little rental stock there is. Investing in a good quality Dunedin student rental may not be a bad idea.

Attack on Negative Gearing

When we are demanding that the approximate 400,000 landlords across New Zealand invest thousands of their hard-earned dollars into their rental properties, the worst thing we can do hit them with a stick and remove the ability to offset rental losses against their own personal income. In many cases, landlords get a significant tax rebate. This rebate could be used to finance many of the much-needed improvements. Yet with this taken away from them, the financial return simply no longer stacks up. Approximately 90% of the landlords in New Zealand own only one or two rental properties. Therefore, this tax break is vital for the financial viability of their investment.

In my opinion, this is Labour’s biggest mistake. From the outset, they have said that the largest exponent of negative gearing is large property speculators. They could not be further from the truth. These landlords probably run their business as a profit and therefore only benefit from the rising rents.

How ironic it is that the biggest exponents and benefactors of this policy are the large landlords Labour set out to target. Increased rents by over 10% per annum means that they find themselves making more and more money.

The best thing that the coalition can do is park this policy until all properties comply with the Healthy Homes Guarantee Bill, or even better, remove it from the table completely. That, however, is unlikely to happen.

Proposed increase of tenant rights

The increasing debate around tenants’ rights has left many landlords feeling that they have been unfairly targeted with many believing that things have gone too far. I for one have no problem with some of the proposed changes such as pets, limiting rent increases to once a year and tighter legislation around Boarding Houses.

However, when you have to give a valid reason to end a tenancy or go to the Tenancy Tribunal to end a tenancy, then many feel as though property ownership rights have been taken away from them.

Landlords have already been hit unfairly with tenants no longer being liable for accidental damages after the infamous Osaki case. The proposed Residential Tenancies Amendment Bill No 2 does address this to some extent but it does not go far enough.

If a tenant is allowed to have a dog by right, and the dog damages the property, then the landlord should not have to spend a cent in repairs to damage caused by the tenant.

Tenants already have a multitude of rights; the main issue is that many do not know how to exercise them. If things go too far in the tenant’s favour, then many landlords again will weigh up their options and if it becomes too hard, many throw the towel in.

There are other factors as well such as the artificial shortage of land which seems absurd considering less than 5 million people live here and our country is not much smaller than Japan, yet they can accommodate 128 million people. Go figure!

Then, add on the cost of building and is it any wonder that Kiwibuild has been an absolute flop?

The proposed implementation of capital gain taxes will also have many investors nervous with the prospect of having to pay a proportion of the capital gain to the state in taxes.

Overall, however good their intentions are, all of these factors are leading us to a potential crisis point with rental accommodation and things will get worse before they get better.

I feel the coalition government are trying to rush too much policy through without taking stock and looking at the potential fallout. I for one agree with many of the things that they are doing such as making it compulsory for all rental properties to be insulated and the passing of the Healthy Homes Guarantee Bill.

However, the targeting of private rental sector landlords is short sighted and claiming that speculators are the biggest exponents of negative gearing is factually incorrect.

At a time when we need our landlords to invest in their properties attacking negative gearing is not the right solution and if anything, it is making matters worse. The potential for mass selling of our rental stock leading to increased rents is a realistic prospect.

Whether many on the left of the political equation like it or not, New Zealand needs a strong and professionally run private rental sector. Targeting them has simply backfired