Government-commissioned report makes a strong case for a rental WOF

This is a repost from the CPAG blog. 

A rental housing warrant of fitness (WOF) sets out a list of fundamental features of a safe and healthy house. If a house fails any component of the WOF, it’s not fit for people to live in. There is a lot of public support for a WOF because of the way that unhealthy housing affects the wellbeing of tenants all over New Zealand.

Despite this support, the Government announced that they had rejected the idea of implementing a warrant of fitness for rental housing. At the same time, they proposed a number of amendments to the Residential Tenancies Act. Some of the important amendments will make smoke alarms and a minimal level of insulation mandatory in rental homes. They also released a slew of documents that they considered when they made their decision.

One document I found particularly interesting was the cost-benefit analysis for a housing warrant of fitness, commissioned by MBIE. This showed that the changes that were announced are insufficient and inconsistent with the advice the Government has received. In this blog post, I’ll discuss what the cost-benefit analysis showed, and how the proposed amendments to the Residential Tenancies Act are unlikely to allow us to reap the full benefits of healthy housing.

The cost-benefit analysis estimates that the total benefits of introducing a warrant of fitness would be close to a billion dollars over a 20-year period – $987 million. The breakdown of the benefits is as follows:

• $456.5 million are safety benefits due to a reduction of hazards in the home
• $422.6 million are health benefits arising from the installation of underfloor and ceiling insulation (in dwellings where this is absent and feasible to install)
• $87.2 million of the benefits come from avoided fire-related fatalities (from the introduction of smoke alarms)
• $21.1 million of the benefits come from energy savings.

Just to be clear, what this means is that currently New Zealand taxpayers subsidise landlords by a massive $987 million (over a 20 year period). That’s because the substandard housing provided by landlords leads to massive costs in the health system that are borne by taxpayers. If New Zealand tenants had energy efficient, safe, insulated housing, less people would fall, become sick, or be harmed by fire, meaning we’d save hundreds of millions of dollars.

Just out of interest, I decided to calculate the subsidy provided on average per landlord. From bond data held by the Ministry of Business Innovation and Employment, we know that there are about 131,000 landlords. That’s an average subsidy of $7,534 per landlord.

(To be fair, I should point out that landlords that provide high quality housing don’t cost the general public a thing. That’s because people don’t suffer in their houses. But what that means is that the subsidy to bad landlords is even greater. And some landlords have many rental properties, meaning they’ll reap this benefit many times over).

On the cost side, the analysis estimates the cost to landlords for repairs that would allow properties to meet the standard for a warrant-of-fitness at an average of $1,811 per dwelling, or a total cost of $653 million dollars. The greatest costs come from installing underfloor insulation and fixing bathroom floors.

That doesn’t seem like an unreasonable cost to expect a landlord to bear to ensure their properties are up to standard, and it is a fraction of the total cost of a property these days.

(Importantly, the WOF that the researchers considered  – contained in the Appendix – did not included a fixed form of heating, unlike the WOF used tested by the University of Otago in collaboration with councils and the Green Building Council. If a WOF required a fixed form of heating, this would be an additional significant cost for landlords.)

Overall, this means that the net benefit of introducing a housing warrant of fitness is estimated at $334 million over 20 years, and the benefit to cost ratio is 1.51. For every dollar invested, there’s a dollar-and-a-half worth of benefits. I’d say this presents a strong case for the introduction of a housing warrant of fitness, in particular as the costs would be borne by landlords and the benefits accrue to everyone.

Unfortunately the government’s recent changes to the Residential Tenancies Act largely ignore this analysis. Alongside changes to retaliatory notice provisions and the government’s power to act on cases of extremely hazardous dwellings, the Government has chosen to take action on two fronts:

• Requiring installation of ceiling and underfloor installation. According to the MBIE-commissioned report, installing insulation has the potential to bring in $422.6 million of health benefits and $21.1 million of energy saving benefits.
• Requiring installation of smoke alarms. According to the MBIE-commissioned report, installing smoke alarms has the potential to bring in $87.2 million of benefits from avoided fatalities.

That means, overall, that the government’s current changes have the potential to capture $531 million worth of benefits over 20 years, or around 54% of the possible benefits of a full warrant of fitness.

Where the government misses out is on the safety benefits from reduced hazards in the home. That means the New Zealand public will continue to subsidise landlords that provide unsafe housing through their ACC levies.

There is also another important detail. The government has decided to implement a 1978 standard for housing insulation as their minimum standard. Under the 1978 standard, just over half as much insulation is required as is currently recommended by the Energy Efficiency and Conservation Authority (EECA) (70mm vs 120mm). As well as introducing a confusing double standard, this decision means that again the government is unlikely to realise the full benefits identified in the cost-benefit analysis. This is because that analysis draws on research that estimates the health benefits of insulation that meets the EECA standard.

It’s also worth pointing out that the extent to which the benefits of the government’s changes are realised depends of the enforcement regime. The most interesting part of the cost-benefit analysis delves into this issue and explores a number of alternative enforcement scenarios:

• Self-regulation regime: In this model, the onus is on landlords to assess their property and bring it up to standard. There is no penalty for non-compliance.
• Market forces regime: In this model, landlords assess their property and bring it up to standard. They face the additional requirement that they advise tenants of the property’s status with respect to housing standards. This is a labelled a “consumer sovereignty” approach.
• Tax compliance model: In this model, the government would undertake a small sample of inspections to audit compliance with housing quality standards, and landlords would be fined for non-compliance. This is the model the authors of the report favour, due to the relatively low cost of implementation but high likelihood of landlord compliance.
• Motor vehicle WOF model: In this model, there would be universal inspections of properties, akin to the vehicle WOF regime. It’s this model that the government explicitly rejects in their press release, due to the high costs of undertaking assessments.

With their recent changes, the government has essentially adopted the “market forces” approach. The new housing quality standards for insulation and smoke alarms require landlords to provide information to tenants about whether or not their properties meet those standards. As is currently the case, tenants will be able to take their landlord to the Tenancy Tribunal if they do not comply with the standards.

The cost-benefit analysis estimates that under this sort of enforcement regime, only two-thirds of landlords are likely to comply, meaning taxpayers will again miss out on possible benefits. Had the government adopted a more stringent model, this could have been raised to 80% (under the tax compliance model), or 90% (under the motor vehicle WOF model).

It is not surprising then that in the Cabinet Paper seeking approval of the changes, there is a comment from the Treasury that the proposed regulations failed to meet quality assurance criteria. This is because the Treasury is “not confident that the range of potential options has received adequate analysis, particularly for enforcement.”

So where does this all leave us?

Despite its own analysis showing that there are close to a billion dollars worth of benefits to introducing a housing warrant of fitness, the government has chosen to ignore changes that would reduce hazards in the home, implemented a standard for housing insulation that is from the 1970s, and chosen a weak enforcement regime that means a third of landlords are unlikely to comply.