A Viable Alternative to Rent Caps

Until a few weeks ago, Landlords held all the aces in their hands and renters none: truly a case of 'Heads I win, tails you lose'.

The New Zealand Government has since put its money where its mouth is and introduced policy to tilt the balance of the ability to purchase property away from property 'investors' and speculators, towards those who currently rent, but want to be home owners.

Many will agree with me that home ownership is a fundamental human right - denied to many in New Zealand because of - no way to say this 'politely' - Greed.

Following her visit to New Zealand in 2020 the then Un Special Rapporteur for Housing, Leilani Farha's report mentioned:

Housing having lost its function as a place to live, and instead has become a speculative asset.

Auckland University’s Robert MacCulloch's statement that investors reactions to policy changes are 'almost hysterical' rings true. In my opinion, the 'landed gentry' have had it too good for way too long. No wonder they're bleating.

Landlords and Widgets

The lamentations of landlords regarding government progressively shutting down the taxation 'loophole' because it is a 'business' just like any other becomes nonsensical when one considers that the (so called) 'business' of property rental is nothing like making 'widgets'. The manufacture of widgets actually gives the many workers involved in production of said items an income - which could be used to purchase a dwelling to live in. Widgets are manufactured in a facility that does not (unlike a residential rental property) remove a dwelling from the pool of those available for purchase by would be home owners. I've come across the phrase 'farming with people' in housing forums; but I'll stop at that.

A Destructive 'Business'

So, for those who still see rental properties as a legitimate 'business' , what would you like to see happen to businesses which are destructive to society and the environment (think of arms, oil and cigarette production) ? Wouldn't you think it fair, and just, to impose a hefty tax on their profits - and ultimately, to phase them out of existence altogether. Well, then, taking away the 'tax loophole' is just another way of effectively increasing tax - just like the 'sin tax' that government imposes on sale of cigarettes. The right thing to do.

Landlord representatives claims that what government has, clearly done in the interests of the Greater Good, will ' hurt middle New Zealand ' is both pathetic and preposterous. 'Middle New Zealanders' cannot afford to purchase their own home - I know, I'm one of them. Thank goodness, for us, government has proved it has a conscious and a heart and the guts to do the right thing - not the easy thing.

The blue camp (and their supporters) bleat that the government has 'broken its 'promise'. Well, blue leader, when there is such imbalance and inequality in society, that is totally justified. Upsetting a few wealthy cadres to uplift the downtrodden and ignored majority gets my nod - any time of day.

Ok, So now We'll just Punish Tenants, shall We

Government has warned landlords who would try to claw back the loss of the (previously) tax deductible interest component of mortgage on rental properties by raising the rents of their tenants that, should they do so, a rent cap may be in the offing. Having proved they back words with actions, I'd be inclined to believe them. Despite this, my sentiment is: once greedy, always greedy and some landlords will, spitefully, try their luck.

Case-in-Point

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.  

I'll not mince my words or response to that: I'd be embarrassed to even mention that I am friends with someone who owns 40 properties. Just when I thought that was the top of the pyramid, someone recently mentioned in the media that they own 69 (yes, six-nine) properties ! Is that admirable ? If you think that I'd suggest you have seriously questionable and junk values.

Tenants are Not the Dummies Landlords Think they Are

Just because they do not (yet) own their own home does not mean that renters are ignorant or stupid.

It is very likely, now that tenants are more empowered and aware of their rights under the improved Residential Tenancies Act, 1986 , that they will contest rent hikes that are clearly motivated to recoup the juicy tax deductibles (that were used to fund their overseas holidays and jet skis) at the Tenancy Tribunal on the grounds of them being unjust.

If this becomes a trend it would show an abuse of the position of landlords and may well require government to consider the implementation of a legislated rent cap to bring landlords in line with policy.

In a letter to both prime Minister Jacinda Ardern and Minister of Finance, Grant Robertson, I wrote to thank them for the (recent) policy announcements made to address our housing unaffordability crisis, but I also asked them to "keep a close eye on the number of complaints the Tenancy tribunal receives in the next while relating to rent increases from landlords who do so as a means to pass on and recover the tax incentives lost as a consequence of yesterdays announcement."

There's Got to Be an Alternate to a Rent Cap

So; let's look at this from another perspective - one of collaboration rather than being in a 'master and servant' situation that ultimately benefits only the master. Why can't we come to a 'You scratch my back and I'll scratch yours' arrangement ?

I'd like to suggest what I believe to be both a fair and savvy policy which could be a viable and alternate to the very real possibility of the introduction of rent 'caps'.

The much touted 'win-win' scenario is an ideal - but with such diverse drivers (landlords wanting maximum money, whilst renters want to save for their own homes) it's unlikely that we'll achieve an outright and equitable 'win-win'. It's far more realistic looking for a solution that is 'reasonable' to both sides; advancing both of their goals...

Its All about Being 'Reasonable' - not Greedy

What I'm about to suggest will bring an income to landlords which is reasonable but not excessive - as is currently the case.

The means to achieve this is simple and I'll explain step-by-step:

Step-by-Step

1. Obtain the current council value of the property.

   Anyone can do this online.

2. Use an online mortgage repayment calculator and input the value of the house.

   I've used the one provided by Kiwibank  

   In our case we'll use $850 000 as the value determined by the local council. 

3. Leave the deposit at 20% (as this is generally the minimum anyone would need to front up to purchase a house.)

4. Leave the loan term at 25 years.(currently considered to be the standard term)

5. Select the fixed term interest rate to co-incide with the period of tenancy (a minimum of 1 year would apply).

   In this case we've selected 2.35%

6. Select the repayments to the 'weekly' option (as this is frequency of most rent payment)..

   In this case the amount is $690 per week.

Now, here comes the interesting bit:

7. Calculate 33% of the weekly amount.

   In this case $227-70 per week.

   This would be the amount the tenant would pay.

The balance of $462-30 (or 66% of the weekly mortgage payment) will be the responsibility of the landlord to pay.

What Using this Model Achieves Is:

a.  By charging rent which is reasonable, this effectively loosens the strangling financial noose around the necks of tenants and allows them to be able to save a deposit for the purchase of their own homes. With rents at the very high and unreasonable levels they currently are, saving the very high deposit amounts required for a home purchase is just not possible (in fact a pipe dream) for a significant number of renters who do want to become home owners and escape from being perpetual renters.

b. Forcing landlords to be responsible for paying 66% of the mortgages themselves, ensures that only those who are financially capable and 'solid', are allowed to operate as landlords. This removes 'marginal' investors - who actually can't afford or tolerate any changes to the system (increases in interest rates, or drops in the value of property at large) with bankrupting themselves.

This reduces financial risk to the banking (lending) system at large.

c. When interest rates change, the rents will change in accordance with the above methodology - but only after the expiry of fixed-term leases in force.

When Interest rates Rise 

Notice I wrote 'when' interest rates rise - as they most certainly will. What then ?

Using the above example, with house value staying at $850 000, should interest rates rise (to say 6%) the weekly repayment would become $1008 and the portions payable by each party would then look as follows:

Tenant  : $332-64 (33%)  was $227-70 and

Landlord: $675-36 (66%)  was 4462-30.

d. Landlords are still having the cost of purchasing a rental property subsidized by tenants - but not fully subsidized as is the case with many 'marginal' investors who rely on tenants to single-handedly sponsor their mortgages - which by its very nature is unethical: as there is only one winner.

Landlords are still making capital gains over the long-term; after all the building is an asset; but now no longer becomes an easily traded commodity.

e. The entire system is transparent and preserves the privacy of financial status and standing of both landlords and tenants.

Remember the Big Picture and Overall Goals

Some might argue that a 33 / 66 split is unfair and that a 40 /60 or even a 50 /50 spilt would be better; however, what is more important than the actual split is that the equation allows renters to be able to afford to - fairly quickly - save the deposit they need for their own homes on top of the weekly rents changed by landlords - who are, all the time, (no matter what rent comes in) building equity and (as the saying goes) getting themselves ahead.

Both parties can make reasonable gains to achieving their individual goals when greed has its legs hobbled. It's not a case of renters 'catching up' but rather putting everyone on an equal footing - after which the hobbles can happily be removed.

Getting the Better of MeFFU / Me1Fu

From time-to-time, you'll notice me using this term 'MeFFu' or 'Me1Fu' in my articles. I have created it to define a societal contagion that afflicts much of our world and, in my opinion, is far more insidious, impactful and destructive than what COVID-19 is.

It means 'Me First F#uck You' and is what lurks behind the amassing of wealth - in New Zealand achieved by buying more properties than what one needs to live in.

I'd say that MeFFu / Me1Fu is rife among the landlord community. Underlying this is an unfounded fear of scarcity; yet there is more than enough of just about everything - houses included - to go around.

Housing Shortage Schmortage

Folk blame our unaffordability crisis on a housing 'shortage'. You may rethink using that term when you understand that as of June 2020 there were approximately 1 928 900 houses in New Zealand and that 683 900 of these are not owned by those occupying them.  

We know that of the 683 900 houses, approximately 66 100 houses (3% of total) are 'free' (gifted) - with the majority of those being state owned homes (approximately 60 000).

We also know that (of the 683 900 houses) approximately 617 800 homes are rented - this represents 32% of all the houses in New Zealand.

The point I'm making here is that there are 617 800 houses that could be purchased by want-to-be home owners - which are already built - but these are not available for purchase as they are held by those who own multiple dwellings as a means of amassing wealth. - whilst those wanting to own a home become increasingly disenfranchised.

Move from Me vs You to Me and You

Having the financial ability and choice to purchase one's own home creates dignity, plus a plethora of other benefits. Right now, we still have one of the most unaffordable housing markets (see, they're traded as commodities) in the world.

To make things fair, every player in the Landlord - Renter game should have an equal number of Aces in their hands.

To achieve that We need to effect changes to create a society where community (the Greater Good of all) is paramount. No individual should have greater rights or privileges than that of society at large.

Remember, we're equals - we all wipe our behinds with toilet paper! Show me one landlord who uses gold leaf for that purpose. On second thoughts, having become aware of someone owning 69 properties; that is a real possibility !