Is it ethical to own investment property? Are you providing much-needed housing or is your rental just propping up crazy housing prices and hurting those who are not yet on the ladder? Finance writer Diana Clement explores this tricky issue.
David Hanna is a man who thinks long and hard about the ethics of his small property investments. When David bought his first rental property in the 1990s to supplement his retirement, the government was making noises that NZ Super wouldn’t be around when he retired.
“We were responding to the signals in the market that we had to save long-term,” says David.
The family bought an investment property in Wellington, followed later by a second one in Featherston. Over the years, however, David, whose day job is director of Wesley Community Action, began to dwell on the ethics of his property investing.
The question was more than just treating his tenants well. He does that, and is considering sharing some of the capital gain with one, to help him into his first home.
“It’s still, in the wider scheme of things, unethical,” says David. “I don’t want to claim that doing something like that somehow negates the iniquity and the injustice of the system which I’m benefiting from.”
The issue for David is that being ethical at the micro-level doesn’t make the wider picture ethical. “You can be ethical as an individual landowner. You can be nice; try to be a respectful and sensitive landlord. That’s only at the individual micro-level. “At the wider economic level, it’s unjust because the capital gain is moving a whole lot of wealth from one part of the population to another.”
The ethical dilemma
Investors who buy up homes to let to tenants are sometimes viewed as parasites, and other less-than- flattering descriptions. Detractors argue that house prices are being pushed to stratospheric levels by speculators, locking first home-buyers out and driving a wedge between rich and poor.
Thrive asks, do property investors have to leave their morals at the door when buying yet another property?
“No,” says Sharon Cullwick, executive officer of the New Zealand Property Investors Federation, who makes the point: “If landlords aren’t providing a house for someone, who is?” Social housing, she says, can’t meet the needs of all, and not everyone wants or is able to buy their own home.
Kay Saville-Smith, research director at Cresa (Centre for Research, Evaluation and Social Assessment), says the answer is more nuanced: “It can be ethical, but it typically isn’t,” she says.
How did we get here?
It’s necessary to go back to the 1980s to see how our housing market became a property market, says Kay. The two are different beasts.
At the beginning of that decade, New Zealand had high home ownership, and social housing for those who couldn’t buy, she says.
That all changed, thanks to the sharemarket crash and the collapse of the commercial property boom of the 1980s. The market was awash with money and more than a few dodgy deals, says Kay, who lived through the era. When the stock market crashed in 1987, huge commercial property investment companies such as Chase Corporation collapsed.
New Zealanders were frightened by the crash and soon began hearing from the government that NZ Super might not be there for them come retirement.
“There was a lot of scary stuff around the tsunami of ageing and the idea of ‘we’re all going to be going to hell in a handcart,’ ” says Kay. Frightened of poverty in retirement, many turned to residential property investment.
“At the same time the government brought in accommodation supplements for people who couldn’t afford to rent.”
Middle New Zealand took to buying rental properties with gusto. By the early 2000s, property investment associations had popped up around the country, and ordinary New Zealanders heard loud and clear that they should borrow against their homes to buy rental properties.
Between the 1986 census and the 2018 census, the number of homes in the country was increasing, but, interestingly, the stock held by investors rose by 191 percent, while those held by owner-occupiers grew by 30 percent.
Crucially, this led to a transition from “landlords” offering a service to tenants, to “investors” who saw homes as products, says Kay. “Increasingly these property owners called themselves investors, and even the national body representing them, the New Zealand Property Investors Federation has the word ‘investor’ in its title, not ‘landlord’.”
A necessary evil
In the mid-1990s Kay conducted the first nationwide survey of landlords. She found the bulk of investors saw property as a commodity for either speculative or long-term returns. They hated property maintenance and tenant management.
Many saw tenants as a necessary nuisance, not a legitimate group with needs, says Kay. “Sometimes [tenants are] an unnecessary evil and they don’t actually even rent out their properties. Tenants are just problems for landlords. They’re a source of income to pay the mortgage and tide the property over until it makes a capital gain.
”Having said all of that, there is nothing inherently unethical about investing in property, says Kay.
“There is, I think, something very inherently unethical in pretending that your investment in property has to do with providing the service industry of homes. Because that’s a form of gaslighting.”
All about capital gains
The ethics of property investing isn’t just about the landlord/tenant relationship. Activists and commentators argue that the flood of investors has led to an unrelenting rise in house prices to the point where low-income and some middle-income people are locked out of home ownership.
What investors conveniently ignore or forget, says housing activist Paul Gilberd at Community Finance, is that every additional home that they take out of the market for owner-occupiers is effectively locking an ever-growing generation of people out of the opportunity to lift themselves out of poverty. “We’re seeing the fabric of civil society fraying and being destroyed.”
Homes have become commodity assets, says Paul. “Their aim is capital gain when they sell.
“Rents don’t cover costs, which means it’s not a rational investment decision,” says Paul. “It’s pure speculation. So, from an ethics perspective, I’ve got some very serious questions around what the driver is for that class of investor.”
Paul notes that many tenants pay more than 50 percent of their disposable income in rent, and 70 percent of tenants in the private rental market are receiving the accommodation supplement. “So over 70 percent of the entire rental stock in New Zealand is subsidised by the government.
“Get your head around that, people! You might have a rental property, but who’s paying the rent to you? Taxpayers.” It means that taxpayers are subsidising private investors’ capital gains, he says.
Providing a choice
The New Zealand Property Investors Federation (NZPIF) rejects the idea property investors aren’t ethical. NZPIF executive officer Sharon Cullwick points out that tenancy is highly regulated and continues to have additional measures placed on it.
Investors, says Sharon, supply a service to a market where there is a demand. “Landlords provide accommodation to someone who wants it.
“People have choices, and who are we to restrict their options,” says Sharon. “Some people do not want to own a property and would like someone else to be responsible for the outgoings such as insurance, rates, maintenance costs et cetera. We don’t force people to rent. It’s their choice to rent [like they] have a choice to buy fresh vegetables from a supermarket or to grow it themselves.
“The same can be said for buying a house. You can rent or own one yourself.”
Sharon says renting meets a short-term need where people would otherwise need to pay more to be in a motel or Airbnb. It also houses students who are only there for a short period of time. “It can be an intermediate step for anyone moving to a new town or city, until they work out the area to purchase their own property,” Sharon adds.
Leave it to the professionals
Paul Gilberd argues that housing the population should be left to professional operators. Community housing provider schemes are common in countries such as the United Kingdom.
It works in Australia, where operators such as Lendlease do it successfully, and there are working examples in other countries, says Paul.
A variety of community schemes have launched in New Zealand in the past few years, providing a range of secure, long-term rental properties.
“There are some green shoots of hope we are seeing,” says Paul. “Three of the big leading KiwiSaver funds (Generate, Pathfinder and Simplicity) have specifically diverted money for the purpose of addressing the New Zealand housing crisis through investing that money into new housing supply.
“The first cycle of this was a community bond issued in favour of the Salvation Army to build 118 new [rental] homes across three sites in Auckland.” It was financed by KiwiSaver providers, the Tindall Foundation and Community Finance.
The advantages for tenants are many, including security of tenure, so they are not having to move regularly. The Salvation Army homes are designed to foster a supportive community and have chaplaincy support and fair tenancy management.
Build to rent is emerging in the private sector as well, with developers such as Ockham and NZ Living building developments for rental rather than sale.
Asked if people can be ethical property investors, Paul says: “It depends.” Ethical property investors exist, and he meets them. What they have in common is they:
- Make sure that the home is safe to live in and is not causing health issues for tenants.
- Ensure the rent is affordable. That means no more than one-third of gross income.
“There are many people around New Zealand right now who are skipping meals [so] they can keep a roof over their head.
”Landlords who want to be ethical can start by understanding their tenants’ point of view, says Sharon. “For example, when I am organising house inspections, I try to make it always when it’s convenient for them.”
Sharon cites the example of a tenant who wanted a heat pump installed ahead of the Healthy Homes deadline. “I didn’t have to get that done now. But I could bring it forward on my maintenance schedule and I did.”
Where else can you invest?
New Zealand investors who struggle with the ethics of residential property investment can simply invest their money elsewhere, through funds or other investments.
Those interested in property investment can buy commercial properties, or invest in syndicates and funds, including KiwiSaver, that focus on property.
New Zealanders can invest and grow their money by investing in a wide variety of funds. Everything from NZX (New Zealand shares) to very specific niches such as electric vehicle innovation to crypto funds. These and many more are available through Sharesies, InvestNow and a range of other platforms.
New Zealanders who are concerned about ethics in their investing have a growing choice of ethical funds, says Barry Coates, of Mindful Money, a charity that promotes ethical investment.
That includes funds that avoid nasties such as gambling, arms and fossil fuels. Increasingly, says Barry, there are investments that actively do good. Mindfulmoney.nz rates every KiwiSaver fund and most other New Zealand- based investment funds based on their ethical standards.
Investors who want to put their money directly into social housing can in some cases invest directly in bonds through Community Finance, or by switching their KiwiSaver to one of the KiwiSaver providers investing in community housing.