Landlords won't like having to pay letting fees but they should be able to negotiate a better deal for themselves than their tenants could

Image: Nick Youngson - http://www.nyphotographic.com/
OPINION

By Greg Ninness

One of the perhaps unintended consequences of the Government’s move to stop residential landlords charging tenants letting fees, is that it should promote competition and improve efficiency among letting agencies.

It has been a commercial anomaly that it is the landlord who chooses and hires a letting agency to find and sign up a tenant on their behalf, but it is usually the tenant who pays the letting agency’s bill.

Under that arrangement, tenants have very little leverage to ensure that the fee they pay is reasonable or that the letting agency is providing value for money.

In theory they could try and negotiate a lower fee, or walk away from signing up for a property if they thought the letting fee was too high.

That is not as far-fetched as it sounds.

In times gone by when we had negative migration growth and the market was awash with rental properties, it was not uncommon for landlords to advertise their properties with “no letting fee” to try and attract a tenant.

But those days are long gone and the reality tenants face today in a market where the supply of housing is tight, is that they just have to grin and bear paying the letting fee if they want to secure a property to live in.

For their part, landlords are in a far superior position to negotiate the fees a letting agency charges, but under the current arrangement have no incentive to do so because they are not the ones paying the bill.

But all that will change on December 12 when an amendment to the Residential Tenancies Act comes into force that will make it illegal for landlords and letting agencies to charge tenants letting fees.

So landlords will be paying the bill.

That could usher in major changes for letting agencies because it means cost becomes one of the factors landlords will consider when appointing a letting agency.

And landlords are notoriously cost conscious.

For agencies that means not just providing a good service, but providing good value for money.

It is likely to lead to more innovative pricing packages among agencies, perhaps tied to other services they may provide such as property management, and of course landlords with large portfolios will likely be able to negotiate a better deal for themselves than mums and dads with just one or two rental properties.

It will probably also lead to efficiency drives within letting agencies as they seek to control their own costs to protect their margins.

That could lead to a shakeout in the industry over time as less efficient players fall by the wayside.

That could favour the larger players whose size helps them develop economies of scale, or agencies that have specialist expertise in a particular niche of the market.

There could well be a round of mergers, acquisitions and rationalisations over the next year or two as agencies adapt to, or become victims of, those changes.

While landlords will inevitably grizzle about the change, and there’s no escaping the fact it will feed in to their overall costs, they are in a far better position to negotiate a better deal for themselves than their tenants were, and most will only pay for the service if they believe it is giving them value for money.

And of course for landlords the letting fee will be a tax deductible expense.

So although landlords won’t like it, the letting fee will probably be less painful cost for them that it was for their tenants.

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73 Comments

In a competition for rental housing I doubt the tenants will escape the letting fee the registration fee the finders fee the vetting fee or whatever else the letting agency calls it.
The letting company is usually a part of a RE agency & as such will find a way
Probably they’ll cleverly collect from tenant & landlord under different criteria labels
How does this help the governments coffers if letting fees all become tax deductible? Did the government even consider that ?
If they did then they know this is essentially yet another “Benefit”
Why can’t the NZ govt ever deal with the real problem with housing affordability The building materials duopoly & the artificial green belts that keep land at exorbitant prices. Oh yes ! They solved the problem with $600,000 terraced homes in Westharbour ! So “unaffordable “

Id consider this a warning shot, letting agents had best abide by the spirit of the law or else they will likely face increasingly draconian policies.
It certainly isn't a benefit, its a tax deductible cost but a cost none the less.
Its a philosophically correct approach to transparent competition, where charges are placed with the person who can make competitive choices. What it does to the governments coffers is basically irrelevant.

It might as well be a benefit as it’s a direct tax deduction that was not available to the tenant but is to the landlord
Personally yields on housing suck in Auckland anyway
Only a fool would buy rentals today but there’s plenty of fools & plenty of stock to buy

The tenancy laws don't allow the landlord or PM to charge the tenant other fees. No Key Money or other BS tolerated.

Landlord pays, and if they think they can get away with it they will increase the rent to cover it. The market will dictate whether that is going to fly or flop.

A real Pragmatist would understand the tenant will still be paying
Unlikely the letting agent will give up fees at all
Creativity is everything in business
Adapt

Like I said, the landlord can try to put rent up to recover costs. Market will decide. But the law doesn't let them make up a new bullshit name for a letting fee and charge the tenant directly.

https://www.tenancy.govt.nz/rent-bond-and-bills/letting-fees-and-key-money/

I’m amazed someone on here was actually like “oh well they could just call it something else, give it a different label”. Just change the expanded noun, that’ll get you around the law.

I'm not.. there are some people with interesting perspectives on how life works on here.

Not sure how they get from their reality to this one... Is there a Tardis like machine for jumping realities?

My comment was referring to Northern Lights.

The letting company is usually a part of a RE agency & as such will find a way
Probably they’ll cleverly collect from tenant & landlord under different criteria labels

What we will see is a slow-down in the letting market - as tenants sensibly wait for the new law to kick-in on 12 December, in order to avoid letting fees.

Then, in the run-up to Christmas, activity will pick up.

TTP

Letting fees were always tax deductible.

I just want to note that all of those who say that rent will rise in response are not thinking about how rent increases work in reality. Regardless of elasticity, rent is raised infrequently based on a generally hazy concept of how much relative properties recently rented charged. It is rare to find a land lord meticulously calculating what his margin should be and adjusting rent based on micro increases to his cost base like needing to pay a letting fee every few years.
This article backs up my point that the land lord and the letting agents are the principal pressure point, the loss will be largely shared between them. Letting agents are most vulnerable as some landlords will take this as a final straw to list privately and save the 7-9% +GST. Many other land lords will over time press the letting fee lower.
This is a great change, a similar change is due in credit cards where retailer charges should be passed straight through to consumers.

Many retailers are passing the charges thru to customers. Particularly in low margin markets. High margin and high volume markets generally eat the charges. High volume markets (supermarkets, petrol stations etc) are able to negotiate low fees so there isn't the 2.5% gouge small retailers pay.

Indeed im glad its catching on but it should be law.

Why? Not in favour of businesses getting to decide what costs they ibclude in the general categiry of overheads and roll into the general price of the goods and services?

Should they also be forced to charge a cash handling fee for those annoying people that still use physical cash?

The reason its important with credit cards is if any one company charges they suffer for that. Companies are not very good at, and are not really allowed, to organise on larger scales, that is the job of government. Credit card retail fees are a hidden charge, that adds to the cost of goods paid for by consumers. If we make that charge transparent then people will stop using credit cards and ultimately we all then benefit from lower cost of goods.

Cash handling fees are also a hidden fee. I don't see why we can't leave it to the retailers to decide how they want to handle it. If they aren't happy with absorbing that cost they can pass them on, or not accept credit cards.

Could see a 1 off increase in rents as this legislation sends a pricing signal, but then it'll be business as usual.

Rent isnt recalculated on such a granular level

Should anyone be foolish enough to "invest" in becoming an amateur landlord, then will pay the cost of their investment, including property management fees such as finding tenants, ie letting fees.
At least this removes the incentive to churn tenants to generate fees.

There is no incentive to churn tenants for letting fees as an almost free 7-9% is much better margin than thrashing for letting fees. Not to mention most people are lazy. Have you met these things called humans before?

Its already happening. I posted the other day about a post on another forum from a landlord saying they had been notified by their PM that the letting fee they were going to charge the landlord was (in his words) about half a weeks rent.

They'll want to have a reasonable conversation with their property manager about why what might be expected to be quite normal services falling within property management are now extras paid for over and above.

Why even hire a property manager??? If being a landlord was such a great idea shouldn't these houses rent themselves out? Duh - just invest in a low cost index fund and be done with it. No need for expensive management.

Where I am in Queensland, the letting fees (if any) are payable by the owners not tenants. Owners can pass this fee on by building it into weekly rentals but it might mean your rental might stay vacant longer if something else cheaper is available down the road.

As a landlord I don't have an objection with paying the letting fee as I ultimately benefit from the property manager conducting a proper background and credit check... that said, I will ultimately seek to look for fixed terms and opt for longer periods so as not to face having to pay the letting fee often. It'll save tenants the upfront cost but will ultimately mean landlords will seek a higher level of commitment.

Which is good. Letting agents and landlords have previously been incentivised to have high turnover of tenants because they were charging lots of fees and often trying to shaft tenants on their bonds etc. Short termers can use Air BnB or Trademe flatmates.

So true on the bond part. We had a property manager who tried to cash grab our bond on a bunch of pre existing damage. That’s why it’s important to keep a signed copy of the inspection report and time stamped photos.

Hell, they tried to sting us on a heated towel rail half fallen off the wall until a) I pointed it out on the inspection report b) provided email correspondence reminding them it needed fixing and c) a web cache of the listing from their website with a photo clearly showing the heated towel rail in that state.

It means rents are going up. The letting agency will have little incentive to make property transaction attractive to tenants and instead solely act to secure the highest possible rent.

It doesn't necessarily mean rents are going up at all.
Firstly, effective rental costs will be decreasing.
Secondly, a huge switching cost is being removed from the market.

To any logical person, that suggests that tenants are going to be much better off - less letting fee burden and lower transaction costs.

"The letting agency will have little incentive to make property transaction attractive to tenants and instead solely act to secure the highest possible rent."
Can you give me an example of a letting agency that isn't already maximising rents?
If it's yours, you are doing something wrong.

Yeah, tenants costs to move are decreased - maybe a logical person can work out the rest of the equation.

The tenant has moving costs reduced and are now more easily able to move - thus increasing the amount of effective Demand. The landlord has had their costs increased and are less willing to change tenants - thus reducing the amount of Supply. Demand increases and Supply decreases, so rents are going up.

But the supply and the demand (ignoring expansion/contraction of the overall supply of rental houses) is the same.. one tenant leaving generates one unit of supply(one vacant property), and one unit of demand (tenant looking for somewhere else to live)

Your suggestion would only be true if tenants were discrete interchangeable units, but we aren't. We have things like maturing children, immigration, divorce, multi-family dwellings, flatting arrangements, lodgers, homelessness, that change constantly.

Sure, but they have always been there, the minor change of letting fee costs isn't going to change the dynamic in any significant way. A couple isn't suddenly going to split because the letting fee is no longer there.. they're going to split for all the usual reasons. Ditto with kids moving out on their own. A $2 or $3/week change of overall costs won't affect the decision to move out of home.

I don’t think it is the same, when a tenant moves out it may be a few days or weeks before new tenant moves in. This means these are lost accomodation days which because of reduced ‘supply’ will lead to higher rent price pressure.

Most tenants give notice, and the landlord has found replacements by the time they move out.. this is again such a minor change it's going to have no noticable effect.

I don’t think it is the same, when a tenant moves out it may be a few days or weeks before new tenant moves in. This means these are lost accomodation days which because of reduced ‘supply’ will lead to higher rent price pressure.

Hang on a tick so because a house is empty the landlord is going to increase the rent? Wouldn't they be equally tempted to reduce it so that they don't have so many lost accommodation days?

Which is what I have seen. ie fellow workers see keen landlords with an empty property strike a deal. However this maybe the small amateur landlords with a bad cash flow who are having to meet the outgoing costs out of their own wallet.

There is no genuine increased incentive to move. Tenants hate moving. There will be no change in turn over. Once you accept that you move on to rent calculations which are not sufficiently granular to respond to a letting fee charge. Landlords simply do not micro manage rent increases that way.

Tenants hate moving. Yes.
Tenants hate moving more when there is cost involved.

To say it will have no effect is disingenuous. Is the effect going to be large; likely not. But, regardless it represents downside pricing pressure, not upside.

There will be no change in demand as a result of this policy. Mechanically that isnt how rentals work, people live in a house until some motivator crosses a threshold, that threshold is not so granular as to account for the letting fee. People move for tangible reasons and a letting fee in context to things like job change, boyfriends, job loss or more space just isnt a factor. You would need to stack up several such factors to get a measurable impact.
In terms of an invisible hand, some microscopic impact can be theorised but that is why i use the term:
"no genuine increased incentive to move" as opposed to "no increased incentive to move".
Its just squabbling about nonsense.
Its a saving to the renter and thats really all it is. Good law.

Demand doesn't increase - every person still needs to consume one unit of housing.
It is market friction that changes.
Given that there are like 4,5k (+ ~30k empty properties) rental properties on TradeMe at the moment for Auckland, I don't think supply is an issue.

Given that renters can only really consume one unit of housing, I doubt some sort of jevons paradox is going to occur.

Hahahaha what? You're forgetting that when a tenant is moving, they're also adding 1 house to the supply equation. You know, the house that they're moving out of!

In unaha's world renters will consume more rental property when efficiency is increased into the market.

So efficient that people will rent 2 houses.

Actually, I live in Auckland and have noticed more than one family unit lives in a rented house. People may appreciate moving from renting 0.1 houses to 0.5 or even 1.

I'm not surprised this has by-passed nymad's attention, lots of things do. But I thought most people would be able to work out that people living in overcrowded accommodation would prefer not to.

So you are assuming the main reason there is over-crowding is because of letting fees?
That an ~2% decrease in effective rents will be the threshold that tips the utility scales for families living two or three in a house?
Yay! No letting fees so we will increase our living costs by ~100%.

Get a grip, man.

Have you not noticed that different houses have different rents? I thought this was almost entirely common knowledge. I am not suggesting they will kick the other family out and take over the rental on their current house. Instead find alternative less crowded accommodation for affordable pricing.

Also residential tenants tend not to take out 12 month lease agreements, so the period to normalise cost over is not 52 weeks which would result in a mere 2% reduction. Rent is paid fortnightly or monthly where eliminating letting fee provides a 20-33% reduction in rental costs over the period. A reduction size liable to highly impact demand.

And finally the overcrowding is due to a lack of rental housing.

Hard to tell if you’re being serious.

He's dead serious.
Don't argue with an armchair urban expert, nzdan.

It always is on the internet.

Basically I say there is "a huge switching cost is being removed from the market", which will therefore have a "huge" impact on people willing to switch. Therefore I feel that all I need to demonstrate is that there are a large number of people willing to switch (for instance people living in overcrowded accommodation in Auckland).

Nymad being nymad says "a huge switching cost is being removed from the market", but this will have no impact at all.

I wish any of this made sense.

FYI - overcrowding isn't due to a lack of rental housing. It is due to a gap between income and market rents.
We have a surplus of rental stock in Auckland.

Oh yay, now nymad has declared the housing crisis doesn't exist.

What is it like in nymad land where:
- a "huge" discount on transaction costs will never impact the number of transactions?
- all renters living in shared accommodation will always live in shared accommodation?
- if you want to stop sharing you need to double your housing costs?
- 4000 rental properties advertised for 700,000 renters is a surplus?
- Auckland has no housing shortage?

They say ignorance is bliss.

I'm not saying it won't impact the number of transactions. I'm saying that renters still consume the same amount of rental properties.

I'm saying shared rental arrangements are due to very low incomes. Slight decreases in effective rent will not change this.

4000 rental properties plus ~ 30k empty dwellings equals a huge consumer surplus.

Auckland housing market is a clearing market. There is not a shortage issue; there is an affordability issue.

MBIE disagrees, they say there is a large housing shortage.

@Nzdan Thats actually true, on an irrelevant level though. When you move you briefly consume two houses. More moves equates to fewer days of total accommodation because the average days a property is inhabited drops. This reduces supply, demand stays the same, and so you could thorise some fantastically small increase in rents. But its completely moot because there will be no real change in tenants behavior, it simply isnt a big enough change to have genuine influence on the choice to move or stay.

Lets say on average a tenant is there for 3 years, $1000 a week in rent, landlord pays 1150 in a letting fee / 156 = thats $7.50 a week rent rise, or not.

Whining Landlords need to get a grip, business is always changing, exchange rates, transport costs, H and S compliance, labour etc etc etc,.. Most of us get on with it, suck it up, sometimes get to pass it on (rarity). I dont know why this is getting so much air time, its pathetic.

Technically I am a whining tenant and yes I do realise that I will have to grin an bear it. But I am going to whine anyway, because I do not want my rent to go up - despite what the Housing Minister prefers.

Im a tenant too. But Ive never had the misfortune to deal with any "property managers" so never paid the fee.

You could argue the same about real estate agents acting solely to secure the highest possible price...yet they don't. They try to sell as many as possible instead because the extra commission from another $10-20k is negligible.

And have you ever heard of letting agencies focusing on creating a good experience for tenants? That's like asking 'Have you ever seen a unicorn?'

Their motivation hasn't changed, they have always wanted the maximum rent without incurring vacancies. More rent = more ticket clipping every week, and a happier landlord.

As pointed out in the article it's only ever been that when "...negative migration growth and the market was awash with rental properties..." that rental cost has gone down. Every other extra expense that legislation moves onto landlords eventually gets paid by tenants until supply demand equation is fixed.

If one bought a rental 10-15 years ago and did spreadsheets of expected future costs/rents one would now be finding that rents are much higher than was projected - as are some costs.

DP

Well PT says there are $74 million paid per year in letting fees. The average rent is $400 and the average tenancy is two years. That equates to 370,000 tenancies paying an average of $400 every second year out of the 450,000 private rentals. So we are looking at 82% of all rentals paying a fee. When I operated my property management business I only charged a letting fee when the tenancy was less than 12 months. The tribunal upheld my right to do this. I used to collect over $10,000 a year in fees. A lot of tenants just keep moving and they are the ones who should pay for the work they create.

When a tenant moves out, a property manager would often deduct a portion of the bond.More often than not, its for very frivolous & vague reasons eg general tidying up,etc

Are landlords ever told how much was deducted from the tenant's bond and furnished an account of how the sum was spent on the property ????

Or is the sum quietly pocketed by the PM as there is another tenant waiting to move in quick???

Something that’s missing from this discussion is that there’s a huge amount of work involved in a tenant changeover if it’s done properly. You have to do your accounting midway through the year, read the water meter, notify the existing tenant of their obligations. Do the final house inspection. Arrange the bond refund with the DBH. At the same time arrange with the old tenant times to show new prospective tenants though the house. Advertise on trademe, and field dozens of emails, and phone calls, have an open home and go through the laborious process of moving someone new in.

You make it sound like they’re unsung heroes. Isn’t that what they charge x% on top of rent for?

Not at all, just pointing out what should to be done in a tenancy handover. In my opinion property management is money for jam most of the time, with all risk on the house owner. I've seen property managers doing a half-arsed job and charging good money for it. That irritates me. That being said, changing tenants is one of those really important things that needs to be done right (from the point of view of the house owner)

Ah my bad, I thought you were outlining the very little work they are required to do as justification for the letting fees.

Lets not forget how hard many tenants work in an attempt to keep their bond safe, let alone the work and costs involved in moving. Where do they send the invoice for their time and costs incurred?

I wonder if there was something like a tenant's insurance, whereby a professional entity would have ensured tenants for paying rent or causing damage to properties, everyone life would have been easier. This way good tenants can build up a history and get rewarded for being reliable tenants, while landlords have a much more robust mechanism to off-set risk of bad tenants. You then will not need a deposit or a property manager. I think housing NZ can potentially subside certain aspects of the insurance scheme (or they do the whole thing themselves), for example insurance for first time renters (who are likely to be defaulted to maximum risk due to no history).

The Regulatory Impact Statement isn't particularly helpful when it comes to the question of whether the cost will be passed back to tenants through higher rent.

"The fees are likely to be charged directly to landlords some of whom may in turn pass it on to tenants in increased rent. The cost of spreading the letting fee through rent over the course of the tenancy may result in some tenants over-paying the cost of the service. The specific behavioural response of landlords is difficult to forecast as time for consultation has been limited and the full extent and nature of impacts are unable to be assessed."

"There is a risk that landlords will pass the letting fee on to tenants through increased rent over the term of the tenancy. However, experience in other countries shows no clear evidence that banning letting fees will lead to increased rents. In the event letting fees were passed on in the form of increased rent, at the current national average weekly rent of was $4521 for tenancies managed by property managers, $9.99 per week would be added to rents over a one year tenancy."

https://www.mbie.govt.nz/publications-research/publications/housing-and-...