Article: Property Investment

Letting Fees And Lotto Wtih Frank NewmanLetting Fees And Lotto Wtih Frank Newman

New legislation banning the charging of a letting fee has past its final reading in Parliament. From 12 December it will be unlawful for a property manager to charge a letting fee. Just to recap, currently a property manger may charge a letting fee of up to one week’s rent to cover their time and costs involved in processing tenancy application forms and preparing the tenancy agreement. A landlord is not able to charge the fee if they DIY manage their property so for the 50 or 60% who self manage their rentals, the change will have no impact whatsoever.

Housing and Urban Development Minister Phil Twyford estimated letting fees were costing tenants “up to” $47 million a year, saying letting fees were “unfair” and had “no economic rationale”.

He said it was unfair because the property manager is acting on behalf of the landlord who has engaged the property manager to do the work for them. The argument is that it is the landlord’s choice to use a property manager so it should be they who incur the cost.

The “no economic rationale” argument is on the lines that there is no relationship between the letting fee charged and the time and cost involved in processing a tenancy application, which is probably about the same regardless of the weekly rent.

Opponents of the change say it is “fair” that the tenant should pay the letting fee because it is their application that is being processed, and tenants have a choice of renting a property via a property manager rather than directly from the landlord. They also argue that rents will increase as a result - the NZ Property Investors Federation says that could be as much as $10 a week.

I personally see the logic in the Minister’s points; especially that the landlord should be paying for the service because they have engaged a third party to manage the property. However, I disagree with those who say the change will not increase rents.

Property managers make between 15% to 20% of their total income from letting fees. I doubt many can afford to lose such a significant slice of their income and remain viable. They will therefore have to recover it elsewhere. Most property managers work hard for what they receive and the honest truth is that some tenants are extremely difficult to deal with, which is why many landlords pass the job onto them in the first place.

The question is, how will property managers recover the income that will disappear on 12 December? They will have to charge landlords more. In simple terms, a property manager charging 8.5% of the gross rentals would need to charge 10%.

Some landlords will accept that as just another cost to bear. Some will take the view that the management cost has become too high and they will manage the property themselves. Others will ask their property manager to increase the rent to recover the cost.

In my view, abolishing the letting fee will be one of a number of factors that contribute to rising rents. I am aware landlords are already increasing rents to cover the cost of insulation and intend to do so again when the Healthy Homes legislation introduces new heating and ventilation standards.

It seems like the rental market is going through a government-driven price transition at present. As the legislative changes kick in landlords will increase rents - and tenants will have little choice but to accept it, unless of course they win “Lotto” - as did the Auckland couple who “won” a KiwiBuild home.

Last week the PM and Housing Minister literally made a song and dance about the handover of the first KiwiBuild home. It was quite a media event with Dave Dobbyn singing Welcome Home, toothy smiles, uplifting speeches, and celebrations all around.

And the lucky winners of the home were a lovely young couple - she is about to graduate as a doctor and he is an expert in online marketing. She likened being drawn from the ballot to winning Lotto, while he took to Facebook to discuss the immediate capital gain they would make, which is reported to be about $70k.

This really points to the absurdity of the KiwiBuild scheme. It will not help a low income household at all - even “cost” price is too great. They will have to continue to rent and pay more as rents rise, thanks to all of the new rental-housing related regulations that the Government is bringing in.

KiwiBuild is a political distraction. The new Government has done nothing to address the regulatory issues and restrictive local council planning rules that have caused land and building costs to skyrocket. Until they do, housing costs will continue to remain ridiculously high and out of the reach of most people - except those lucky enough to have a KiwiBuild windfall and make a tidy $70k.

Frank Newman is the principal of Newman Property Consultancy. He is the author of numerous books on investment matters. For questions or comment about this article contact .(JavaScript must be enabled to view this email address)

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