Who sets the rent?

[Bob Kane]

Who do you think determines the rental amount?
Who has the last say on what the rent is?
Is it the landlord?
The tenant?
Wages?
Something else?

If the result of the tax review is $100 pw extra costs per investment property and all landlords raise their rents by $100pw, what happens next?

I have a few ideas about what might happen and I'm interested in what others think.

[Son of G]

1) If you are letting a property then it is is the "market".

2) At rent review time, as long as the increase is not too much, the landlord. The only option if the tenant can not afford it, is to move out. In which case you are back to point 1)

One of the things that holds the market down is a lack of cartel behaviour by landlords. Some landlords think they will get a better tenant by asking for a "below market" rent. I am sometimes tempted to ring up the advertisers of the cheapest properties and tell them to lift their rents.

[Winston001]

Ultimately the rent is set by the ability of tenants to pay it. You could have a $1 million property asking $1000/wk but if the local population were beneficiaries, you'd just have an empty house.

There is a lot of talk here about putting rents up because of the TWG proposals. However those discussions always ignore the reality of tenants being able to pay the increase. You can't get blood from a stone.

[Keys]

The telephone.

Rings often. Too low.

Never rings. Too high.

Rings enough. Just right.

[Keithw]

I agree with Son of G. & Keys
I disagree with Winston for "average" property but there is some validity to tenants ability to pay for very high value property, but even then, price is set by supply and demand- if people want it then they accept they have to pay a premium for it.
Tenants increase the number sharing a property when prices rise beyond what they can handle themselves, just the same as homeowners will pay up to 8 times annual income for a property, despite the "recomended norm" being 3 times. It simply means both partners go out to work, when years ago there would have been just one income earner.
ie rather than trying to get blood out of A stone(we don't want stones as tenants anyway), we are trying to get blood out of multiple rats & mice, which is much more likely.

As a landlord, the higher my costs, the harder I will be trying to push the rents up.
The less stress I am under, the less likely that sitting tenants will get rent rises.
It is mainly at re-letting time that I will do a comparison of other similar properties available at the time and set the rent accordiingly at an "average level" as high as possible.
The effect of supply & demand is easy to demonstrate right now, as demand is increasing due to students looking for places, so higher rents can be asked, whereas a change of tenant in the middle of the year is likely to be at a lower rent as there is less demand, and landlords with vacancies will tend to lower the asking price if they cannot get new tenants quickly- a low paying tenant is better than no tenant.
However, if costs are significantly increased due to tax changes or whatever, I am more likely to be looking at market prices every 3 months and pushing up the rents at every opportunity. ie the focus changes from erring low in order to ensure long term tenants, to pushing for as high as the market can handle, at the expense of higher tenant turnover.

[Tan]

It all comes out in the wash over time. If home ownership gets more expensive, more people are forced to rent. These people will not be at the lower end of the market, as the lower end will always rent, nor at the higher end, as the higher end will always buy. (In general)

So it stands to reason that over time more average people will be renting instead of buying. The pressure on those houses will cause rents to rise.

In the meantime the adjustment slowly happens, and I would say landlords take the hit initially, with the impact lessening over time until the supply/demand balance is found. A rocky road for both tenants & landlords.

Landlords will then receive the same average gains they always have, with higher gains being made by smart buying and good management as it always has been.

[Bob Kane]

Thank you for your thoughts.
I'll run through your replies:

At rent review time, as long as the increase is not too much, the landlord. The only option if the tenant can not afford it, is to move out. In which case you are back to point 1)

I'll come back to this point.

One of the things that holds the market down is a lack of cartel behaviour by landlords.

If every landlord gets hit with $100 pw tax increase then they might start thinking this way.

There is a lot of talk here about putting rents up because of the TWG proposals. However those discussions always ignore the reality of tenants being able to pay the increase. You can't get blood from a stone.

I'm thinking of moving the stone down the road and around the corner to a slightly cheaper location.

Tenants increase the number sharing a property when prices rise beyond what they can handle themselves

I agree - so the landlord can pass on the tax increase as a rent increase.

In the meantime the adjustment slowly happens, and I would say landlords take the hit initially, with the impact lessening over time until the supply/demand balance is found. A rocky road for both tenants & landlords.

I'm thinking that the road may be rockier for the tenant in the short term.

Ok, here's the scenario:

If the result of the tax review is $100 pw extra costs per investment property and all landlords raise their rents by $100pw, what happens next?

We have 3 rentals:
Landlord A rents rental A to tenant A for $200 pw.
Landlord B rents rental B to tenant B for $300 pw.
Landlord C rents rental C to tenant C for $400 pw.

The govt implements the new tax rules and each landlord has to find $100 pw extra. They all up the rents by $100 pw.

It now looks like this:
Landlord A rents rental A to tenant A for $300 pw.
Landlord B rents rental B to tenant B for $400 pw.
Landlord C rents rental C to tenant C for $500 pw.

Assume the tenants can't pay the new rent.
What happens?
Tenant A can't pay $300 pw so gives notice to leave rental A.
Tenant B can't pay $400 pw so gives notice to leave rental B. He jumps on trademe and looks for a rental for $300 pw. He finds rental A has just been advertised. He takes it. He has to live somewhere.

Tenant B is still paying $300 pw, landlord A has got his new $300 pw rent and pays IRD the extra $100pw.
With the tenant, landlord and IRD all happy it's a win-win-win.

The point is tenant B has just dropped down one rung on the rental ladder - he ends up renting a place not quite as good as the one he left.
This 'dropping down one rung' will be repeated through the rental market - a ripple effect.

In this way all landlords can pass on the tax increases, all tenants move down one rung and the govt collects the new revenue.

I'm not sure Bernard Hickey or Mark Weldon were thinking of this when they were attacking property investors but I'm pretty sure the tenants will be thinking of Bernard and Mark as they pack up their belongings and downsize their accommodation.

As always, feel free to comment.

[One]

We have 3 rentals:
Landlord A rents rental A to tenant A for $200 pw.
Landlord B rents rental B to tenant B for $300 pw.
Landlord C rents rental C to tenant C for $400 pw.

The govt implements the new tax rules and each landlord has to find $100 pw extra. They all up the rents by $100 pw.

Assume the tenants can't pay the new rent.
What happens?
Tenant A can't pay $300 pw so gives notice to leave rental A.
Tenant B can't pay $400 pw so gives notice to leave rental B. He jumps on trademe and looks for a rental for $300 pw. He finds rental A has just been advertised. He takes it. He has to live somewhere.

In this way all landlords can pass on the tax increases, all tenants move down one rung and the govt collects the new revenue.

Except tenant A. They can't move down a rung because the next rung down is the gutter. So what do they do?

[Keys]

Except tenant A. They can't move down a rung because the next rung down is the gutter. So what do they do?

Become part of the "market" and force the rental price up further.

[muppet]

Tenant A puts pressure on the Govt to provide them with a house or provide/increase a rent subsidy.

The Govt realises it has been an ass and reverts back to the status quo.

[Perry]

I'm not sure Bernard Hickey or Mark Weldon were thinking . . .

Couldn't agree more!

[whitt]

Tenant A just moves further out to another suburb eg Papakura . Then in 2 years times as rents stabilise at new levels moves back in closer for same rents

[Halfway To Paradise]

Tenant A may not be the type of tenant we want anyway.

[muppet]

Tenant A may not be the type of tenant we want anyway.

Hence they will put pressure on the Govt to provide them with a house.

[Bob Kane]

Except tenant A. They can't move down a rung because the next rung down is the gutter. So what do they do?

There are many rungs on the tenant/rental ladder.
$200 pw isn't the bottom rung at all.
Tenant A steps down one rung.
I guess your point is 'what happens at the extremes of the tenant/rental ladder'?
The top rung is occupied by the wealthy who simply pay the rent increase.
The bottom rung is occupied by those who obtain their rent from WINZ.
WINZ just pays the rent increase.
All landlords get their rent increases.

So no flaws in the way this might pan out?

Tenant A puts pressure on the Govt to provide them with a house or provide/increase a rent subsidy.

The Govt realises it has been an ass and reverts back to the status quo.

Well said.
Though I kinda like the idea of 30% top tax rate, it will hurt my portfolio by reducing my tax refund.