“We need to focus on the wins we can sustain”: An interview with Shamubeel Eaqub (Part 1)

Generation Rent: Rethinking New Zealand’s Priorities, by Shamubeel Eaqub and Selena Eaqub, has received a great deal of attention since it was released six months ago, and quite rightly. It’s an accessible, wide-ranging and thought-provoking read in which the authors discuss housing unaffordability, its importance, its causes, and its solutions. These range from the “palliative” – fixing the rental market and building more houses– to the structural –reforming the tax system, changing the way we invest, dealing with Nimbys and improving our construction sector.

I asked Shamubeel to sit down with me over Skype to discuss some of the ideas in the book that especially interested me. The following transcript of the interview, on 9 November, has been edited for clarity and length, and divided into two parts. In the second post, which I’ll publish on Monday, I ask about tax, density and Nimbys. Today, Shamubeel talks about how best to provide for security and quality in the rental market, and touches on social housing and the accommodation supplement.

Elinor Chisholm:  Do you think anything has changed since the publication of Generation Rent that will make a difference to the issues you discuss in the book?

Shamubeel Eaqub: Not a great deal. We’ve had a few new policies coming in to effect, so things like the bright line test for capital gains, the foreign buyer register, the restrictions on investors by the Reserve Bank. But the underlying story hasn’t changed. Everybody likes to talk about the solution that fits their narrative. If it’s a left perspective, it’s all about the need for more social housing to be built by Housing New Zealand. If it’s a more right-leaning organisation then they’re really all about “how can we beat up on the council and get them to release more land”. So everyone’s trying to pick little bits of it, but nobody wants to take the whole suite of policies. And that’s my frustration. Everyone wants their little slice to be implemented, but the reality is we can’t get a sustainable solution if we don’t do all of those things.

EC: As you say, dealing with the housing crisis requires action of many different fronts at the same time. Yet political campaigns tend to have one key demand. For the people out there who want to be taking action on these issues – I’m thinking Renters United and others – what’s the best strategy?

SE: For me the whole housing story is probably a 20 or 30-year campaign. Realistically, that’s how long it will take to put all the different policy pieces together in sequence to make it work. The first things to think about are: what is going to be the easiest thing to do? And what’s going to have the biggest impact? For me, it is all about shifting the way we have regulation around renting. So rights and responsibilities of tenants is a really big area. And literally that’s a stroke of the legislative pen. We can just make the legislation tomorrow and things would immediately begin to improve for the majority of adults in New Zealand who are now renting. So I think if we sequence it, if we can get that first thing together about improving things for renters, then that buys us time to fix all the other things.

EC: One of the ways you suggest that we could improve security for renters is by making the standard lease contract longer– tenants and landlords could agree to a shorter term if they wanted. It’s a market solution – are there other things we could also do?

SE: I think we need to focus on the wins we can sustain, which will endure. Legislative rights, particularly around reasons that can be given for people being kicked out. And actually having a check so that we can see whether, if you gave that reason [for ending a tenancy], you actually followed through with it. Because right now, a landlord say, “oh, my family’s going to move in”. We don’t know if that was the case. We know the reason was given, but we don’t know if that was the outcome.

The changes we propose are relatively modest. What can you do with the place you rent, the length of the lease.  You shouldn’t be kicked out just because the landlord has sold the house. The person who’s buying the house knows he has a contract [with the tenants]. So why, all of a sudden, is the contract not valid? It’s a weird exception. Any other contract would not allow you to do this. It’s so bizarre. In commercial property, a lease is a lease. If you want to break the contract, than you have to go through the negotiation of breaking the contract. I don’t think we need lots of big radical ideas. All we need is for standard contract practices to be applied to the residential market. Changing the standard contract is a relatively easy way to just nudge people in the right direction.

EC: Having a secure home is, as you say in the book, hugely important to health, wellbeing, education. One thing that interests me about tenancy security is how it interacts with income security. In one Australian survey of low-income tenants a few years ago some people said they didn’t want longer contracts. They wanted the option of moving to a cheaper house if there was a drop in income.  

SE: That’s also true for New Zealand. We’ve heard the same kind of thing from landlords who’ve told us that a lot of their tenants don’t want long-term contracts because they want the flexibility to go off and do other things. And so, I don’t think you want to take away that ability to have these different kinds of contracts. But in most cases, when you’re talking about that flexibility people want, it is usually linked to poverty. People live very precarious lives, because their income is very uncertain, they’re at the mercy of whatever happens in their lives. We’re talking about some of the most vulnerable people in New Zealand. And they’re simply not able to participate normally in the private rental market.

So that gets us into the social housing story. And that’s a big story, one that we’ve been neglecting for decades in New Zealand. The social housing stock hasn’t increased since the early 1990s, and on a per capita basis it’s at the lowest level since 1948. So it’s really disappointing. There’s no system in place that is going to increase the stock of social housing.

For [very vulnerable] people, I don’t think changing the rental contract is going to make any difference. But I think for the vast majority of middle income or lower income New Zealanders who rent, it will.

EC:  In the book you note that “New Zealand house prices are overvalued relative to income and rents, suggesting that house prices are too expensive but there’s no shortage of rental properties” (p.12). Yet we hear of people in Auckland visiting 30 rental properties who just can’t find a home, and rent takes up a large proportion of their income. So surely there’s a shortage of rental properties for certain income brackets? How do these two things add up?

SE: That was a very big picture statement. The reality is that the nuance is much more complicated than that. There are significant income constraints for a lot of people. For people on limited budgets it’s very challenging. That’s why we see a high incidence of overcrowding. In the aggregate, rents haven’t risen very much relative to incomes. But for the bottom 25% of New Zealand they have increased a great deal. So you’ll see 40 or 50% of income paid on rent, which is far too much. That’s when you see situations like seeing 30 houses and not being accepted for any of them.

For people on middle incomes it’s not too difficult because of their income capacity. You talk about houses for rent in, say, Epsom – there is no shortage. But in south Auckland, because incomes are so constrained, it’s just not possible to pay that extra five bucks to secure a place. But that’s a poverty, or income question. So, I try to stay away from welfare stuff [in the book].

What I was really fighting against was this bizarre view that we just don’t ever build enough houses. That’s not true. We build enough houses. We just build the wrong houses in the wrong places for the wrong people. So we get under-occupation in St Heliers and Epsom and Remuera, but overcrowding in south Auckland. There’s this misallocation of resources because our rules and regulations are just so mucked up that we would rather build a McMansion than six units.

EC: The accommodation supplement helps make renting more affordable for some people, but rent is still a large proportion of their costs. I wanted to hear your thoughts on how it affects the rental market, as it’s not something you cover in the book.

SE: I didn’t really talk about the accommodation supplement for a deliberate reason because it gets into the whole thing of welfare policy. It’s a really difficult area because I don’t know what would happen in the absence of it. Rents would be lower, because people wouldn’t be able to pay as high rents as the market apparently charges. But it’s also possible that we might not have as many properties available.

So I think the challenge is, are we getting the right outcomes in terms of welfare spending? Yes, it’s great for the private rental sector, which is able to extract the market rent from people who would otherwise not be able to participate in the private rental market, but I don’t know if [the private rental market] provides all the services that people who are in a vulnerable position of low income and poverty require.

EC: You write about the importance of a “warm, well-built home” (p.11). What do you think we should do to get those homes in our private rental sector?

SE: It’s a really big challenge. I think we need a large public programme to let people cancel out their expense of improving the homes. The reality is, if you mandate for a higher quality of homes, some kind of base level of insulation, dryness, and so on, and that investment could be catalysed over a long period of time, then I think it would work.

The benefits of warm, dry homes accrue over a long period of time, and the benefits don’t accrue into the department or budget of the housing vote, but of the health vote, and the education vote. Without coordination across government, it’s very difficult to see these small incremental gains, and cross-subsidise in all these different areas.

[Subsidies are important because] I don’t think it’s fair to ask the landlords to go out and improve the quality of their homes when the government is going to get all the benefits. [The government needs] to say “we understand that if you are going to make this investment, our people will be healthier. As a result we will be saving x many dollars on health, so we are going to help you to make this investment.”

We don’t spend a lot of time in terms of prevention when it comes to healthcare costs. Philippa Howden-Chapman’s work is coming out very soon [edit: is now out] on quantifying the benefits of a warm dry house – that kind of stuff is helpful because it starts to move us in the right direction. Yes, there is an upfront cost, but the benefits to New Zealand are really quite massive and there is a public benefit and a fiscal benefit.

…to be continued. Next, I’ll post the parts of the interview where we talked about tax, density, and Nimbys.

9 thoughts on ““We need to focus on the wins we can sustain”: An interview with Shamubeel Eaqub (Part 1)

  1. There’s another reason that our rental housing market is failing and we have a great opportunity right now to fix it. It’s the fact that most residential rentals are from Mum and Dad investors, with all of the vagaries, insecurity and quality issues that causes. The answer would be to attract more corporate investors with a long term investment horizon and a professional approach to management and maintenance.

    This would have two useful spin-offs. It would provide an alternative investment avenue for those small investors to get a stake in the residential property sector. And, very importantly, it would provide middle income renters with secure housing so that the state can focus on secure housing for the poorest. The realty now – as the Eaqubs’ book shows – is that it’s just as important to offer a secure rental option for the middle class and right now, there is none.

    However, most corporate investors would find it makes little economic sense because of high land prices and low cashflow returns in the right areas. The opportunity we have right now is to use some of the government and council land that’s being released for development. Instead of selling it outright, it should be leased long term based on a formula that makes building for rental financially sensible, provides a fair long term investment return to the investors, and offers fair rent and lease terms to the renter.

    The current “shortfall” in this equation – which causes today’s market failure – is picked up by the state through the ground rent. In the long term, once we have a properly-functioning market, the state should also receive a fair return.

    By choosing their sites carefully, the government, council and property investors/trusts could also ensure that areas with the potential for higher density and good transport links and amenities are maximised through good planning.

    My guess is that all if this could probably be done using existing property law and covenants, so it would only require a little public will and foresight. The result could be the kickstarting of a professional, corporate rental sector that would go a long way to meeting housing needs and social and economic goals.

    Instead, because of the current government’s agenda to convince the public that we have a housing shortage rather than a bigger market failure, we’re heading down a track that will miss a great opportunity.

    1. Thanks for this! Shamubeel talks a bit about how changing the tax settings might attract investors who want long-term tenants in the next post. Using council/govt for housing land is often suggested, but I hadn’t heard the lease option raised before – very interesting.

      1. Leasehold land gets a bad rap because it’s usually the wrong option for individual owner/occupiers. But it’s an excellent option for investors who can match the lease payments to reliable, long term income streams.

        They would benefit from a lower land cost in return for some restrictions on its use, notably that — while it could be sold — it would have to remain in a single corporate ownership (ie not be later converted to multiple individual titles) and that owners would be bound by its use for residential rental accommodation.

        By maintaining a long term interest through the lease and covenants, etc, the state/council can protect the interests of all parties, eg by stepping in with statutory administration in the event of corporate insolvency.

        At the end of the lease period, say 50 years, there could perhaps be an option to freehold or renew the lease, giving a future generation the chance to review the land use restrictions.

        Having quality, long term rental accommodation isn’t just for those who can’t afford to buy. It’s also for those who would prefer to separate their housing needs from their investment goals. Right now, people on good incomes who want to do that would find it hard because of housing insecurity, so they are forced to maintain portfolios which over-invest in residential property assets and under-invest in financial assets.

  2. Hi Eli,
    Great interview – first comment: SE says “You shouldn’t be kicked out just because the landlord has sold the house. The person who’s buying the house knows he has a contract [with the tenants]. So why, all of a sudden, is the contract not valid?” This question confused me a bit, because if tenants have a Fixed Term Tenancy, they _can’t_ be kicked out just because the landlord has sold the house. Having an unconditional agreement to sell the house does give a landlord the right to give 42 days notice rather than the standard 90 days if the tenants are on a periodic tenancy, but it doesn’t give the landlord the right to end a Fixed Term Tenancy – the contract is still valid, and the tenants and tenancy are “sold” with the house.
    The only instance in which a house sale can end a fixed term tenancy against the tenants’ wishes is if the house is sold at mortgagee sale.

    1. Thanks for clarifying the law around this Lucy! Do we know approximately how many tenancies are fixed term as opposed to periodic?

      One idea for change could be that the notice period remain the standard three months under a periodic tenancy even if the house is sold. On fixed term tenancies, one change people sometimes suggest is that there be a sort of “right of first refusal” for the current tenants to renew a fixed term lease. What do you think?

  3. Second comment: SE says “I don’t think it’s fair to ask the landlords to go out and improve the quality of their homes when the government is going to get all the benefits. [The government needs] to say “we understand that if you are going to make this investment, our people will be healthier. As a result we will be saving x many dollars on health, so we are going to help you to make this investment.”
    I think we need to turn this language around. I think it’s fair to ask landlords to go out and improve the quality of their homes because right now it’s the taxpayer who bears the burden of their poor maintenance and neglect. The government needs to say “we know that when you neglect maintenance, our people are sicker. As a result we have to spend x many dollars on health, so we are going to require you to maintain your properties”.

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