Paying the rent should be a reasonable task for a full-time worker
Summary of proposal
This paper recommends the New Zealand government creates a build-to-rent programme capable of building a significant number of houses, up to 3000 houses per year.
These rental houses should cost tenants no more than twelve out of forty hours work, which this paper defines as a living rent.
The government should budget for this build-to-rent programme costing $400m/year in capital grants to be given to non-profit housing trusts in the community housing sector.
The paper contends this will achieve the following benefits;
- It will more effectively provide housing assistance to low income workers than the current flawed Accommodation Supplement Scheme.
- It creates a new tool that addresses the market failure of rapidly escalating rents and the private sector not building enough housing that is affordable for low income workers.
- It ensures government expenditure is directed at treating the cause not the symptoms of housing related financial stress.
- It provides an intervention that can directly target providing affordable housing for ethnic groups like Maori and Pasifika who are disproportionately affected by the poor functioning of the housing market.
- It can be part of a programme that tackles child poverty.
- It assists the government housebuilder Kainga Ora to ramp-up to a size where it can provide transformational benefits.
- It helps rebalance central and local government responsibility for housing so they can work together towards a common goal of improving housing supply.
For too many New Zealanders paying the rent is their biggest problem. Rent consumes more than 30% of their gross income. Renters have little protection from rent increases and little security of tenure, especially from landlord’s whose business model is to buy and sell rental housing for the purpose of making capital gains.
Renters best protection from these uncertainties would be to purchase their own home, yet for most renters their income is insufficient for them to buy.
These problems have grown so big that it is now accepted that New Zealand has a housing crisis.
No one solution will provide the silver bullet to solve this crisis. The government needs to expand its policy toolbox. This proposal is aimed at creating another tool.
Previous New Zealand governments have provided housing assistance in one form or the other for over a century. Financial assistance has come in three basic forms; either the government has built houses itself to directly provide affordable housing, or it has paid renters a one-off grant so they can buy a new or existing house, or ongoing accommodation supplements so they receive affordable rental housing from the private sector.
This report contends that the last option, which is New Zealand’s most expensive housing assistance scheme -the $1.5bn/year Accommodation Supplement Scheme -is flawed, as it subsidises landlords more than tenants. A radical review is required.
Added to this flaw there is over 200,000 households in rental accommodation whose incomes are too great to qualify for the accommodation supplement yet who are not in a financial position where they can benefit from home ownership grants (including the mooted progressive home ownership scheme, which the Green Party secured a one-off $400m funding allocation for).
The remedy proposed by this report would cost $400m/year for capital grants to fund the construction of ‘living rent’ housing.
What is Living Rent?
The living rent concept follows from the living wage idea. The living wage concept being that workers should be paid an income so they can afford the basic necessities of life.
The living wage rate for 2019 in New Zealand is $21.15. Which is $3.45 more than the minimum wage rate of $17.70.
If the living wage concept is applied to rental housing, then a ‘living rent’ value can be calculated.
Affordable housing literature indicates rent should consume no more than 30% of gross household income to avoid poverty or financial stress.
So full-time workers should live in homes that costs no more than twelve hours of work. Note 12 hours is derived from the simple calculation that 30% of 40 hours of full-time work is 12 hours.
For example, a single-income household, living in a ‘twelve-hour home’ and earning a living wage of $21.15/hour, should be paying no more than $253.80/week in rent
Wellington bus drivers are an example of an occupational group being paid just above the ‘living wage’, as they are paid $22/hour. That would mean a Wellington bus driver in rental accommodation should be paying no more than $264/week in rent.
This theoretical ‘living rent’ can be compared to actual rents.
Living rent compared to actual rents
Interest.co.nz publishes median rent figures for different size houses in the three main centres. These figures give an indication about the kind of rents low-income earners are paying.
The median rent figure for the lowest cost dataset option -a two-bedroom house is compared in the below graph to a twelve hour rental home where the tenant is paid the living wage rate ($21.15/hour)
So, in Auckland and Wellington renting is expensive and in Christchurch it is more affordable.
Even in more affordable Christchurch a median two-bedroom rental is $76/week above what a ‘twelve hour’ living rental should be.
Rents since 2017 have increased the most in Wellington and the least in Christchurch.
For living wage households, assuming they were paying for a two-bedroom median priced rental, means they would need to work 78 hours in Auckland, 76 hours in Wellington and 52 hours in Christchurch for their rent to be under 30% of their gross income i.e. to be a living rental.
In Auckland and Wellington to rent a median priced two-bedroom unit, whilst earning a living wage rate would require two full-time living wage workers.
Increasing rents will obviously lead to more crowded rentals, which at the extremes will lead to housing related health difficulties.
This living rent analysis shows how difficult it is for low income workers to live in New Zealand’s cities in a manner where they can comfortably afford the necessities of life. Yet frequently it is cities where the best employment opportunities are.
For example, high Wellington rents is almost certainly a factor behind Wellington’s chronic bus driver recruitment difficulties. Wellington has spent all of 2019 short of fifty bus drivers despite offering a living wage of $22/hour.
Wellington’s housing and employment situation might be an example of the productivity loss resulting from inelastic housing supply which was discussed in the article -The Housing Productivity Story, if the reason for the high rent is Wellington builds insufficient affordable housing in response to rising house and rent prices.
The Wellington region for some decades has built housing at half the rate of Canterbury (link). Auckland in recent years has managed to ramp up its house building rate and this appears to have reduced rent and house price increases.
If a slow building rate of affordable homes is a cause of high rents then it is also a factor in the public and private sectors inability to recruit staff.
Public and private sector firms could of course increase wages to keep up with the described landlord’s rentier economy. In Wellington’s case that would mean bus drivers receiving wage increases of $1/hour every year to keep up with the current rate of rent increases.
If the cause of this rentier economy is not remedied, the wage costs of keeping up with rapidly inflating rent will be a heavy burden on the public sector. It will either cause budget difficulties due to the compensatory wage increases or if wage increases do not keep up with rent increases, by degrading public services due to staff shortages.
The rentier economy burdens the private sector with the same dilemma, of either increasing wages or experience staff recruitment difficulties. Logically this private sector dilemma is being passed onto consumers in the form of either higher prices or lower quality goods and services.
This rentier economy is contributing to New Zealand’s high cost of living, poor productivity, high immigration rate, high emigration rate and low wage difficulties.
Understanding renter’s situation helps craft a better policy making response.
A stocktake of New Zealand’s rental housing
When New Zealand’s actual rental cost information is combined with the 2018 stocktake of New Zealand’s housing a clear picture of need can be seen.
Renters are nearly half of New Zealand’s adult population that are over the age of 15.
Based on the 2013 Census there are 687,000 households which are not owner occupier homes.
Around 82,000 dwellings are social housing units. A further 190,000 private tenant households received the accommodation supplement. 85% of these accommodation grant recipients are beneficiaries, with an increasing number being superannuitants (A Stocktake of New Zealand’s Housing, P.32).
These figures mean only 40% of the private rental market has some level of government housing assistance and the main group not receiving support are low-income workers.
The number of social housing units and subsidised private tenant households has changed little in recent decades, while the number of households renting in the private sector grew by 126,000 between 2007 and 2017. This means that in the decade to 2017, an increasing number of rental households received no government support against a background of rising rents (A Stocktake of New Zealand’s Housing, P.9).
Pasifika and Maori are the ethnic groups with the highest renting figures -over 50% of these ethnicities rent.
Children are increasingly growing up in rental households, nearly half (43% in the 2013 Census) live in rental accommodation. This percentage increased from only 26% of children in 1986 living in rental households.
For the government to make progress in addressing childhood poverty, then fixing the flaws in the way it provides housing assistance will need to be part of its child poverty reduction reform agenda.
What housing assistance does New Zealand currently provide?
The below housing continuum graph indicates the situation of New Zealand households not in owner-occupied housing, with a particular focus on how many rental households can afford to buy a KiwiBuild priced home.
Home ownership even at KiwiBuild prices is a step too far for most renters. Only the bottom bar in the above housing continuum graph can afford a KiwiBuild priced home. Note the house prices this financial calculation is based on are dependent on location and household size. This averages as $615,000 in Auckland and $425,000 in the rest of New Zealand. It also assumes a 15% deposit and 85% mortgage.
Fortunately housing assistance from the government extends beyond KiwiBuild.
At the most vulnerable end of the housing continuum there is increasing financial support for New Zealand’s most housing deprived cohort. These are homeless people living in inadequate housing conditions because they are living on the streets or in cars, couch surfing, living in garages, camping grounds or in other inadequate or temporary housing situations.
There are approximately 41,000 individuals in severe housing deprivation (2013 data).
The 2019 Budget increased the government’s investment in Housing First, by funding 1,044 new transitional housing places. This raised the number of people the programme can help to 2,700.
There is nearly $500m allocated in the 2019 budget targeting the most deprived end of the housing continuum. Unfortunately, much of this funding is going to short-term motel accommodation, which community housing providers rightly say is not a permanent solution to New Zealand’s terrible shortage of affordable housing.
For the next most vulnerable group Housing New Zealand provides state housing. The main method of funding this social housing is through income related rents.
For the 2019- and 2020-years Housing New Zealand is expecting to receive $414m and $444m in rent income from tenants and $876m and $940m from the government in the form of income related rent subsidies (source -page 61, Forecast Cash Flow Statement, HNZ). This is an increase in funding and has allowed Housing New Zealand to create a programme to build 1600 new state houses a year, which it is currently exceeding.
Housing New Zealand had reversed its policy of state housing selloffs. Under the previous government the number of dwellings owned or managed by Housing New Zealand peaked in mid-2011 at 69,717 units before falling to 62,917 units by June 2017.
Despite the government’s state house build programme Housing New Zealand’s waiting list continues to increase, as can be seen in the above graph. Housing New Zealand may need an even larger injection of capital funding.
The next group up the housing continuum to receive housing assistance are the 190,000 household’s in private sector rentals receiving the Accommodation Supplement. The main recipient group of this supplement (85% of recipients) are working aged beneficiaries and retired superannuitants.
The previous government in the 2017 Budget made a $500m/year step increase in expenditure on the accommodation supplement grants by increasing the maximum weekly amount tenants could receive. Below are the details of the increased level of housing assistance provided.
The 2017 Budget increased accommodation grants by increasing maximum weekly pay-outs and increasing the number of locations considered to be in Areas 1 & 2.
The biggest increase of $80/week was in Area 1 districts for families of three or more. Wellington which is in Area 1 has seen rent increases of $75/week for its lower cost rentals between 2017 and 2019, so the increase in the accommodation supplement has mostly been negated due to rapidly inflating rents.
Rent increases in New Zealand’s towns and cities are on track to consume all of the increased rent supplement which tenants received. This is the reason that the Accommodation Supplement Scheme is a very expensive and a very flawed policy for providing housing assistance to low income earners. The government to address this flaw needs a housing supply policy that targets house building which is affordable to low income earners.
The biggest group in the rental house continuum is the 425,000 households in private rental accommodation who cannot afford to buy a KiwiBuild priced home.
Of the 425,000 households, there is about 230,000 whose incomes are such that they do not receive the accommodation supplement, yet whose incomes mean they are not in a financial position to take advantage of home owner grants, such as Homestart to buy a house in the Kiwibuild price range.
A progressive home ownership scheme where the household only pays a mortgage on 60% of the value of the house, only increases the number able to buy a KiwiBuild priced house by 60,000 households. This scheme has been championed by the Green Party, it will cost $400m and the funding has already been allocated by the Coalition agreement. The government said the number of households the scheme will support depends on how it targets funding, but it expected 2500 to 4000 homes to benefit over four years.
This progressive home ownership scheme does not build many affordable houses. 4000 houses over 4 years is only 3% of of the total builds expected for the period. To stop escalating rents will require more affordable houses to be built. Another issue is that progressive home ownership is not accessible to the full continuum of renters. These issues mean the scheme doesn’t provide a comprehensive solution to the housing crisis for renters.
Progressive home ownership will provide a benefit but another tool is required. One that targets further down the rental continuum and that can build a greater number of affordable rentals. This reports contends the living rent scheme discussed in this paper could be that tool.
The flawed Accommodation Supplement Scheme punches holes in the government’s books
The Stocktake of New Zealand’s Housing report in February 2018 discussed the Budget 2017 increase in the accommodation supplement. They acknowledged it had a short-term benefit in relieving the harm caused by the housing crisis, but presciently they doubted the accommodation supplements medium-term worth, as the benefits tend to be eliminated quickly by rent increases.
The Accommodation Supplement Scheme has long been suspected as being a landlord subsidy. For example, journalist Alex Tarrant wrote for Interest.co.nz back in 2011 an article titled -Accommodation Supplement: Landlord subsidy punching a big hole in govt books due to unaffordable housing, or an essential benefit?
New Zealand based economist Eric Crampton clearly explains the accepted economics of who benefits from government grants to renters. Basically, in tight housing markets, it is landlords. For tenants to benefit, the conditions need to be such, that it is easy to build affordable homes.
Eric Crampton summarised these conditions as follows; whenever the flow of expected rental income exceeds the cost of buying land and putting a new house on it, somebody would build a new house. That means that rents can never get too much above construction costs because new housing would get built. Under these conditions, tenants benefit from the accommodation supplement. Landlords can’t just put up rents, because somebody else would build a house and get the tenant. Competition works.
Given that New Zealand’s housing construction market is not functioning in this way, as rent increases are on track to eliminate all the benefit from increasing the accommodation supplement in 2017, means there will be increasing political pressure in the coming years for another $500m/year increase in the accommodation supplement.
Alternatively the pressure might be transferred to increasing grants which treat the symptoms of housing stress, such as, Working for Families tax credits, Best Start new-born baby payments, Winter Energy payments, the School lunch programme etc.
This paper recommends the government preempt this political demand for more spending on the accommodation supplement by providing $400m/year in capital grants to charitable trust non-profit Community Housing Providers to construct build-to-rent ‘living rent’ houses.
The purpose of these capital grants being to provide living rent housing for low-income workers who are not currently benefiting from government housing assistance schemes and are not in a financial position to buy a house even with government grants, such as HomeStart.
The recommendation being these capital grants be delivered in three tranches of a 1,000 houses/year each.
- The first tranche with the highest capital grant of $170,000 would target workers at the lowest end of the housing continuum that is not currently receiving housing support i.e. minimum and living wage workers.
- The second tranche, a $130,000 grant would target higher up the income spectrum.
- The third tranche, a $100,000 grant would target the group of renters who fall just below the income level where they can financially consider buying a KiwiBuild priced home (even using the proposed progressive home ownership scheme).
A minimum requirement on Community Housing Providers who receive capital grants is that they price their rents below the median value for the number of bedrooms in the particular city concerned, so that the build-to-rent housing provides competitive price pressure on the local rental market, therefore reducing future rent increases. For the larger capital grants the requirement would be to target housing demand further down the income spectrum, by providing ‘twelve-hour homes’ for living and minimum wage workers.
In this way the build-to-rent programme would provide wider benefits to all renters.
Who would build Living Rent houses?
Non-profit housing charitable trusts with an ethos of housing being a human right not a speculative asset should be the recipients of capital grants to build affordable living rentals. This type of housing provision has a long-term record of providing affordable rental housing. For example, the original capital endowment to Peabody Trust by the banker and financier George Peabody in 1862 has sustained the affordable rental house provider for over 150 years.
The Peabody Trust retains enough earnings so that it can continue building and modernising its properties, it currently supplies 55,000 affordable rental houses in London and the South-East of England.
A significant proportion of the funding/housing should go to charitable trusts which build papakainga housing that better provides housing to meet Maori cultural needs. Architectural designer and housing advocate Jade Kake in a paper titled -The future of papakainga: there’s no place like home describes this opportunity.
Community housing providers which focus on improving rental accommodation for the Pacifica communities should also receive funding.
Making capital grants to non-profit charitable trusts to build new rentals has the advantage that if house and rent prices do continue to rise, the charitable trusts can borrow against this rising capital value to supply more new build rentals. So, this proposed remedy improves to a small degree, the housing supply response to house price rises in the long-term, as well as providing a strong short-term housing supply effect.
Having affordable rental housing owned by non-profit community housing trusts also has the advantage of removing social housing from the political football of successive governments building up and then selling off public housing stock.
Community housing providers could partner up with institutional investors like the Superfund or ACC. These investors because of large fixed due diligence costs would likely to be interested in larger housing projects of $100m or more i.e. a minimum of about 300 houses per project. Stable long-term rental payments from such schemes may be attractive to these investors.
Community housing providers engaging in the proposed build-to-rent program therefore have access to three sources of capital funding -direct government grants, philanthropic donations and institutional investors.
Having long-term institutional investors in the rental market delivering professional standards of rental service based on a rental yield not capital gains business model should have a positive flow-on effect for the whole market. Not just in the sense of charging tenants reasonable rents but also by instituting good quality professional property management practices for issues like maintenance repairs.
How does these living rent proposals fit into the wider political and economic housing reform puzzle?
There is a need in New Zealand to remove restrictions on house building and to find better ways to fund the public infrastructures that new housing requires.
This report envisions the proposed supports for low income renters would be complementary to the wider housing reform programme not a substitute for it.
There is a need to find mechanisms that increase the supply of housing so that New Zealand can respond to population growth. Over time house building has responded less and less to increases in population, as can be seen in the above graph. This declining build rate in response to population gain is likely to be a subset problem of a bigger issue; that New Zealand’s housing construction sector (housing supply) has been unable to build affordable housing in response to rising house prices.
New Zealand’s more sophisticated housing affordability advocates realise that it will take more than just requiring local government remove unreasonable planning restrictions (NB: there is a discussion mid-way through the housing paper here about the difference between reasonable and unreasonable planning restrictions). What is required is for local government to want to remove unreasonable planning restrictions. The way to achieve this is by rebalancing the gains and losses from population growth between central and local government.
If this rebalancing does not occur, then central and local government will play a game of whack-a-mole. Central government will remove restrictions and local government will find new ones.
Eric Crampton as the chief economist of the New Zealand Initiative has written about this local and central government imbalance. Saying, central government gets more income tax revenue when a city’s population expands; local government gets an infrastructure bill. Central government gets more Goods and Service Tax (GST)and company tax revenue when it allows more development; local government gets the complaints about tall buildings blocking views and faces the bill for trunk infrastructure upgrades.
For central government housing initiatives to succeed will require local government buy-in. This will be determined in large part by whether the housing initiatives facilitates the provision of good quality public amenities or whether it leaves these as a liability for local government.
The New Zealand Initiative advocate that local government’s opposition to house building could be improved by removing local government’s building consent liability i.e. its ‘last man standing’ joint liability for building defects like leaky homes. That new special purpose vehicles which can utilise targeted rates to pay off infrastructure bonds be allowed, so that new housing developments can pay their full infrastructure costs. The New Zealand Initiative strongly recommends that there be a mechanism allowing local government share some of central government’s revenue gains from population growth, such as receiving the GST on local construction. These are all sound recommendations and they match affordable housing building company’s complaints of the current regulatory system.
Yet even if the private sector builds enough housing supply to catch up with population growth, it may not build new housing for low income renters who require ‘twelve-hour homes’. The private sector builds over 95% of the housing in New Zealand (currently 35,000/year), yet since the 1990s they have built few houses for the middle or lower end of the market.
One of the mechanisms that restricts the building of lower priced homes is many developers impose private covenants on new housing developments, which prevents ‘low-value’ smaller homes, multi-unit dwellings, rental housing etc from being built. Even in more responsive house building markets, such as Greater Christchurch private covenants are a strong feature of the new house market.
Subsidising the building of 3000 affordable rentals a year, in addition to the extra 1600 state houses and whatever smaller number of Housing First and progressive home ownership houses are built could help correct the market failure of insufficient smaller, lower cost housing types being built.
Local government might prefer if some of the rebalancing happened in the form of central government directly subsidising the construction of new housing typologies that are affordable to those on low incomes. Especially if that meant decent housing could be constructed in a way that the housing paid for high quality amenities that provides long-term cost benefits to local government, rather than creating a long term liability.
One of the biggest expenses for house construction in New Zealand is GST, which of course goes to central government. A typical new-build would pay about $50,000 in GST. If living rent houses were intermingled with normal market houses, so that living rent houses were less than a quarter of the total houses in a particular development, then the new housing area would easily pay more in GST than it receives back in capital grants.
In a system like New Zealand’s where housing pays for local infrastructure through rates and developer contributions, capital grants for new builds can be seen as an indirect way of central government contributing towards infrastructure provision to meet the needs of population growth.
There would be strong public support for such a programme. Surveys show that housing is one of the most important issues that New Zealand has to deal with according to both boomers and millennials.
There is very strong support for more public spending on housing from both millennials and baby boomers.
A government house builder has been created called Kainga Ora. It came into legislative existence on the 1st of October 2019. Kainga Ora being a housing and urban development authority is likely to concentrate on ten to twenty, multi-year, major housing projects around the country with a goal of building many thousands of houses in each project.
Kainga Ora will need a public sector entrepreneurial approach. It will be aiming to build quickly and in large numbers so that economies of scale and competitive efficiencies can reduce the per house cost of land development and construction.
In these projects Kainga Ora will build market rate owner occupied housing, KiwiBuild houses and subsidised state houses. KiwiBuild priced houses will also be eligible for government subsidies, in the form of new buyer HomeStart grants.
Yet if Kainga Ora wants to facilitate the building of affordable rental housing, targeting housing demand from the living rent segment of the housing continuum currently there is no financial assistance available. This living rent group therefore are likely to miss out on Kainga Ora built homes.
This is inequitable and there may be political consequences, as the government house building programme could be accused of narrowly focusing on beneficiaries and middle-class professionals, whilst low-income workers miss out.
Economically it doesn’t make much sense either. The economic rationale for the government builder -Kainga Ora is its ability to build at pace and scale. Once it achieves pace and scale then it can transform the housing market in a number of positive ways.
For example Kainga Ora can be transformational by directly building affordable housing and new types of housing, with low-cost building materials from more competitive suppliers, with greater use of prefabrication, building more liveable communities near employment and other high-demand amenities, with warmer, drier and more energy efficient housing, which integrates housing with rapid transit and builds communities that are less car-dependent to meet climate change objectives.
To achieve pace and scale requires Kainga Ora tapping into as much housing demand as possible. Not providing capital grants for the building of affordable rental housing for low income workers could compromise Kainga Ora’s ability to ramp up its build programme to achieve the necessary economies of scale transformational benefits.
Lessons from the past
In the past New Zealand has built a lot of state houses quite quickly. In the period immediately before and after WW2 the government built between two and four thousand state houses a year. New Zealand back then had less than half its current population, so this rate of building was outstanding. During this period the government built for the large demand coming from middle to low-income workers. This can be clearly seen in the story about New Zealand’s first state house.
The first state house built by the First Labour government in 1937 was rented to David McGregor’s family. David was the sole income earner for the household. David worked as a tram driver for the Wellington City Council. For his efforts he received a wage of £4 7s 9d per week. Out of this total he paid the state £1 10s 3d in rent, just over a third of his pay. It is noteworthy that David and Mary were able to buy their state house 15 years later in 1952.
The modern-day equivalents of David-the-tram-driver are not being given the same opportunity of paying a living rent so they can have a stable start to life.
New Zealand needs to provide capital grants to a build-to-rent programme providing living rent to give modern day ‘David McGregor households’ the same opportunities as the past.
Living Rent: A Twelve Hour home has mainly focused on discussing what the rental price of build-to-rent housing should be. It is the first paper in the Living Rent series.
The next in the series is Living Rent: A Future Proofed Home which discusses what the quality of build-to-rent housing should be.
The third in the series, which has not been written is Living Rent: The Thirty Minute Home will discuss where build-to-rent housing should be located.