Defining Market Rent: How Much Is Too Much?
Landlords can find themselves in a difficult position, leading to significant rent increases, but there is help and guidance out there, writes David Faulkner.
2 September 2023
Yet again, housing will be a significant topic in the forthcoming election. As the current cost of living is at the forefront of most people’s minds, there is no doubt most of the electorate will be financially worse off.
From an investor’s point of view, many will be coming off low-interest rates and will see their mortgage payments increase significantly. Add the removal of interest deductibility into the mix and landlords will find their expenses have skyrocketed, and now there is limited tax relief to alleviate the pain.
This is not good news for renters. Numerous landlords find themselves in precarious situations, leading to significant rent increases for many tenants.
It has been well-documented that house prices have come back from their peak. REINZ reported in June that the median house price is down -8.2 per cent from June 2022. House prices may have come back, but what’s happened with rents? Trade Me Rental Price Index has reported rents have risen 8.8 per cent in June 2023 compared with last year. House prices have come back, but rents continue to rise.
A common mistake we see investors make is failing to understand and keep abreast of what is happening with rents.
Many investors are reluctant to increase their rents if they have found a good tenant looking after their investment. This seems logical until the investor realises that the rent they receive will fall well short of the pending cost increase as they come off low-interest rates.
We have seen landlords increase rents by more than 20 per cent to minimise the shortfall they will experience. This can be unfair to tenants. You could argue that the tenants have had it good for a long time, paying under-market rent and that an increase in excess of 20 per cent highlights how much they have saved previously.
However, I would argue tenants will have a budget and plan their expenses around this. They will not be expecting such a big increase, which will add significant emotional and financial stress.
It isn’t fair for the stated reasons, but what about the legality of such increases? Section 25 of the Residential Tenancies Act defines what market rent is.
This section states that landlords cannot increase rents substantially above market rent. Therefore, there is no limit to what a landlord can ask a tenant to pay if it is not considerably above what the market will accept. The next question is, what is a substantial amount? Is it 5 per cent or 10 per cent over market rent?
In such cases, I sympathise with organisations like Renters United. The tenant advocate group demands that rent increases are limited to the consumers price index (CPI) so tenants are not exposed to such significant increases. This is like many commercial leases that have rent review clauses based on CPI.
However, the capitalist in me feels the market would correct itself if we had enough housing stock. Unfortunately, we do not.
At Property Brokers we have worked closely with Valocity Global and MRI Palace, who have helped us create a live real-time Rental Automated Valuation Model. This tracks rent payments for over 100,000 properties and, based on this live data, provides a real-time analysis of what is happening with rents.
The issue with Tenancy Services data is that it is only based on bonds lodged and needs to track changes in rent. Valocity Global has overcome this issue. Therefore, Property Brokers’ landlords can instantly see how their property performs compared to the market. It provides the most accurate assessment of market rent in New Zealand.
My advice to landlords is annual small increases in line with CPI, so tenants have certainty about what they will be paying. Or give us your property to manage, and we will ensure we keep you up to date with any changes in the market.