Should Rents Rise?

There sure have been a lot of squeals from landlords lately. New rental regulations and the prospect of a Capital Gains Tax – both years away from implementation – have led to claims on the right that rents will go up to compensate. Of course this has led to retorts on the left that landlords make enough money and should be more worried about their tenants. As usual, both positions are glossing over the real point

A Capital Gains Tax – thanks to the exclusion of the “family home” will likely see some landlords sell up. House prices might drop a bit, before continuing their inevitable march higher – the Tax Working Group predicts increases of 3% per year. This drop will see a few more owner occupiers enter the market than would otherwise, but it will come at the expense of fewer rentals. Rents will rise as a result – helping the remaining landlords look to maintain the return on their asset they are losing through the tax.

All in all, the CGT would be a small bonus for first home buyers, but this comes at the expense of the worst off in society – those locked into renting. Given that renters tend to squeeze more people in the same property than owner occupiers do, the pressure on accommodation could also rise. A CGT would not be a win for the poor.

On the other hand tougher rental regulations are clearly a good idea. The toll of our cold, damp housing on the health of our growing children is massive. We know that insulation improves kid’s health and is worth the extra investment.

Of course the real long term solution here is our building code. We are quite simply building crap quality houses and we need to do better. This is the one hope of Kiwibuild – it won’t add much to the housing stock but if it can increase the benchmark for building standards that would be one positive thing.

The argument against improving the building code is the same as the argument against better rental standards: cost. But we already know that the long term cost in terms of energy bills and hospital visits easily justifies the short term extra cost of building (or retrofitting) decent places to live.

So what gives? Why are we so obsessed with cost? Isn’t there enough money around to give renters a decent house? Of course many landlords are able to afford to improve their properties. However, that won’t stop rents rising in the longer term. 

The fact is that the biggest increase in the cost of both building new houses and providing rental accommodation is the price of the land underneath the house. Land is the one asset that has continually grown in value in recent decades – often without any improvement at all. It has proved to be the one of the best investments anyone investor can make.

Landlords have the right to make a decent return on the value of their investment. They are providing a service – they are a housing provider – and as long as they provide a decent service they deserve to be rewarded for that. If they can’t make a decent return – including the expenses and risk they face – they will sell up and invest in something else. As noted above that will push up rents anyway.

As land prices have risen year on year, it has been harder and harder for landlords to get a decent return through rent. Gross returns on rental properties have been usually around 3% - that is before expenses. Of course landlords have stayed in the game for capital gain from the higher land prices, but this isn’t sustainable. The more property prices rise, the greater the pressure to push up rents in turn order to make a decent return from rent.

The obvious solution here is to kill off the growth in land prices once and for all. Then landlords can focus on investing in their property in order to increase their returns. Instead of bidding up the value of land, new home builders could afford to invest in building better quality homes.

How do we do that? This growth in the price of land has happened largely because of our tax system. Land owners have benefitted from investing in land compared to other assets. This has pushed prices up in a neverending spiral.

A Capital Gains Tax as proposed won’t stop that spiral, largely because the family home is exempted. People will continue to landbank, but they will have an incentive to have their “family home” on that landbank.

The Opportunities Party proposes to drop income taxes by 30% and encourage people to invest in productive businesses, rather than speculating on land prices. We would do this by ensuring all assets – including land – pay as much tax as a bank deposit. The tax benefit of investing in land that has driven land prices higher and higher will disappear.

Under the status quo rents will go up. But don’t blame landlords. Blame our national obsession with making money off the value of land going up and up.