Would Muller fix Labour’s rental property failures?

Since any promises made by former National Party leader Simon Bridges are effectively void, the new leader, Todd Muller, should tell New Zealand’s 290,000 residential rental property owners whether he supports Labour disastrous experiments or whether he intends to restore some sanity to the sector.

Currently, the sector remains frozen under the Covid-19 Response (Urgent Management Measures) Legislation Act which over-rode previous tenancy termination agreements, extended the period of allowed unpaid rent from 21 days to 60 days, and imposed a $6500 fine on any owners who put a step wrong.

During the lockdown, the Government continued pushing through changes to the Residential Tenancies Act that:

  1. Require 118 days of unpaid rent before the Tenancy Tribunal may end a tenancy because of unpaid rent. Currently, 21 days’ arrears are sufficient to end a tenancy.
  2. Require three disturbances in three months before the Tenancy Tribunal could end a tenancy because of anti-social behaviour.
  3. Remove a property owner’s contractual right to end a tenancy – the so-called 90-day no-reason termination.

Rental property owners would like to know whether, before the election, a National Party under Mr Muller vote against those amendments.

We are not the only group to say that the current Government’s housing policies have been a rolling maul of incompetence.

  1. KiwiBuild promised 100,000 new homes in a decade yet in three years was only able to deliver 1535 houses.
  2. The waiting list for state houses reached a whopping 16,309 applicants by March 31 this year, more than double the number when the coalition government was formed in 2017.
  3. Changed tax rules hit on March 31 this year. This ring-fencing of rental property losses will tip up to 116,000 negatively geared owners out of the sector, according to documents obtained under the Official Information Act.
  4. Expensive and poorly conceived regulations on rental properties presented as guaranteeing a “healthy home” brought a regime of spot checks, narking, and massive fines on owners. This will drive more out of the sector once they take effect in the middle of next year.

If Mr Muller becomes Prime Minister, would he:

  1. Work with the private sector to build homes.
  2. Work with rather than against rental property owners to increase the supply of housing.
  3. Revisit the so-called “healthy homes” regulations as his predecessor promised. They should be changed from punitive regulations to recommendations and widened to include other methods to reach the recommended goals (such as shower domes instead of extractor fans). Standards for housing are nothing new and have existed here since 1947 under the Housing Improvement Regulations.

Stop the War on Tenancies is a group that since October 2018 has been highlighting the failures of successive governments while creating rental property policy and law.

The costs of rental property ownership

If you own your own home you will know that the costs of property ownership are constant, substantial and inescapable. Even for those owners who are fortunate enough to have no mortgage to pay, the bills for council rates, insurance, maintenance, repairs, power and water are unavoidable.

Yet somehow there is a wide-spread belief that this does not hold true for rental property.

Although many tenants, having never owned property themselves, are firmly convinced that their landlord fritters away the entire rent payments they receive on frivolous things of no lasting value, you would expect that those politicians, bureaucrats and lawmakers who do have the benefit of property ownership would actually realise that this cannot be true.

I have recently completed my draft 2019-20 accounting summaries, and some of the ratios they reveal may be of interest.

I have a long term-rental property portfolio, with the last property bought in late 2015, and all of these rentals are located in the Auckland southern suburbs. Over many years I have paid down most of the borrowings, so my mortgages are now quite a low percentage of my property values.

The rent I received works out at just under five percent of estimated current property values. A bit higher than if I just deposited the money in the bank to be sure, but then factor in that the time and effort devoted over the year to property and tenant management adds up to a lot more sweat and stress than just inspecting a bank statement once a month.

Like any asset, rental property takes money to maintain, and failure to do this can lead to rapid and substantial deterioration that is costly to rectify.  Quite frequently, the maintenance costs on a rental property are even higher than on a similar owner-occupied property. Human nature is such that few people treat as asset they rent as well and carefully as an asset they actually own. For instance, nobody bothers to wash a rental car.

In my case the repairs and maintenance bills add up to 20 percent of the rent received. Sure, this includes one full professional external house repaint and one substantial bathroom plumbing upgrade, but then such costs are an integral part of maintaining the value of any long-term real asset investment.

Then we come to some of the less tangible items. Insurance premiums take 4.4 percent of rent received and the Council rates add up to 7.7 percent. Like any business there are also the costs of running a vehicle, paying the accountant, bank fees and a few other minor items.

After allowing for all of these expenses I eventually end up with an income of around one third of rent received for all of my time, risk, effort and investment.  As you can see, the return on the capital involved is not that great given the work it all entails and, despite popular opinion, the overheads are actually quite high.

These figures show the unworldliness of those who believe that all the rent they pay goes only into the landlord’s pocket, where it is then spent in a wasteful manner on high living and expensive toys. In my case, I need that money to survive.

There are those who would say “but look at the return you are getting against the price you paid all those years ago to buy that property”.

However any business must compare today’s costs and incomes against today’s asset values. We do not expect a supermarket to keep its food prices down because the value of the supermarket land and buildings have increased over the years.

In the current lock-down, there are many people who are demanding that landlords (both residential and commercial) should reduce or not even ask for rent payments. “After all”, they say “You are now getting a rent holiday, you should pass that on!”. Wrong. There is no holiday and no subsidy, only the deferring of repayments to some later date, and the interest still accumulates and must eventually be paid.

In my own case, if I reduced a tenant’s rent by one third – say from $450 to $300 – I would effectively then get no income from that property, income which I need to put food on my own table. Anything more than a one third reduction would mean that I am then subsidising my tenants living costs at my own expense.

A recent Property Investors Federation survey has found that rental property owners are affected by the Covid-19 situation just like tenants and all other New Zealanders. Most rental property providers do not own vast numbers of properties, 90% of landlords owning just one or two rentals. The majority of these people have another source of income apart from the rent they receive, but this survey study found that almost 60% of providers have lost either part or all of their other income.

So we need realism here. We do not expect health workers, teachers, or emergency personnel to work for nothing. Those who grow, transport and supply us with food are still being paid for their efforts, and rightly so. Therefore, why expect those private individuals who rent out housing to families who cannot buy their own to do so for no return?

By Peter Lewis, who is vice-president of the Auckland Property Investors Association.