Landlords and property managers are objecting to the Government's plan to axe real estate letting fees, saying it could result in more rental auctions, but a Cabinet minister says the fees are a "bizarre anomaly" he wants stamped out.

Housing Minister Phil Twyford said tenants would no longer have to pay hefty letting fees due to a bill introduced to Parliament yesterday making it illegal for agents or landlords to demand the payments.

Tenants are now forced to pay at least a week's rent on top of upfront costs of up to four weeks' bond and two weeks' rent in advance get a place, Twyford said. It was a "bizarre anomaly" that the current law allowed letting agents to charge tenants a fee for services provided to landlords, he said.

But NZ Property Investors Federation executive officer Andrew King said the law change was unnecessary and could reignite rental auctions where tenants try to out-bid each other by offering higher rents to secure places.


Prohibiting letting fees was removing choice from those tenants prepared to pay and get "a step ahead of some other tenants," King said.

"By paying the letting fee they have a wider choice of property and less competition from tenants unwilling or unable to pay.

"It is possible that those tenants previously willing to pay a letting fee may turn to offering a higher rental in order to put themselves ahead of other tenants. So we could see an increase in rental auctions initiated by these tenants," King said.

Kiri Barfoot, a director of Barfoot & Thompson which is Auckland's second-largest residential property manager behind Housing NZ Corp, is also worried.

The agency manages about 15,000 properties and lets on average around 700 places each month, she said. With the average Auckland rent being about $550/week, Barfoot said that equated to a significant sum lost from the business when the Government bans the fees.

She declined to be specific about precise lost revenue and said on the surface it appeared good for tenants but it could exacerbate landlords' already-rising costs.

"This is good for tenants' cashflow in the short term, but it doesn't deal with the housing shortage and the upward pressure on rents in Auckland - increases of almost 5 per cent a year.

"Our average tenant now stays for two years so if costs of finding a tenant are passed to landlord in some form, then that's an average cost increase of $550 over two years, $275/year or $23/month," Barfoot said.

"So in isolation, it is not a big cost but adds to the cost of being a landlord - increased compliance costs with insulation, insurance increases, smoke alarms and healthy homes so there is pressure to recover that cost via potential rent increases," she said.

The Government needed to get balance right and be fair to both sides because private landlords were needed to supply housing, she said.

David Whitburn, a property investor and former lawyer, said: "This is no surprise and is long-standing Labour party policy to abolish letting fees. Many property managers in my network plan to absorb thee fees for their landlord clients.

"But casual letting will be less common. I do not fully support the change but I understand the reasons for it and feel this will not impact the financial performance of my portfolio. This is another legislative move against property investors. Negative gearing or ring-fencing abolition will hurt the most," Whitburn said.

A document from the Ministry of Business, Innovation and Employment said 576,000 households rent, tenancy lengths rose from one year four months in 1995 to two years and three months last year and an average letting fee was $519.60.

"Tenants have little choice or bargaining power with regard to paying the letting fee in the current competitive rental market," a summary paper said.

"Removing letting fees is intended to reduce some of the financial stress faced by tenants in securing a rental property."

Peter Lewis, Auckland Property Investors Association vice-president, said finding tenants was time-consuming and expensive.

"Time is money, so the cost will inevitably appear somewhere in the structure of the property manager's business and will over time be passed on somehow," Lewis predicted.