Housing demand is very topical in New Zealand. Over one in 3 households no longer own their own home. More people than ever need rental housing! Is it time that short-term tenancies also changed?
Due to the inflation of house values and inadequate housing supply in recent years this new trend for rental housing demand has emerged, over the past 10 years in particular. 12-month residential tenancies are the norm in NZ. However in other parts of the world it’s common and perfectly acceptable for people to rent rather than own their own home, so five-year tenancy terms or longer are not unusual. With the tide turning to ever increasing numbers of people renting homes in NZ, for longer, perhaps it's time there were changes to our tenancy laws.
Most households that rent are renting from the private sector. Despite publicity at times to the contrary, of the approximately 130,000 landlords in NZ, the vast majority - just over 104,000 of them - own only one rental.* Typically they have chosen to invest in a rental property as provision for their retirement, and for their children after them. These owners may be less inclined to tie up their sole asset in a long fixed term, however with a new coalition government ahead and probable changes in the taxing and housing landscape, more rental owners may choose to sell to owner-occupiers, or to multi-rental owners who’d consider long-term rentals as viable.
Long lease terms mean pros and cons for landlords and tenants alike. What are they?
PROS
Financial benefits
With longer leases a tenant can budget much more effectively – they know their monthly costs in advance. The lease can have an automatic annual increase of a specific percentage or amount written into the contract, enabling the tenant to be prepared for what’s ahead.
The landlord is equally able to plan since they can calculate their return on their investment over a longer period. This can be beneficial if they decide to sell since an investment buyer can be aware of the rent it will yield. This becomes even more important if property supply in that area becomes greater than demand.
A solution to tenancy insecurity
Tenants love the security that a long-term lease provides knowing they can remain in a specific location they like, particularly if they have children in a local school for example. It also gives them protection from the landlord terminating without grounds, or if the property is sold.
It provides stability to both parties, as the landlord knows their tenants can’t legally terminate their contract without grounds, giving them assurance of a steady, regular income without the hassle and expense of the tenant changeover house clean, advertising, vetting and securing of new tenants, with potential weeks in between of no rental income.
Happy Neighbours
Another advantage for both tenant and landlord is the long-term renter is more likely to be personally invested in their community, meaning they’re less likely to have loud parties and be uncooperative with neighbours since they will have to live with the consequences. A longer term enables people to become established and treat the property more like their own home, especially if they become regularly involved in local activities.
CONS
Loss of Flexibility
It can be difficult for tenants to get free from a lease early if they need to, without having to pay expensive fees. For the landlord that wants to sell their property it can seriously restrict them if buyers willing to pay the best price don’t want to inherit tenants.
Falling Property Standards
It’s very easy to let things slide with a long-term tenant, trusting that they’ll contact you if any maintenance issues arise. This can be a very expensive mistake. Don’t forget to have a plan and stick to routine checks and upkeep.
The Difficult Tenant
A tenant can start out really well but over a longer period of time become a living nightmare – accumulating pets, or secretly subletting their leased property to someone else for a monthly profit etc. They may have wanted a long-term lease because they have a poor rental history and have nowhere else to go. This is where a property management company like Dominion Property Management are invaluable, providing careful background checks on former rentals, character references, and regular property inspections throughout the tenancy.
Law Changes Required
We may need some key changes in our country’s tenancy laws and taxes that protect both landlord and tenants for long fixed terms to be more successful. Legally there should be provision for reasonable grounds for tenancy terminations, appropriate and specific notice periods etc., particularly for the single rental, private landlord. New Zealand needs to look at how we can provide a more stable rental housing system on a greater scale. One that protects the tenant and is not going to threaten the vulnerable small property owner.
It's important to note that a lack of home ownership does not mean people are spending irresponsibly, or have a lack of finance to pay rental reliably. Our Kiwi way of life is changing - newer generations are starting their careers with student loan obligations, some are remaining single for longer, giving birth later, there are more childfree couples, there are some changes in employment patterns such as shorter-terms of employment, our population is increasing,* and people are choosing investment options other than the traditional home ownership, e.g. buying shares.
There is increasing need for smaller rental homes (yet still the need for larger homes too). Due to trends such as smaller family sizes and longer life expectancies, the average number of people per household has dropped very significantly in the last 100 years resulting in a greater proportion of one-person and two-person households. We average less than 3 people per home now, whilst our country’s population has roughly quadrupled.* There’s been an increasing residential shift towards the North Island with three quarters of our population being based here,* and our cities keep growing, so the demand for rentals in Wellington is higher than ever!
As a country we need to adapt and find creative ways to realistically supply housing to meet our needs. Long-term rentals can be one such solution.
* Information sourced from Statistics NZ