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The rental crisis affects us all - and it's crippling NZ's progress

Michael Worth Michael Worth

If you think the rental crisis doesn’t affect you, you’re wrong. Maybe you think you’re not affected because you own your own house, and you’re not a landlord. Wrong. New Zealand’s rental crisis isn’t only causing homelessness and poverty, it’s dragging down wages, stifling innovation and suppressing productivity for the whole country.

You can’t get ahead when you’re at the bottom of the rental market

People in poverty need two things in order to flourish and raise their children: a home and a living wage. Housing unaffordability is working against them. Nearly 10% of renters are ‘in-work poor’, according to a 2020 report by the Human Rights Commission, and among poor working households, over 50% of earnings are being spent on rent. These households struggle to pay the rent and move regularly; this transience has “flow on effects on work, education and social connections.” They’re more likely to live in sub-standard accommodation too, which has a negative impact on health.

These renters are working full-time, trying to get ahead, and never making any progress. Unwell children, low-quality accommodation, constant stress. This is not what life should be in a rich, egalitarian nation like New Zealand. People in this situation cannot achieve their potential at work and can’t be creative, and it’s much harder for them to be the kind of parents they would like to be. This has a knock-on effect and their children are disadvantaged, too.

New Zealand needs to raise our productivity and our wages. The people in these households have a lot to offer – but their energy, focus and money are being consumed by their precarious housing situation.

First you have to build more houses

The first and most obvious way to fix the rental crisis is to build more houses. We have some major mindset problems that hold back large-scale construction; changing our thinking will go a long way to accelerating home building. Having more houses to rent and buy is the single most important way to ease the pressure on our rental market. With a physical shortage of houses, it’s impossible to meet everyone’s needs.

Beyond the supply issue, there are several other ways we can address the rental crisis, ultimately benefitting everyone in New Zealand.

Change the incentives

What holds New Zealand back as a nation? Our low wages and low productivity are two major factors, and these filter down into poverty and lower standards of living. One clear cause is a lack of investment in industry. We run small businesses, inefficiently, and we have a tendency to throw low-cost labour at problems instead of investing in innovative systems that will lead to more sustainable growth. Our stock exchange is laughably anaemic; any business that wants to raise serious capital lists on the Australian stock exchange instead of our own.

And why do we have such weak investment in business? Partly because the rental market is sucking billions of dollars out of our economy each year via unsustainable Ponzi-like investments into a housing bubble. If we spent even a quarter of what we currently invest in rentals into business, that money could go towards funding research and development, innovation and higher wages. That would lift the standard of living for every New Zealander. It would lift your salary (or wages or profits). It would mean fewer homeless people on the streets, better outcomes for the average child and a more prosperous and sustainable nation. Instead, our addiction to rental properties has not only hamstrung New Zealand’s growth, it’s also funnelling billions of dollars in low taxed profits offshore to the shareholders of foreign-owned banks.

We don’t want to stop people investing in rentals if they choose to do so, but we can certainly change the incentives. At an individual level, buying a rental property currently makes perfect sense. People want to grow their wealth and have a more secure financial future. But your financial abilities might be someone else’s debt peonage.

Kiwis are responding rationally to the current economic upsides: rising values, increasing rents and a friendly tax system. Those incentives feed into each other and keep this vicious cycle turning. They need to be disrupted by separating the incentives to invest in providing shelter from investing in financial speculation on land value. The current tax system is unfair, favouring our wealthiest individuals and disadvantaging those who can’t get onto the property ladder. What if our system addressed these two values separately? The rising land value could be addressed by introducing higher rates to feed infrastructure development; this would benefit the whole community, not just some of it.

Rent rises should be justified

Not only do incentives drive everyday Kiwis to buy rentals, they push us towards buying cheap rentals and spending as little as possible on them. Renters at the bottom end of the market pay a much higher proportion of a property’s value in rent than they do at the top end. For example, a basic three-bedroom house in Kawerau will cost around $350,000 and rent for about $300 a week. A basic three-bedroom home in Ponsonby, Auckland, will cost you around $2 million and rent for roughly $900 a week. Yes, it’s triple the rent compared to Kawerau, but the house is nearly six times as expensive and you’re surrounded by many more job opportunities, public transport and amenities. As a tenant, you’re getting much better value for money in Ponsonby. As a property investor, Kawerau is a far better choice.

Rents are currently set by owners and property managers who work out a maximum amount that the market will bear. But that is not an appropriate method for pricing a basic human right. We don’t price power that way, because we understand that it’s not a choice, it’s a necessity. The Government regulates the power industry so everyone can have access to it, even when they can’t afford to pay their bills. When the price of power increases, the supplier must justify the rise to the regulator, and have systems in place to help those who can’t pay.

This should be the same for owners of rental properties. In order to raise the rent, they should justify how the actual dwelling has increased in quality - separate from the value of the land. What has the landlord done to improve the property? Why should a deteriorating asset cost more to live in this year than it did last year?

As for helping those who can’t afford market rent, the Accommodation Supplement is one of the current fall-backs, but its poor design means it actually drives rents up, according to research by the Child Action Poverty Group. We need to do better.

Every rental needs to be warm, dry and healthy

We understand that food is an essential human requirement, so we have vigorous food safety rules in place that start all the way back at the primary producer right through to the point of sale. It’s comprehensive, highly legislated and closely monitored. There are large teams of people who work hard to ensure our food is safe.

One motivator for this system is protection – for both consumers and New Zealand’s reputation. However, consumer protection for renters has been sub-standard for a long time, and we don’t seem to be too concerned about having a reputation for unaffordable, cold, damp housing that makes our children sick. This is insane in a beautiful, wealthy nation that prides itself on being kind and friendly. We need every home to be warm and dry. Preventable third world diseases, like rheumatic fever, in Kiwi kids is just horrifying.

A safe place to live is an absolute necessity. The only way to guarantee our homes are warm, dry and healthy is to regulate rentals. If we don’t, owners will not spend what’s required to maintain them. The Healthy Homes Standards are a huge step in the right direction, and there should be more where that came from. We can continue to raise the standards for rental accommodation until it becomes acceptable.

The rental crisis is undermining New Zealand’s success

Our rental crisis is an embarrassment. It’s driving down our economy, restricting innovation and lowering our standard of living. It’s contributing to poverty, illness and homelessness. It’s unfair and inequitable in a nation that prides itself on fairness and egalitarianism. It is cannibalising the future of the next generation. They will inherit an underproductive economy which will not provide the income to rent or buy shelter. It will also affect those who think they are sitting pretty. As the demographic changes and those in work are out-numbered by the old, the productivity of the economy won’t be enough to support them either.

It will take significant effort to build more houses and raise the standard of rentals. Changing our rating and tax system could be done much faster, literally with the stroke of a pen. By failing to commit, we’re like that small business which doesn’t want to invest in a new online system, instead throwing cheap labour at the problem and becoming less efficient and productive every year. This is smart investment that would generate far more than it costs in the long run. Fewer families in poverty, lower medical costs, a more productive economy and a higher standard of living for every New Zealander.