New rental rules are being welcomed but they could cause more problems if they’re not accompanied by more social and rental housing, Dileepa Fonseka reports

New rental reforms will abolish ‘no cause’ evictions, limit rent rises to once per year, end rental bidding, add a degree of anonymity to the Tenancy Tribunal process and hike up punitive damages for breaches of rental legislation. 

Legislation containing the changes will be introduced early next year and will likely further drive the growth of New Zealand’s unregulated property management sector as “Mum and Dad” property investors pay somebody else to manage an increasingly complex web of legal obligations. 

“Where there’s a tightening of conditions there will be some [landlords] who will exit the system.”

But an economist believes the rules could worsen the rental crisis, especially in the provinces where there aren’t enough property managers to take on new rental stock. 

Sense Partners economist Shamubeel Eaqub said the new reforms were not “going to make things better for renters for some time to come”. 

“Even though we can make a very strong argument that these are the right things to do we know that it’s going to be a tightening of conditions and where there’s a tightening of conditions there will be some [landlords] who will exit the system.”

Property managers

Advice received by Ministers on the latest batch of rental reforms sets out the context: 59 percent of all private rentals are managed directly by the landlords that own them

But with greater regulatory burdens landlords appear to be increasingly turning their properties over to the unregulated property management sector. 

The number of people employed as property managers is the highest it has ever been in nearly two decades.

Statistics provided by Sense Partners showed the number of property managers per bond lodged had doubled from 4 per 1000 in 2010 to 8 per 1000 today. 

David Faulkner of Real iQ property management, who trains property managers, said that chimed with his own experience. 

“We are seeing landlords saying this is getting too hard let’s outsource this now to a professional property manager.” 

“This is why regulation of the industry is important.”

The removal of “no cause” evictions – where landlords could evict a tenant for no reason with a 90-day notice – would make pre-screening of tenants more important under the new rules.

Faulkner said “no cause” evictions were used very rarely – he had only used it twice – but with that ability now gone there would be a greater need for landlords to hire property managers to do background checks and search tenant databases. 

“The property management sector is not yet big enough to be able to take on that professionalisation of landlord-ing.”

But Faulkner said the public outcry after “KFC-gate” – where a property manager was sharply criticised after she told a Social Services Select Committee she checked bank statements for purchases of KFC – had led to tightening up of the information property managers could access.

A property manager’s “gut feel” from the experience of renting out hundreds of properties would the most useful pre-screening method, Faulkner said. 

Eaqub said “Mum-and-Dad” property investors would be more likely to hand over their properties in greater numbers to professional property managers under the new rental regime, but said the property management sector was not large enough to absorb a major increase in landlord demand – especially in smaller centres.

“If you’re going to have those rules and regulation changes coming through we know there’s going to be a period of transition where current landlords are going to have to learn how to deal with new ways of doing things.”

“And the property management sector is not yet big enough to be able to take on that professionalisation of landlord-ing.”

Source: Sense Partners

The danger was that those rental properties were sold on by landlords instead, and in smaller centres those properties would likely not be sold to other landlords who would rent them out but to new arrivals to the region and first-home buyers, Eaqub said.

With population in many provinces set to grow that could take enough rental properties out of small rental markets to cause more pressure on the affordability and availability of rentals.

“We actually have to build more houses to rent,” Eaqub said. 

Rental yields and the squeeze on social housing

Yields on rental properties have fallen since the 1990s, from 7.1 percent in 1994 to 4.3 percent in 2019. 

Eaqub said rental yields didn’t add up relative to other investments but lower interest rates had kept them attractive. 

But it meant there was no incentive to build properties to rent, one of the reasons why the supply of rental stock had flatlined.

“If you’re not adding more houses then there are local people who are being displaced and inevitably the ones that getting displaced are at the bottom end.”

While the public’s focus was largely on the big cities the problem was worse in smaller centres like Gisborne, where no houses were listed for rent for nine months of last year Eaqub said.

Gisborne also has one of the longest social housing waitlists relative to its population. 

Eaqub said large population growth in these areas had made it an attractive proposition for landlords to exit the market and sell to incoming first home buyers. 

That decreased the rental stock, putting pressure on the rental market, driving up rents across the board and making rents unaffordable for those at the bottom-end of the market.

“All of those things are only going to intensify unless we also do something at the same time that increases the supply of state housing and rental housing.”

Cabinet papers released with the announcement can be accessed here:

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