New Zealand Property Investors' Federation

The NZPIF is the umbrella body for 20 local Property Investors' Associations throughout New Zealand.

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www@nzpif.org.nz

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17-09-2022

Comparing the cost of different types of rentals

There are people and organisations that would prefer rental properties to be provided by social landlords like the state or Community Housing Providers (CHiP’s).

They make the argument that social housing providers charge lower rental prices and offer better security for tenants and the Government appears to agree. But is it true?

The government has instigated tax changes to discourage private individuals from buying rental property, which increases the demand for social housing. (The list has grown from 5,000 in 2017 to 27,000 today)

They have also encouraged private rental property owners to provide their rentals to the state and CHiP’s for them to run. They did this by removing mortgage interest as a tax deduction to private rental property owners while allowing owners to keep the deduction if they agreed to hand the rental over to a social landlord to manage.

However, the reason social housing providers can offer tenants cheaper rent than private providers is that they get more government funding through Income Related rents (IRR) payments. This subsidy allows social housing providers to charge tenants just 25% of their income for rent, with the Government topping this up to the market rent level, paid directly to the social housing provider.

So social housing providers’ rental prices are artificially cheap. In addition to this, who your landlord happens to be shouldn’t determine how much government assistance you get.

To explain what currently happens, consider three families in a similar financial situation, renting their homes from three different landlords. In this example, the families are Mum, Dad and two children, with one parent working 40 hours a week on minimum wage, earning $848.

The three landlords are all providing a similar home, valued at $895,000, with a market rent of $550pw. The following shows how costs are distributed under the various landlord groups over a year.

Kainga Ora
(Housing NZ)

Community Housing

(Property leased from a private owner)

Private landlord

(Can’t claim mortgage interest)

Accommodation supplement to tenant

$ 11,440

Income-related rent subsidy

$ 17,576

$ 17,576

Cost to tenant

$ 11,024

$ 11,024

$ 17,160

Total rent

$ 28,600

$ 28,600

$ 28,600

Excess costs over income for owner

$ 10,972

$ 22,100

Excess costs over income for Kainga Ora

$ 9,724

Total cost to the Government

$ 27,300

$ 17,576

$ 11,440

Cost to CHiP

Unknown

Under Kainga Ora, the government not only pays the higher IRR subsidy but also supports Kainga Ora for the losses they make. This makes state rental property, in this example, the most expensive for taxpayers, at $27,300 a year. Additionally, Kainga Ora (and so the state) takes on the risk of interest rates and other cost increases.

Charging a tenant less doesn’t make the rental cheaper to provide but it does mean the cost has to be met somewhere else.

Returning mortgage interest to being tax deductible for all rental property would be equitable and encourage more rental properties to be provided for tenants. The NZPIF proposal for an additional tenancy option for long term tenancies would also provide security of tenure for all tenants that want it.

Those who want to push private rental providers out of the market need to understand that we are in the best position to house New Zealand tenants. Not just with good, warm, and dry properties, but also through being cost-effective.

Tags: federation reports

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