In a month’s time, the bizarre practice of letting fees will be banned in New Zealand.

By bizarre, I mean that letting fees defy generally accepted business practices. Normally, the person who orders the good or service pays for the good or service. Want a burger? You have to pay for it.

Very rarely do you find a situation where one person orders a service and someone else is bound to pay it.

With letting fees, that’s the unfortunate case. Landlords or property managers hire a letting agency to help them sell the house…and the bill for that service lands directly in the lap of the tenant.

The tenant has no input in deciding to hire the agency, nor do they have any negotiating power in agreeing on a price.

It’s created a phenomenon where letting agencies can charge renters for a service rendered to landlords…and that also means there’s no mechanism for determining a fair price. Letting agencies can basically charge whatever they want.

Now that the practice will be banned, folks are wondering how landlords will react?

As relays, ‘…Property managers said tenants would be in for a rent increase.

In other words, property managers are going to have to bear the cost of letting fees…so they’ll pass that on via the rent price…which could hurt long-term renters.

On the other hand, as Greg Ninness of points out, there’s now an incentive for landlords to negotiate the price of letting agencies…and that in turn creates competition amongst agencies.

He reckons it’s going to shake the market up. I agree.

Letting agencies can no longer sit in this ethical and legal loophole, charging whatever they want…and delivering whatever value they feel like. It’s back to the real world, where they’ll need to consider delivering a quality service and a good value for money (like any other business).

While considering this strange phenomenon, you may realise that we’re all victim to another organisation doing the exact same thing — the government.

Legislators, like letting agencies, enjoy the backwards arrangement where they order the goods or services…and you foot the bill.

Sure, we have some say in who’s making the decision…and occasionally what’s to be done…but in the end, the politician has the final say.

Their only incentive is that they want to be re-elected…so if they blow a bunch of your money on some project, they might have to explain themselves come election season.

We’ve come to a dynamic where politicians order projects that give them campaign fodder every three years…and they do so with a stronger emphasis on getting the project on the books than they do focusing on value for money. [openx slug=inpost]

Dr Bryce Wilkinson is a senior fellow at The New Zealand Initiative. A few weeks ago, he released a report titled ‘Fit for Purpose? Are Kiwis getting the government they pay for?

In the report, Dr Wilkinson revealed alarming data pointing to a government that achieves poor outcomes relative to the resources it’s using.

His research found that roughly one dollar in three of general spending is wasteful — equivalent to 13% of GDP or $20k per household.

In education, one dollar in six is wasted.

In health, he found that we could spend 2.5% less of GDP and still achieve the same outcomes.

ACT Party Leader David Seymour also unearthed some of the more ridiculous examples of wasteful spending:

  • Taxpayers paid $580k for a research paper on ‘Cultivating chamber music in Beethoven’s Vienna: a study in socio-musicology.’
  • Taxpayers paid $495k for a research paper called ‘Missing narratives of modern Chinese intellectual history: modernity and writings on art, 1900-1930.’
  • Taxpayers pay out the wazoo for programmes on NZ On Air. Shows like:
    • The X Factor NZ ($800,000)
    • Mastermind ($685,360)
    • Jono and Ben 2016 ($1,717,042)
    • The Adam and Eve Show ($3,080,400)
    • Find Me a Maori Bride ($590,000)
  • Through the Major Events Development Fund, taxpayers are dishing it out to fund events like:
    • The Ultimate Waterman stand-up paddle boarding event ($1,200,000)
    • New Zealand Golf Open ($1,900,000)
  • Then there’s KiwiRail, which has cost $13b in the past decade…or $5000 per household.
  • Lastly, there are armies of bureaucrats filling seats and cashing cheques:
    • 2,500 policy analysts (Average salary $90k)
    • 5,000 managers (Average salary $124k)

It’s hard to look at those expenses and say, ‘My life is significantly better because of them.’

It’s even harder to say that those things couldn’t have been done cheaper or done away with completely.

I thought the exact same thing as a renter who has had the unfortunate experience of paying for letting fees. ‘Am I actually better off for their service?’ and ‘Surely it could have been done more cheaply.’

There’s a clear parallel between what’s going on in the rental sphere and in the public sphere, but now one of them will be banned while the other continues on…

In other words, if the state disapproves of letting agencies contracting with one party and charging another, perhaps legislators should take a look in the mirror.

They might not like what they see…

Taylor Kee
Editor, Money Morning New Zealand