By Rosie Collins *
We have a rental crisis. There are more tenants, but the number of rentals is not increasing fast enough. We need policies that encourage long term rentals, not house price speculation by accidental owners.
One solution for part of the rental market is to “build to rent”. If done right, it could introduce badly needed housing tenants, with more secure tenure and the certainty of rising rents. This is because the homes would be owned by investors and would be professionally managed.
While institutional landlords and rental buildings are common in Europe and America, they are just beginning in New Zealand. I want to see changes made to override this.
We have a housing crisis. Houses are unaffordable: the average price of houses exceeds $ 1 million. We are now building at an all-time high, but this follows decades of under-construction. This shortfall will take decades to be corrected.
Despite a growing number of homes, the number of rentals is not increasing as quickly. Only four districts had sufficient rental supply to meet demand over the past decade (Hamilton, Waitomo, Christchurch and Dunedin). In places like Gisborne and Porirua, rental stock has barely increased in nearly a decade, despite a rapidly growing population.
Unsurprisingly, rentals are hard to find, rents are skyrocketing, there is overcrowding and the unfortunate are on the housing register or worse.
The situation is so bad that the government spend nearly $ 4 billion a year on housing assistance. Half of this amount is spent on people accommodated in emergency, transitional and public housing. The other half is devoted to the Housing Supplement, mainly subsidizing rents. But all this is the proverbial ambulance at the bottom of the cliff. It does not encourage more rentals, make occupancy more secure, or increase rents more predictable.
Could build to rent help?
There are two things we need to achieve: more new rentals that remain leased and rentals that are better in terms of security of tenure and price certainty.
Building to Rent has solved this problem in some places. But don’t expect it to provide affordable rentals, nor to be risk-free.
The main risk is that we simply add land speculators with huge pockets to the list of home buyers. In some markets, private investors have bought existing homes and are doing everything possible to limit new development or density, to create scarcity and increase the value of their homes.
Any qualification for construction for rent should relate only to new homes, which are added to the offer, are generally of better quality and are kept for a minimum period, with rigorous control and severe penalties in the event of failure. This can only happen in the context of permissive planning, abundant land supply, and defined infrastructure and financing plans.
The model works best when a large investor, usually institutional, professionally owns and manages an entire building or community, offering high-end units to specifically serve the upper quartile of tenants. By nature, this means that this is usually not affordable housing, as the rents have to be relatively high to make the project commercially viable (because the land and construction costs are insanely high). The developers of Build to Rent are explicitly targeting those willing to pay extra for amenities and stability.
But by improving the functioning of the rental market for “independent” tenants, those who are relatively well off and do not need subsidies, at least less competition for a limited rental supply. This is an ongoing benefit, but right now we need all the relief we can get.
In the United Kingdom, the increase in affordable rental supply is explained by the fact that the local authority has demanded it for a fixed period, usually in exchange for more permissive planning rules, tax advantages or of land at reduced prices. Only Queenstown has used similar tools (called inclusionary zoning), but the Resource Management Act (RMA) makes this very difficult to do. If we want more affordable rentals in the mix, we should develop an inclusive zoning policy with RMA reform.
Since we don’t really use these tools, maybe we could make better use of the housing supplement. The government could negotiate leases for, say, half of a building for 20 years, provided that rents in the top quartile could only increase by 2% per year, with higher housing supplements for people who live in them. have rented.
The owner would have full certainty of occupancy and cash flow from an inflation-linked bond (rather than an equity investor who also seeks capital gains), and tenants would have more security, live in better homes and would have more financial security.
Flirt with or adopt construction for rent
New building-for-rent policies are being developed based on new government rules that prohibit tax benefits associated with interest payments. It is very likely that the change in interest policy will further slow the growth of the rental stock, thus exacerbating the rental crisis.
Right now, the build-to-rent policy is reactive, rather than a deliberate attempt to catalyze and develop a whole new industry that will build new rental homes on a large scale. We may not like it, but the number of tenants continues to increase and they are not well served by a slow supply, old and shoddy stock, land risks and erratic rent increases.
There are two essential things that I would like to see.
First of all, a clear definition of what qualifies as a building for rent. How many homes need to be in the portfolio, how long they need to be held, what kinds of conditions they need to offer (eg tenant rights greater than the regulatory minimum). We are already doing this for retirement villages; we should also define the rental construction sector.
Second, the Overseas Investment Act should allow foreign investment in this newly defined sector, such as retirement villages and student accommodation (it virtually bans foreign investment in residential real estate). It would attract experienced investors and institutional lessors who know how to design, build and manage large rental portfolios.
Both require a champion to build to rent, who can see the benefits and the risks. With our growing rental crisis, which is worsening despite record house construction, we can’t wait for the big fix. Building to rent won’t solve all of our housing problems, but it could certainly be something that improves rental for some, as our politicians find the big solutions on land supply, density, capacity and performance. construction and infrastructure.
* Rosie Collins is an economist at Sense Partners.