The problem: unaffordable rents

A home is a home, whether someone rents or owns it. The 1.4 million people who rent in Aotearoa should be able to reasonably expect to stay in their home for as long as they need to.

But the cost of renting a home is rising, much faster than incomes. Internationally, having to spend more than 30 percent of your income on housing is recognised as “unaffordable”. In Aotearoa, more than four out of every ten people who rent have to spend more than 30 percent of their income on rent. People who rent generally spend a higher proportion of their income on housing than people who live in a home they own, and rental housing is often lower quality.

Unaffordable rent in cities like Auckland and Wellington is spilling out into other parts of Aotearoa. Rents in Northland, Waikato, Gisborne, Hawke’s Bay, and Marlborough have all hit new highs in 2021.

When rents get really unaffordable, people are made homeless. Rising rents also force households to go without other essential items, such as healthy food and heating. Unaffordable rent can make families move often in search of a more affordable home, unsettling community connections and children’s education. High rents can push people to move further away from their jobs and places of education, increasing commuting time and making it inconvenient for people to walk, cycle, or use public transport. They can disrupt established neighbourhoods and communities, leading to gentrification.

Why aren’t rent rules reasonable in Aotearoa?

Unlike many other countries, Aotearoa does not have effective rules for rental affordability. Recent changes to the Residential Tenancies Act limit rent increases to once a year and aim to stop “rent bidding”, but they don’t stop rents becoming unaffordable.

The law states that rents must not exceed the market rent by a substantial amount. The only way to enforce this is for a tenant to challenge their rent through the Tenancy Tribunal. The Tribunal looks at market rents in that area, and decides whether the rent for that specific property is fair. This places the burden on individual tenants, rather than creating a fairer system overall. It also means what is judged to be fair rent doesn’t consider what is actually affordable.

This disproportionately affects young people, Māori, Pasifika, and disabled people, who are more likely to rent a home.

The system isn’t working, and rents are rising to unaffordable levels in many parts of Aotearoa. Rents for properties listed on TradeMe are rising faster than they have since 2018.

Reasonable rents mean secure, stable homes and communities

Reasonable rents do more than just keep living costs manageable, they also enable people to stay in the same home for longer. This helps families put down roots in communities and be part of their neighbourhoods. Children can stay in the same schools, which helps contribute to better learning. Stable housing helps support stable employment.

Landlords also benefit from secure, long-term tenants who have an extra interest in looking after properties because they want to keep living there. Institutional housing investors looking for predictable, long-term investment returns might find that reasonable rent regulation helps deliver this.

But in Aotearoa, one-year tenancy agreements are the norm, and landlords often keep rental properties in worse condition than owner-occupied homes. People who rent have to accept instability and poorer quality housing. With rents increasing faster than incomes, people lose the choice to save for a first home deposit. Successive governments have treated renting as a temporary step on a path to home-ownership, but renting is a long term reality for many people.

Renting a warm, dry, accessible home should be affordable for everyone, no matter how long they’re planning to rent for.

Why have reasonable rent rules?

In places like Aotearoa where there are not enough homes, renters are often faced with a “take what you can get” situation, knowing that most landlords will easily be able to find other tenants. Reasonable rent rules are fundamentally about reducing the power imbalance between people who need to rent a home and those who own properties as investment assets.

Rising rents are often driven by a particular neighbourhood becoming more desirable, or an overall shortage of housing – not because of anything specific to an individual property. For older rental properties, the costs of building the home will have been paid off long ago, and its overall capital value will have risen on the back of rising land values.

Rent regulation can also reduce the incentives for short-term, profit-driven property speculation. This can help level the playing field for non-profit, community-based, papakāinga, and build-to-rent housing developments, undertaken by people who are in it for the long-term to provide stable, secure tenancies. Rent regulation can provide long-term investors with a good way of predicting their long term returns.

Many more rental properties need to be built. These should be a mix of state homes, homes built by non-profit community housing providers, papakāinga housing, and private rentals. After decades of Governments running down and selling off the state housing stock, the Government is now building more state homes than any Government has since the 1970s. However, building takes time and by itself, it won’t solve the immediate affordability problems that people who rent are facing.

How do other countries make rents reasonable?

Around the world, there are two main types of reasonable rent rules: rules about the amount of rent a landlord is allowed to ask for, and rules about how much rents can be increased.

London’s mayor is proposing to limit rent increases in the short term, while an independent Rent Commission is established to design a system for long-term rent affordability.

In Ireland and Scotland, the Government has declared Rent Pressure Zones. Landlords inside these zones can only increase rents by four percent a year in Ireland and by inflation plus one percent in Scotland.

California takes a similar approach: annual rent increases cannot be more than five percent plus local inflation. Most Canadian provinces also restrict annual rent increases to a certain percentage, which varies between provinces.

In Sweden, groups representing tenants and landlords negotiate rent increases that apply to around 500,000 homes. If they can’t agree, an independent government agency sets fair rent standards for homes based on things like size, location, and features.

The Netherlands has a similar system, where rental properties are allocated points for things like size, condition, facilities, and distance from transport links, shops, and schools. The number of points determines the maximum rent allowed.

New York has a Rent Guidelines Board which sets annual rent adjustments for some apartments. The Board is made up of two landlord representatives, two tenant representatives, and five members representing the public.

Malta caps rents at two percent of the market value of a property.

When rents started rising rapidly, Berlin froze the rents of properties more than five years old at their 2019 level for five years. Conservative political parties challenged this and the courts have recently overturned the rent freeze.

In France, rents are capped at no more than 20 percent more than the “reference median rent” for similar properties.

Several countries have exemptions or different rules for newly built rental properties, to encourage developers to build more homes.

So what options do we have?

Option 1: rent transparency for new tenants

Landlords could be required to tell potential new tenants how much rent they charged previous tenants in a property. This transparency would make things fairer for tenants. It could encourage landlords not to raise rents much when tenants change in the same property. The transparency requirement could also cover the previous 3-5 years rent. If landlords want higher rent, they would need to explain why: for example, making substantial upgrades to the property between tenancies.

However, this wouldn’t actually limit rent increases. In the current market where housing supply does not meet demand, a new tenant might still need to pay much higher rent than the previous tenant – just to get a home.

Option 2: link new rents to what previous tenants paid

Rent for new tenants in a property could be linked to what the landlord charged the previous tenant. For example, the new rent could be limited to a certain percentage more than the previous tenant paid. This would help slow the rate of rent increases when tenancies change, and give new tenants a fairer deal relative to previous tenants.

A larger rent increase could be allowed if a landlord has made substantial improvements to the property that genuinely increase its value (e.g. a new upgraded kitchen or bathroom, or building a garage), but not just what is required to meet Healthy Homes Standards or for regular maintenance and upkeep like basic paint jobs, new curtains, or fixing leaks.

Option 3: agree maximum rent increases in tenancy agreements

Tenants and landlords could agree how future rent increases will be decided when they first sign a tenancy agreement. For example, a tenancy agreement could state that landlords will not raise rents by more than five percent a year, or it could state that landlords will not raise rents more than inflation or average wage increases.

This would allow renters and landlords to plan ahead, knowing what future rents could be. However, there’s an unequal power balance when renters are signing a tenancy agreement because the landlord often knows they could just get a different tenant, so many people who need a home might not be able to negotiate a fair deal. Also, if market average rents reduce, tenants might find themselves locked into previously agreed rent increases that are now out of step with similar properties.

Option 4: set limits on annual rent increases

The Government or a new independent agency could determine what a reasonable rent increase will be in different parts of Aotearoa each year. They could look at things like general inflation and the cost of living, average wage growth, and borrowing costs. Landlords would not be allowed to raise rents more than this annual limit.

Different limits could be applied in different parts of Aotearoa, or rent increases could only be limited in areas where rents are rising rapidly or already unaffordable.

A larger rent increase could be allowed if the landlord can show that the property has undergone substantial improvements, not just regular maintenance and upkeep.

Option 5: set fair rent standards

The Government or a new independent agency could assess what is a reasonable rent for particular types of properties, looking at things like a home’s size, design, features, and location. They would then agree a reasonable range for what rents can be charged for similar properties. Landlords would have to charge a rent within that range, unless they can show why a higher rent is reasonable. The fair rent standards would be updated annually.

Option 6: freeze rents for a few years

The Government froze rents when Aotearoa went into COVID-19 lockdown, but the freeze has ended and rents are rising again. Aotearoa is in a housing crisis and so rents could be frozen again for a period of time. Rents could be frozen nationwide, or in the least affordable areas to stop them becoming worse, or in areas where rents are rising much faster than wages.

A quick rent freeze could be applied in the short term, while some of the other long-term options are put in place.

Option 7: change the Accommodation Supplement instead

Instead of putting in place reasonable rent rules, the Government could increase the subsidies it pays to people on low incomes to help cover housing costs. The Government already pays out nearly $2 billion a year for the Accommodation Supplement, to more than 350,000 households (some people use this to pay mortgages, but most use it to pay rent).

Currently, the most someone can get is $165 a week, and only low income earners qualify. The Government could increase the amount of subsidy people are eligible for, and it could also make more people eligible for this subsidy. This would not make rents more reasonable, but it would help more households be able to afford to pay rent. It is possible that in response to the higher subsidies, landlords would raise rents, knowing their tenants can pay more.

Option 8: renters clubs to negotiate rents

Government subsidies help more than 300,000 households pay their rent – mostly through the Accommodation Supplement – and this number is rising. These tenancies are individual agreements between landlords and renters, meaning individual renter households don’t have much power to negotiate. The Government could group together renters who receive the Accommodation Supplement, and negotiate as a collective with landlords to set reasonable standard rents in different areas. Because so many renting households receive the Accommodation Supplement, their collective power could help influence market rents for everyone else too.

An alternative approach would be for the Government to develop a collective bargaining framework for tenants who use the same property management company, to negotiate rents and/or rent increases as a collective. This could lead to the development of tenants unions, which exist in some other countries like Sweden.

Responsible rental property management

Many landlords and property managers are responsible and treat their tenants well – but some let everyone else down. There is no licencing or registration of landlords, property managers, or rental properties in Aotearoa. The Government does not have a coordinated way of keeping track of which properties are rented, who owns them, or how much rent is charged. Compared to other occupations that provide services that affect peoples’ personal wellbeing and safety like taxi drivers, doctors, and builders, there is no professional regulation for people who choose to run rental properties as a business.

All of the reasonable rent options need a good base of information to make them work. We think the Ministry of Housing and Urban Development should create a register of rental properties, their owners, and intermediaries like property managers. This would enable the Government to track the amount of rent charged for a property over time, and compare it easily to other similar properties. If a landlord kept breaking the rules around rents or other tenant protections like Healthy Homes Standards, they could be struck off the register and not allowed to be a landlord anymore.

The Government should also bring rental property managers into a similar regulatory system to real estate agents. That would enable professional standards to be set, a formal complaints mechanisms to be put in place, and clear penalties for breaking the rules. Property managers who repeatedly breach their obligations could have their licence revoked.

How to make reasonable rent rules work:

There are some important things that would make reasonable rent rules work.

1. The Government needs a good database of landlords, properties, and rents, so rules can be applied fairly and accurately.
2. Rents for individual homes need to be reasonably consistent when their tenants change, so landlords can’t push tenants out just to put the rent up.
3. The obligation to show why a large rent increase is fair should sit with the landlord, rather than the current system where tenants have to take their landlord to the Tenancy Tribunal to prove a rent increase isn’t fair.
4. An independent agency with a mandate to enforce the rules. This could include representatives of tenants and landlords.
5. Standard maintenance and upkeep, or meeting minimum quality standards like the Healthy Homes standards, shouldn’t justify a large rent increase. But landlords should be able to cover the cost of genuinely substantial improvements, like a whole new upgraded kitchen.
6. Short term property speculation should be discouraged, but people and organisations who build new homes to rent out on a stable, long-term basis should be able to cover their investment over a reasonable period of time.
7. Governments need to make sure new homes keep being built, faster. This includes building many more state homes, supporting papakāinga, working with non-profit community housing providers, and enabling infrastructure.

As well as reasonable rent rules, moving to longer-term tenancy agreements as the default would give people greater housing security. Some people want to move around a lot, but many want to make their rented house a long-term home.

We’re interested in your views about other things that might be needed to make reasonable rent rules work well.