18 degrees celsius. Putting the heat on landlords

  • Why the Healthy Homes Guarantee Bill is going to be a game changer for landlords and tenants in New Zealand
  • Tens of thousands of rental properties may soon become non-compliant

“This is my generation’s nuclear-free moment and I am determined that we will tackle it head on.

— Prime Minister Jacinda Arden talking about climate change

As winter approaches, few will dispute that the majority of rental properties in New Zealand are not up to standard.
Thousands of tenants up and down the country live in cold, damp properties that makes a mockery of our global clean green image.

Late last year a bill was passed through Parliament that will literally change the face the housing in New Zealand forever, yet many people are unaware as to the true impact of this legislation and the cost of compliance.

How warm is your rent roll? Take our one minute survey

The Healthy Homes Guarantee Bill became law in December 2017 and many landlords are utterly oblivious as to the impact of this bill. The Labour backed bill passed through Parliament at the second attempt late last year due to the fact that it had support from the previous National Government coalition partners the Maori Party and from United Futures. Because of this, it passed through the first reading by one vote.
This bill is in our opinion, the single biggest piece of legislation for tenancy law since the introduction of the Residential Tenancies Act back in 1986. It is simply going to change the face of renting forever.
Along with Labour stating that they are going to build 100,000 new houses, we are seeing the largest and probably most ambitious undertaking by any government surrounding housing in New Zealand since the Labour Savage Government of 1936.

Why is this bill so significant and what is going to be the impact for both landlords and tenants?

The bill focuses on the ability of tenants to be able to keep their rental property warm and dry using energy efficient heating. The penalties for landlords who do not comply with this bill will be severe and we believe that the majority of rental properties across this country would not meet the criteria if it was set today.

What does the bill focus on?

The Healthy Homes Guarantee bill states that all rental properties must meet the following standards.

  • Standards about the indoor temperatures that must be capable of being achieved in the premises. We believe that this will be 18 degree Celsius.
  • Probably likely that the source of heating must be energy efficient.
  • These standards have already been set.
  • Moisture ingress.
  • Draught stopping.

If landlords fail to meet obligations in respect of healthy homes standards, then they may potentially face exemplary damages of up to $4,000 plus they will face a work order instructing them to get the property to the standards before they can rent it out.

18 Degree Celsius

World Health Organisation recommendation for minimum indoor temperature

How many rentals many rentals will comply?

The big question we are all asking at the moment is what are the standards going to be? As yet we do not know but if you read between the lines one can assume that the indoor temperature capable of being achieved will be 18 degrees Celsius. This is the temperature set by the World Health Organisation as to what constitutes a suitable minimum indoor temperature for a home.

Many properties around New Zealand simply would not be able to achieve this and to get our current rental stock up to standard is going to be a monumental task. Particularly as we have a shortage of skilled tradespeople and the Government is promising to deliver 100,000 new homes over the next ten years. If you're looking for a new business opportunity, heat pumps, central heating and double glazing is probably the way to go.

We are unsure as to when the standards will be set yet they will become enforceable at the earliest 1st July 2019 but no later than 1st July 2024. Each Tenancy Agreement and renewal or variation will need to have a statement on it stating that the property complies with the Healthy Homes Guarantee Bill. Failure to do so is also an unlawful act with exemplary damages up to $500.

Baby boomer landlords struggle to accept change

It was interesting to gauge the response of an audience of investors that I recently spoke to at an Investor Evening in Christchurch about the changes that they will face. As I explained the impact of this bill and the potential costs associated with improving the current rental stock I watched carefully assessing what the audience thought about it. I think it is fair to say that most of the audience, particularly the older generation really struggled with what I was telling them.

Baby Boomer landlords have generally been able to do what they like with regards to their investment portfolio, but things have changed and many of them don’t like it. I remember being a Property Manager about 10 years ago. When a landlord told you to do something you simply did it without question. Now, it is not so simple, taking shortcuts with regards to maintenance treating tenants poorly could see you end up in Tenancy Tribunal as tenants become more aware of their rights. Do not expect a warm greeting from your local adjudicator if you breach this legislation. The temperature in Tribunal will be as cold as the property you provide for your tenants.

This student flat in Dunedin will not cut the mustard when it comes to the HHG Bill. If tenants cannot achieve an indoor temperature of 18 Degrees Celsius, landlords may face exemplary damages of up to $4,000.

Landlords face double blow as negative gearing to go

The amount that landlords budget for repairs, maintenance and improvements will likely more than double over the next few years to ensure that their stock meets the criteria set in the Healthy Homes Guarantee Bill. Many older properties may simply end up being demolished as the cost of making them compliant will simply not add up.

What will be a double whammy for landlords will be the removal of negative gearing. This is when landlords can offset their losses from their rental investment against their own personal income. Many, including myself think this is a bad move. In some cases investors may be able to offset about $4,000 to $5,000 from tax rebates on a single rental property.

This would go a long way to helping landlords front up with the added costs around compliance. Instead, many small Mum and Dad investors are going to be punished. Labour's policy around negative gearing is to remove tax loopholes which they claim the biggest users are large-scale speculators who own multiple rentals and use losses on new acquisitions to continually reduce their tax. Some may do so, but in our opinion it is the small Mum and Dad investors who own one or two properties that will be hurt the most. Some may be forced into selling their asset when they realise the costs associated with compliance no longer make it financially viable to own it.

Rental warrant of fitness to become compulsory

We have long suspected that the Rental Warrant of Fitness (RWOF) will at some stage be written into law and we believe the Healthy Homes Guarantee Bill will be the instrument for this to happen. Why else would the recent national census ask the question as to whether the property you live in has more than an A4 piece the size of mould in it? This is one of the criteria's under the Rental Warrant of Fitness.

Although the rollout of the scheme in Wellington has been a flop, there is enough support for the RWOF across the power brokers of New Zealand politics and expect it to be incorporated into the standards set around the Healthy Homes Guarantee Bill.

This will mean that every rental property will have to meet the criteria set by the RWOF and have assessments carried out probably every three years at a cost of around $250 to landlords.

This could become a new revenue stream for Property Managers as we see no reason as to why they cannot carry out these checks.

There is no doubt that successful Property Management is based primarily around people skills. However, we predict that more emphasis will be placed on Property Managers having more in-depth knowledge of the property that they manage and eventually move towards Asset Management.

Short term pain for long term gain

Overall, we believe that the Healthy Homes Guarantee Bill in conjunction with the Rental Warrant of Fitness will benefit New Zealand long term. Housing is a basic human necessity and everyone should live in a warm, dry, compliant property. However, the cost of this exercise will be born by everybody. Landlords will have more costs, taxpayers will have to contribute to housing supplements and tenants are already facing greater hikes in rents.

Long term though, it is an investment worth making. It will contribute to a healthier nation with less pressure put on our already straining healthcare system. We will also see a more productive economy with a happier, healthier workforce taking less time off for sicknesses caused by unhealthy housing.

However, Labour could have done better by not hitting investors hard by removing negative gearing. One feels at times they are out of touch with the thousands of property investors up and down the country. Do they really think that they are all evil, wealthy capitalists, pouring hot tar on the poor peasant tenants below? This is the impression we get, particularly when you read their policies on the Labour party website. Many landlords will find themselves being pushed to the limit.

The reality is often opposite. Instead, Mum and Dad investors who own one property simply see an investment in property as a way of funding their retirement. They are about to get hit with a sledgehammer, penalised for being proactive and not looking at the state to look after them in retirement. That simply isn't fair.


houses-on-hill-wellington

Rental Warrant of Flopness

  • Why the rental warrant of fitness will not work in its current format
  • UK style rating is the way forward for healthy houses

First of all, let me start by stating that this is not an article beating up the people who have designed and implemented the Rental Warrant of Fitness. The intentions of these people are good and they are thinking of the most vulnerable of citizens within New Zealand. I also genuinely applaud the Wellington City Council for trying to get this off the ground. The current Mayor Justin Lester campaigned in the mayoral elections stating that if he was elected he would implement the Rental Warrant of Fitness. He is as good as his word and he should be commended.
However, the current guidelines for the Rental Warrant of Fitness are seriously flawed and in my opinion, are bordering on 'Nanny State'. This was a criticism of the previous Labour Government with policies around new standards for light bulbs and restrictions around hot showers.


Professor Philippa Howden-Chapman and Wellington's Mayor, Justin Lester discuss the newly launched Rental Warrant of Fitness.

The Rental Warrant of Fitness(WoF) is the brainchild of the University of Otago and in particular Prof. Philippa Howden-Chapman and Dr. Julie Bennett who have spent nearly two decades researching and designing the WoF. The WoF was launched by Wellington City Council in late August with much fanfare however the scheme recently hit the headlines for the wrong reasons when it was revealed that only two landlords had taken up the voluntary scheme and one of them had complained about it in the media.

Read about landlords feedback in media.

The criticism came from landlord Joseph Williams who stated that his tidy clean and relatively new rental property in Johnsonville had failed, even though it passed a basic council inspection in 2011. He also went on to state that the report was poorly written and full of spelling errors however these are minor issues that should be easy to rectify. Currently, the Sustainability Trust carry out the WoF inspections and charge $250.

The WoF inspection has 29 criteria and 63 questions that an inspector will assess. The assessment covers insulation, heating, ventilation, structural stability, sanitation and hazard identification. Where the main issues lie is that it is a simple Pass or Fail with a six-month window to get the property up to scratch if it fails the first time around. The idea is that landlords can promote the property as WoF passed to prospective tenants when advertising it.

In principle, it seems like a good idea but when you take a closer look it is seriously flawed.

I first came across the WoF when I was involved in the REINZ Property Management committee about 4 years ago. Nick Smith was the National Party Housing Minister and he sent out a proposal seeking feedback on the WoF. As a committee, we were asked to critique it and at the time I felt it went too far, measuring cupboards, having window strips on and having security stays on windows more than 2 metres off the ground. My opinion hasn't changed. In the end, the National Party threw it out stating it would add more cost onto landlords and subsequently it would increase rents.

I use my own house as an example. We recently renovated our own home and have gone to huge lengths to ensure the property is warm and dry. We have done the following work.

  • Insulation installed in the ceiling, most of the walls and underfloor
  • Installed double glazing windows throughout the property
  • Had central heating installed throughout the property
  • Installed a Showerdome
  • Installed a ventilation system
  • Had a polythene sheet installed on the ground under the property

You would struggle to find a warmer, healthier home in Wellington. However, our house would fail the WoF because we do not have window strips and we have no intention of installing them.
There are other factors seriously wrong with the WoF as well. Let's take into account issues around mould. The WoF guidelines state The house must be reasonably free of visible mould, having no more in total area of mould than an A4 sheet of paper. That is a very generic statement. There is a big difference in size between a 1 bedroom unit and a 5 bedroom mansion yet they are both measured on the same criteria. Also, what if the tenant is causing the issues around mould? This is a constant grey area that is often debated. It does not seem fair that a landlord may fail a WoF because of the way in which the tenant may live in the property.

What is in the warrant of fitness?

What we believe is a better model is to replicate the UK style Energy Performance Certification (EPC) on all properties, making it compulsory for all residential housing to show how the property performs in terms of its energy efficiency and its environmental impact through Carbon emissions. If homeowners and landlords do not display the EPC when a property is on the market, then they may be fined. We prefer this scheme as it gives a property a rating, similar to that of any household appliances rather than a simple pass or fail.

This is a far more productive way to demonstrate whether a property is energy efficient

The EPC is valid for a period of ten years compared to the WoF which is valid only for three, saving the landlord and subsequently the tenant money, as any increased costs are likely to be passed on to the tenant. The cost of an EPC is anywhere between $120 and $240 which is similar to New Zealand but as it is valid for ten years rather than three means there are significant savings to be made.

If every house has a rating, this will make landlords and homeowners more incentivised to ensure that their properties perform more efficiently providing warmer, drier homes for prospective tenants. It will also lead to long-term tenants reducing vacancy periods.
This could become the framework around the standards for the upcoming Healthy Homes Guarantee Bill, ensuring that the standards set are transparent, compulsory and easy to follow.

In all my years involved in Property Management, I would have been into thousands of properties up and down New Zealand. I have seen tenants living in conditions not befitting of a country as advanced as ours and our housing stock has to improve. I for one, applaud initiatives to raise the standards for tenants across the country. The nation as a whole benefit with less sickness, less time off work and less of a strain on our healthcare system. However, this format will not work.
The new Labour lead coalition also has to take into account whether or not there will be enough skilled people available to do all the work. They have already announced they are going to build 100,000 affordable houses in ten years. That is one challenge they've committed to but who is going to do the work on the rest of the countries housing stock?
Maybe increasing immigration is the answer? Oh, I forgot, NZ First is in the coalition. Winston Peters would never stand for that!


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.