Sharing the Juicy Fruits

Supporting Renters into Their Own Homes Through a Tax Incentive for Leg-up Landlords

I would like to make a suggestion that I believe may expedite getting more renters into their own homes more quickly AND keep landlords happy.

Jiminy Crickets: The Housing Equivalent of Hens Teeth

Professor Graham Squires from Massey University’s School of Economics & Finance, said :

If society deems everyone deserves to have a roof over their head, there’s a social imperative wrapped up in housing… investors are not necessarily under legal obligation but you get some with a social conscience.”

But what about those investors who do not have a moral conscious or, have one but consciously choose to not respond to their Jiminy Crickets ?

When it comes to Housing, $ in Pocket Trumps Morals

According to an article published in Stuff in April, The New Zealand Property Investors Federation says that they have no moral obligation when it comes to housing.

It's disappointing that a body representing a group of privileged people publicly chooses to take this stance; especially when they have a golden opportunity to show a human-ness and help repair the housing divide that now characterizes our fractured society.

It seems, sadly, the only way to sway some landlords into reducing rents would be with a financial incentive - as, clearly, this is what matters most to those with a 'money matters most' disposition.

The Big Picture: The Housing Curved Wall

We know that the real steeply curved tall wall that renters have to summit to become home owners is made so difficult because of principally, two things:

1. Seemingly ever increasing (and seriously over-inflated ) house prices, and

2. Being unable to pay rents AND save for a home of their own.

We also know that government is working on increasing the supply of houses. It is the second impediment (saving for a deposit) that I wish to offer a suggestion about.

A Balanced Approach: Using Both Stick and Carrot

One Hand Taketh - The Stick Approach

Government is taking away the ability of property investors to offset interest on mortgages against their rental income. I would not, for even 1 second, advocate the removal of this policy - as then we're then back to square one in not having a (more) level playing field for want-to-be home owners.

However, as a consequence of wielding this (very necessary) stick, we have a segment of the population that feel they have been 'unfairly targeted' - some of whom threaten to retaliate by increasing the rents of their tenants.

In my article A Viable Alternative to Rent Caps I provided an example of this: On 24th March, Duncan Garner mentioned on 'The AM Show', that in response to governments housing announcements, his friend - who owns 40 properties - will force a $135 a week increase of rent on all his tenants in his 40 rental properties.  

So, this is a case-in-point for the use of 'the Stick'.

The Other Giveth - The Carrot Approach

In a previous article Helping Others Up I touted the concept of landlords (through exercising moral conscious) voluntarily reducing the rents charged to tenants; to help them save for a deposit for their own home. I coined the term 'Leg-up Landlords' for those who would do so.

I believe it possible to incentivize landlords, who would not voluntarily practice Leg-up Landlordism, to reduce rents charged to tenants by introducing a reduction in rental income tax for doing so ?

Give unto Caesar what is Due to Caesar

Simply put: tax is payable on rental income and, just like with any business, taxable income is calculated by deducting your allowable (rental) expenses from gross (rental) income.

Who wants to pay more tax though than what is absolutely necessary ? How about we find a way then of reducing that tax burden .....

The Proposal

In broad terms, the proposal is for government to reduce the tax on rental income for those landlords who reduce their tenants rent. This incentive would need to be of sufficient 'potency' and value to act to drive rents down.

Its All About The Details

As I'm a 'big picture' ideas generator, not a policy-maker, I can't give a details of how this would translate in practice. What I can say is that the reduction in rent would need to be meaningful and not just a token amount; otherwise it defeats the purpose.

In my opinion, to qualify for this incentive and enjoy the fruit, a landlord would need to reduce the rent currently charged by a minimum of $100 a week - which becomes a $100 savings a week towards a house deposit for want-to-be home owners. Anything less than this would not be making a difference to renters.

I reckon that reducing rent by $100 a week should equate to a reduction of 10% of rental income tax. Perhaps for every $50 extra the rent is lowered over and above the minimum of $100 a week, an extra 5% reduction in rental income tax could gained?

This is a financial reward for landlords helping tenants become home owners reasonably quickly.

Here is an actual example of that in action:

In response to my article A Viable Alternative to Rent Caps published in LinkedIn, Robert McAulay wrote:

“We were fortunate when we got married in that our landlord thought in a similar way and kept our rent low enough that we were able to save and in just under 4 years we were able to purchase our first home, so the concept does work but as you say greed stops it.”

We All get to Enjoy the Fruit

The goal is to have tenants paying a 'reasonable' rent whilst still being able to save up a deposit for their own home.

Considering that, with the new housing policy, government has taken away from landlords (tax deductible interest) with one hand, how about extending the other hand and giving some reward for reducing rents?  That approach has the potential to be a win-win for both landlords and tenants. We could call the incentive a 'helping-hand' or 'goodwill' or 'leg-up' incentive.

This incentive would not replace the revocation of tax deductible interest on rental income - but rather supplement it. So, we're using a balanced 'stick and carrot' approach.

The incentive would ONLY apply to those who can prove they have reduced the rents of their tenants - perhaps through an affidavit or similar from the tenant.

Incomes Well Behind Cost of A Roof Overhead

As you will see from the image above; the increase in providing a roof over one's head by far exceeds income in New Zealand.

When events such as wage freezes are implemented, this only exacerbates the issue. It is therefore imperative that both house prices and rents reduce over time to bring them much closer to wages. With so many benefits that come with affordable rents we should be supporting initiatives such as the Green Parties 'Reasonable Rents Campaign' .

The Best Ideas are The Simplest Ones

This proposal is simple, can be done at the stroke of a pen, and requires no consultation, or wrangling, with the Reserve Bank.

Who knows, implementation of this concept may avert the need for a rent cap policy being introduced by government.

If you like the idea, pass it on so that it makes its way to those who have the power to make it happen; then we can all share the 'juicy fruits' of home ownership.