With Phil Twyford’s bill being tabled this week proposing the banning of letting fees for tenants, the government are making another high-profile yet short-sighted dig at landlords.
First things first, landlords are not allowed to charge a letting fee. Property managers charge the letting fee to cover their costs of advertising and time involved in doing viewings and signing up new tenants. According to figures from Tenancy Services last year, 164,000 of the 425,000 bonds held had been lodged by property managers, which means that a letting fee could only have been charged in up to 40% of cases. Already, more than 60% of tenancies have not had to pay a letting fee. If tenants are completely averse to paying a letting fee, then they can rent directly from a private landlord but many tenants prefer to rent via a property management company to receive the additional security of a professional manager and avoid the fear of a ‘bad landlord’.
For a property management company, a letting fee is on average one week’s rent plus GST. This makes up a substantial proportion of their income. If a property changes tenants annually, that letting fee is about 20% of the yearly income for the property manager. If they are banned from charging letting fees to the tenant then that additional income will need to be made up elsewhere, either by an increase in the general property management fees or by charging the letting fee to landlords. Either of these additional costs to landlords will lead to rents increasing. If the market cannot sustain an increased rent, it will lead to private landlords selling rental properties and a reduction in rental housing at a time when the government have acknowledged that we are in a ‘housing crisis’. The government want 10,000 additional rental properties but are, yet again, bringing in legislation to make life harder for landlords.
Tenants to foot the bill
Then there’s the frequency of the letting fee to consider. If rents increase to cover increased fees from property management companies, it will be the tenants who stay in a rental long term who are subsidising those who move house frequently. The government is talking about making changes to tenancy law to make it easier for tenants to enjoy stable long-term tenancies, and yet they are removing one of the financial benefits that they currently enjoy. We have tenants in some of our houses who have lived there for 7 or 8 years. Why should they have their rent increased because our costs have increased due to additional property management fees? The government says that landlords should see owning investment property as a business. It is our business and we have to run it as a business. It’s not a matter of being greedy and taking from tenants, we have to balance the books.
As ever, government intervention creates opportunity. They manipulate one area and it creates distortion in other areas.
As ever, government intervention creates opportunity. They manipulate one area and it creates distortion in other areas. Remove the letting fees, and the rents will inevitably increase for professionally managed property. In turn, this will mean that the rent can increase for a privately managed property.
The upshot is that if letting fees are removed, I believe that rents will rise and in turn lift yields. A rise in yields is overdue as rental increases have lagged behind house price increases over the past few years. This will end up being good for landlords.
John Kenel, Assured