An emerging rental crisis caused by macro-economic drivers

The new tenancy law changes and investment tax proposals, although quite sound in their intention, may unwittingly combine with emerging negative macro-economic forces.

As a result, some of the new government legislation, even though it can benefit students and low income renters immediately, may potentially exacerbate the growing economic inequalities and property hurdles faced by renters. There are methods to implement such new legislation to have the most beneficial impact while also reducing instability in the market.

The most effectual option for improving housing and rental conditions can come from government legislation that will offer a combination of incentives and enforcement through some punitive laws.

Unfortunately, legislation which creates only disincentives for property investment may ultimately result in reduced rental stock and rises in rental prices. As tax laws and global economic forces shift overall against housing investment, there will be a direct opposite, negative impact for renters, especially on the bottom tiers.

Moreover, the global economic cooling cycle, driven by reduced liquidity and increased debt consolidation, is already starting to impact regional growth drivers across markets, including investment properties.

REAL WORLD MACRO-ECONOMIC RESULTS

One example of how this macro-economic reality applies to New Zealand’s regional property investment market can be seen with the growing trend to kick out existing tenants on periodic tenancies and start a type of Airbnb business. Many property owners have told me that they see this as reducing some risk and addressing problems associated with upcoming new legislation.

Another example can be seen in the rather ineffectual new law that came into force December 12 as an amendment to the Residential Tenancies Act. Nearly every landlord and property management company that I’ve spoken to have noted that they can absorb the cost of the former “Letting fee” because the market pricing for rent has skyrocketed.

In other words, no matter how you wish to promote this new law to help tenants avoid an up-front Letting fee, the actual cost is still being incurred by new renters.

There is no macro-economic event in which property investors will absorb new costs associated with legislation without impacting renters.

The costs will flow-on either directly or indirectly, especially as most potential new investors have already started abandoning the industry and shifting wealth to other growth vehicles. This is one more way in which fewer actual long term rental accommodations are being added to the market during a period of significant demand and shortage of stock.

NEGATIVE INCENTIVE LEGISLATION WORKS FOR THE SHORT TERM

I submit the following government legislation has incurred negative impacts that are already being observed in multiple regions:

1. Changes to Residential Tenancies Act

The new laws around insulation requirements were imposed on housing investors who in many cases will be seeing decline in investment growth yields while feeling the direct impact of an increase in investment maintenance costs.

By offering no incentives, this punitive policy is leading to increased costs for many property owners without any realised gains. Few owners will simply absorb this cost.

Such increases will always translate to one of two real world economic responses:
A) shifts away from rental property to other more lucrative investments actually reducing overall rental availability, or
B) a flow on cost to renters to offset the impact on the bottom line. At the very least, rental stock remains static, rental costs will go up.

The optimal solution is that whenever punitive legislation is applied to an industry such as property investment, it should also include positive incentives that encourage stability in the market. Incentives can be implemented in a broad range of methods, such as tax breaks for making improvements to health and safety features of a rental property, or offering one-off financial support for specific upgrades to heating or windows (similar to solar power incentives).

Otherwise, negative legislation will have a flow on impact on the very people it proposes to assist.

2. Forthcoming Capital Gains Tax

The current proposals for a Capital Gains Tax dictate that profits from sale of most assets and investments will be taxed. The capital gains recommendations have a potential to decay any property investment growth, and impact overall New Zealand economy.

Moreover, if a gradual economic downturn occurs, the profits on asset sales will diminish and the tax proposal benefits will become ineffectual.

Even though many of the principals behind such a tax are sound, this tax proposal comes too little, too late to positively impact housing stock or improve any aspect of the economic climate in New Zealand.

Global lending liquidity is rapidly decreasing, much of it on the heels of both declines in overall global growth and the impact of BASEL III and BASEL IV banking standards. A review of the Basel Accords banking liquidity formulas shows that overall global liquidity will need to decline by over 25% as banks come to implement the new standards.

At the same time, a major regional paradigm shift is influencing how property owners use their investments and hence the impact of any capital gains tax. The Airbnb business model is being applied at a growing rate, directly impacting the rental stock. Moreover, it circumvents many of the Tenancy laws and reduces perceived risk by property investors who are being inundated by growing negative legislation. Adding the fear of capital gains tax only further encourages such property investors to stay away from the general rental market.

Finally, similar capital gains taxes applied in other countries have proven to be a strong incentive to hold property investments rather than to sell them. The potential, seen in other markets such as the United States and Canada is an even greater decrease in rental stock, as new investors shy away from the market entirely due to many disincentives, while existing owners move to more lucrative lower risk solutions like Airbnb or allowing extended family to cohabitate.

Discouraging property investment through legislation and policies is always quite complex and volatile. It could have a substantive negative long term impact on the overall economy.

Moreover, when applied in conjunction with numerous other disincentives, it can become an intolerable situation for most property investors, many of whom will be forced to change their business model or level of rent to remain solvent.

A more effective and time tested method is to reduce overall taxation rather than use targeted taxation as a social engineering tool, since over time macro-economic forces will always counteract such attempts.

CONCLUSION

The government’s focus on making micro economic improvements for renters will have a flow on negative impact on the very same renters. The result will be that for every new government legislation that pressures property investors, renters will be directly impacted by the reduced stock, increased prices and eventual total failure to find a residence.

The assumption that punitive legislation will somehow improve housing stock or benefit tenants ignores macro-economic reality. When supply is far short of demand, negative legislation and taxation cannot improve overall stability or market conditions.

The best options for improving housing and rental conditions come from government incentives provided to BOTH tenants and investors. Investors must be part of the solution -- building more new homes, and renting more accommodations.

Helping tenants with protective laws makes good short term sense. But in the long term, macro-economic forces will always supersede politics.

It is far better to incentivise tenants to stay longer, care for their residence, and pay promptly, and to encourage landlords to regularly maintain and update their properties. The key is in offering incentives rather than punitive legislation.

By moving from punitive, negative legislation to positive incentivised policies, there will be an overall benefit to the New Zealand economy as a whole, especially with the growing global economic instability.

Other Scoop articles by Mark Rais:
• Fallacies promoting housing collapse
• The end of the Housing Boom
• Low Interest rates are creating broader instability
• Interest Rate Cuts Fail When Applied in Isolation
• Trapped in the age of Nuclear Deterrence
• Clash of Super Powers in an Age of Global Conflict

Mark Rais is a writer for the technology and science industry. He serves as a senior editor for an on-line magazine and has written numerous articles on the influence of technology and society. Airbnb is the registered trademark of Airbnb, Inc. San Francisco USA.

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