As a tenant having a cap on the amount your rent can rise is a welcome reprieve, but for a landlord the same idea can be a nightmare.
Rent controls have long been a controversial topic among the real estate sector, and now with a Green party mandate to introduce them if elected, the issue is again heating up.
Rent controls are essentially a cap on the amount of rent a landlord can charge for a property. The idea is to protect tenants from sudden and excessive increases, through methods like a temporary rent freeze, or maximum annual increase.
Some reported benefits include housing affordability, preventing the displacement of low income tenants, and controlling property values in the local market.
The policy is nothing new with countries and cities like New York, San Francisco, Canada and India rolling it out. But Bayleys National Director of Property Management Will Alexander says the strategy can be fraught with challenges.
“History has shown us that rent controls do not address the underlying issues that lead to housing affordability like supply issues, high construction costs, and income inequality.”
Alexander says India introduced rent controls after the Second World War, but it led to a slow down in housing growth and poor maintenance of existing rentals.
“These are issues we don’t want to see here in New Zealand. What happened in India contradicts everything our country has worked to achieve through the introduction of the Healthy Homes Standards”.
Alexander says despite its good intention, there are a number of reasons why introducing rent controls to the New Zealand market could be problematic.
Disincentive Landlords to Make Property Improvements: Many cash-strapped landlords are already struggling financially. With rent caps, many could struggle to see any benefit in renovating or maintaining properties - especially without any return. This could lead to a slip in building standards and quality.
Supply and Demand: Less profit could disincentive landlords from placing properties on the rental market. Instead they may opt to sell or hire them out on platforms like AirBnB, which also enables owners to dodge many requirements under the Residential Tenancies Act.
Inefficient Allocation of Housing: With caps on rent, tenants may be motivated to fill bigger properties that are better suited to large families or groups of people. The follow on effect reduces choice and availability, and could also lead to overcrowding as bigger families are forced to live in smaller homes because of supply issues.
Black Market and Misuse: Rent controls have often led to the establishment of a ‘rental black market’ where landlords have demanded hidden charges. In 2020, the law was amended to protect tenants in New Zealand from ‘rental bidding’, but a black market could potentially derail those protection measures. Landlords may favour tenants who can afford to pay higher rents or hidden fees, causing bias in the tenant selection process.
Reduced Rental Pool: Rent controls can often lead to lengthy waitlists for housing. With cheaper pricing, tenants can be motivated to hold onto properties for longer - limiting rental options and increasing demand in an already very tight market.
Decreased Tax Revenue: Lower rents mean lower income for landlords, which could lead to reduced tax revenues from rental income.
Reduced Incentive for New Construction: Developers could be less interested in building new rental properties if the income generated from them is limited - adding to the existing supply issue.
It’s no secret that New Zealand’s housing market is already under pressure. According to the Demographia international housing affordability survey, New Zealand’s housing is “severely” unaffordable. But if rent controls aren’t the answer, what are some viable solutions to tackle housing affordability and supply?
Will Alexander says it’s essential to cut through red tape, and make more land available for building.
“Councils need to be motivated to provide supporting infrastructure for developers looking to build homes at scale.”
“Mechanisms that alleviate issues around the supply of building materials and incentives for businesses in New Zealand to grow will also be a huge step. It will also allow them to pay their employees more, and hopefully address income equality.”
Lastly, Alexander says addressing the issue of vacant and empty homes purchased by foreign investors before the Overseas Investment Amendment Act was introduced, would go a long way to addressing issues of supply and hopefully alleviate the demand for rent controls.