Otago Property Investors Association Inc

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01-08-2012

If it aint broke, don’t fix it

Presidents Report

The opposition Labour Party have recently accused landlords of ripping off tenants who receive the accommodation supplement (AS).

Labour refer to the AS as a subsidy for Landlords, which is completely incorrect. Worse than this, Labour has accused landlords of directly using the AS to increase rental returns. Labour housing spokesperson, Annette King, said " landlords take whatever the AS is and add it to their rent."
 
It would be interesting to see Labours proof of such a practice occurring or even the information source they use to make such a bold accusation. 
 
It is difficult to see how landlords could achieve such a fraud, as few would know which of their existing tenants are even receiving the AS let alone tenant applicants for their properties.
 
The idea that rental property providers would add a premium to their property rental price for anyone receiving an AS is absurd. For a start there is a limit on the amount tenants can receive under the AS rules. 
Even if they are entitled to the supplement, the tenant has to come up with 30% of the rental increase themselves. So if the landlord discovers that a prospective tenant will receive an AS and increases the rent by $10pw, the tenant will have to find three of those ten dollars themselves.
 
This is a component of the AS that actually prevents it from influencing rental prices to increase. If the tenant was able to claim any amount of rent and received the entire rental price, then there would be no upper limit to the price they could pay and no disincentive to pay a higher price.
 
This is a pointwhere some social service associations differ in their view of the AS. Some view it as a subsidy to landlords and want it removed, while others view it as a subsidy to Tenants and want it increased to 100% of the rent. Unfortunately both these views are wrong.
The AS is clearly not a subsidy to landlords, otherwise the cashflow from rental property would be a lot higher. Currently the average NZ house is more than $4,000 cheaper per year to rent rather than own even assuming the homeowner has a 20% deposit of $73,000. If the AS is a subsidy to Landlords, allowing them to increase rental prices, then why is it still cheaper to rent than to own, even with mortgage interest rates at historical lows? In addition, it still costs a rental property owner nearly $2,000 a year to provide this average home to a tenant, which is on top of an assumed $36,500 or 10% deposit they would have to make purchasing the property. 
 
Although it would be a great benefit to rental property owners, from a tax payer point of view increasing the AS to 100% of the rental price would also be a mistake. The current structure of limiting the AS acts to prevent it being used to push up rental prices. Without this limit the AS would balloon even higher and be a larger burden on the Government.
 
The reality is that the AS is a subsidy to assist the tenant. Without it, many tenants would be forced to live in overcrowded situations. Rental property Owners would have fewer tenants which would put downward pressure on rental prices. While this is what some Social Service Associations want, it would only work in the short term. Fewer people would want to provide rental property and supply would eventually fall. With tenants living in overcrowded conditions anyway, rental prices would again rise to previous levels. 
 
Regarding calls to alter the Accommodation Supplement, this is clearly a case of if it aint broken – don’t fix it.

Tags: federation reports

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