By Dr Lucy Telfar Barnard*
Opinion - On Thursday, Housing Minister Phil Twyford announced letting fees would be banned. This change is overdue, relieving tenants of a cost they don't need, for a service they don't receive.
The Residential Tenancies Act 1986 bans landlords from collecting 'key money', a quaint old name for money tenants were once asked to pay in exchange for the key to their rental home. Landlords who charge key money can be fined up to $1000 in the Tenancy Tribunal.
However, there's an exception to that ban: the Act allows landlords to charge new tenants "for services rendered by any … letting agent" when granting the tenancy.
Letting fees are meant to pay the property manager for time spent running tenant viewings and background checks, and completing letting-related paperwork. In practice, however, letting fees are usually a week's rent, even though the costs of letting a property are much the same whether the rent is high or low.
More importantly, time spent arranging to let a property is the same for a private landlord as it is for a property manager. Landlords employing a property manager to sign up a new tenant are outsourcing a job they can't or don't want to do themselves. The property manager's charges are therefore a service to the landlord, but letting fees make the tenant pay for them. Having landlords pay for the service would improve competition between property managers, and efficiency in letting services.
Banning letting fees will also prevent a repeat of their most exploitative use: in Christchurch's post-quake rental shortage, unscrupulous property managers charged full letting fees simply for renewing leases. With rentals so scarce, tenants were too afraid of losing their lease to challenge the charges' legality.
Some landlords may argue that without letting fees, they will recoup property manager charges through rent increases, but international experience and economic theory suggest otherwise. UK housing advocacy group Shelter found only 2 percent of landlords in Scotland increased their rents after letting fees were banned there; while in New Zealand, the Reserve Bank notes rents are driven primarily by supply and demand, not landlord costs. Latest rental statistics support this finding: while rents have increased in most parts of the country, where demand has increased faster than supply, rents have decreased in Christchurch, where there is no housing shortage.
A more important reason to remove letting fees is that they are inequitable. Massey University research has shown landlords consider some tenants more desirable than others.
"Desirable" tenants find it easier to secure the tenancy they want and so can cherry pick properties that don't have letting fees. Less 'desirable' tenants, who generally have lower incomes, have less choice and must take what they can get, so may have to settle for a property with a letting fee. Lower-income tenants also move more often than higher-income tenants, so pay letting fees more often. Together, these realities mean that those who can least afford it are most likely to have to pay more in letting fees. Removing letting fees will also remove the current incentive for high tenancy turnover, encouraging property managers to work harder to retain tenants, which will reduce tenant mobility, improving neighbourliness and children's schooling continuity.
Banning letting fees is a simple legislative fix to improve efficiency and competition in property management services, and to reduce the cost burden of moving house, borne unequally by our most vulnerable. If only the more complex problems of affordability and security of tenure could be addressed as easily.
*Dr Lucy Telfar Barnard is an epidemiologist and Senior Research Fellow at the University of Otago, Wellington. Her research centers round housing quality, but extends to respiratory disease, the effects of cold weather on health, and the use of administrative data in environmental health research. She is currently leading He Kainga Oranga/ the Housing and Health Research Programme's Rental Warrant of Fitness study.