Frank Newman: Letting fees to go

On 22 March, the Government introduced the Residential Tenancies (Prohibiting Letting Fees) Amendment Bill to Parliament. The Bill makes good the new government's pre-election promise to ban the charging of letting fees to tenants.

The law as it currently stands allows a property manager to charge up to a week's rent for services relating to the granting or assignment of a tenancy. This charge is to cover their time and cost vetting prospective tenants and completing the paperwork involved.

Some media reports have incorrectly reported that landlords can charge the letting fee. They can't. It's a charge that can only be imposed by a property manager (or solicitor) acting for a landlord. Landlords cannot charge the fee if they are dealing directly with a tenant, so it’s not landlords that have profited from the letting fee, but property managers. It is estimated that letting fees account for between 10% and 20% of a property manager’s total revenue. That income stream will now disappear.

The other 80% to 90% comes from: 

• Property inspection fees,
• Management fees,
• Management fees for organising repair work or paying accounts on the landlord’s behalf, and
• Attendance at Tenancy Tribunal mediations and hearings.

I know of a local property manager who charges $30 per inspection (4 per year), 8.5% of gross rents received, 10% on accounts paid on behalf, and $90 an hour for attendance at Tribunal matters. They also charge tenants a one week letting fee.

However, property management is an unregulated and competitive market and fees are very negotiable. I am also aware of a property manager that only charges a management fee of between 6.5% and 8% based on the number of properties they manage for a landlord. They do not clip the ticket on work done by tradies, don't charge for inspections and don't charge for attending Tenancy Tribunal matters. They do charge tenants a one week letting fee.

The Minister estimates some $47m a year is paid in letting fees. The issue facing the property management industry is how they recover the lost $47m.

They will undoubtedly do so by either charging landlords the letting fee, or by increasing their management charge (which by my calculations would need to be about 1% more).

Some say landlords will, in turn, raise rents to recover that cost. I doubt it, for a number of reasons.

Firstly, it's not a significant cost to landlords. It is one week's rent over a tenancy that on average lasts for two years and three months.

Secondly, it does not affect rentals that are self-managed by a landlord, which is around  half of all rental properties.

Thirdly, it’s the market (demand and supply) that determines rents, not cost. It may be that this is just another factor that makes owning residential rentals less attractive and as a consequence reduces the supply of rental housing, which manifests itself as higher rents.  That's a more likely scenario given the government's intention to make further change the Residential Tenancies Act.

The Minister says, “Banning the charging of letting fees to tenants is a good first step in improving the life of renters, while we continue our broader review of the Residential Tenancies Act." That review is likely to:

• "Increase 42 day notice periods for landlords to 90 days…"  The 42 days notice period currently applies when the property has been sold and the new buyer wants vacant possession, or the owner or a member of the owner’s family wants to live in the property. 

• "Limit rent increases to once per year (the law currently limits it to once every six months) and require the formula for rental increases to be specified in the rental agreement." 

• "Abolish ‘no-cause’ terminations of tenancies." Presumably this means a property owner or manager would need to state why a notice to vacate has been given, and the tenant would have a right to challenge that in the Tenancy Tribunal.

The new government has already extended the bright line test which taxes gains from the sale of property as income from the current two years to five years.

Once the Letting Fees Bill has had its first reading in the House of Representatives, it will be referred to a Select Committee. During that time, members of the public will have the opportunity to make submissions on the Bill.

Frank Newman, an investment analyst and former councillor on the Whangarei District Council, writes a weekly article for Property Plus.