Wednesday, November 30, 2016

Running repairs? The cost of longer term tenancies: part 1

Recently we reported on a round table meeting convened by the Minister for Innovation and Better Regulation (which includes Fair Trading) to discuss options for longer term residential tenancies. One of the ideas that was kicked around at the round table was that if landlords agreed to offer longer term leases they should get something in return – for example, tenants taking on the responsibility for repairs and maintenance of the premises.

We don’t think tenants giving up their established right to repairs is a very good idea.

In general housing available to renters is of lower quality than housing for owner occupiers. It is more likely to be in need of repairs, and almost three times more likely to require ‘essential and urgent’ repairs (ABS 2002).
So renters who trade away their right to repairs, if allowed, should generally expect that they will need to front up for repair costs through the year. But how much?

Estimating repair costs for a rental property is not an easy ask – the age of the house, size, fixtures, and number of people who might be living in it all need to be taken account of.

Property management ‘experts’ advise landlords to put aside funds for repairs and maintenance costs each year. They offer a range of methods to calculate what this amount should be, including for example:
Following these methods, if a tenant was considering how much to put aside for repairs for this recently listed Kogarah rental – a 2 bedroom house on a 300m square block of land, advertised for rent at $550 a week, and estimated to be worth around $900,000 - they’d be looking at around:
  • 5% of rental income: $1,430 annually 
  • 1% of value of property: $9,000 annually 
  • ‘Square metre rule’: $3,000 annually 
These methods of estimation assume that while the tenant may not spend the full amount one year, they might be up for higher costs the next (or vice versa). Note the significant variance in the figures above. Despite this, experts do not recommend any one method above another - reinforcing the point that there is no clear or reliable method for predicting what repair and maintenance expenses might be. The only thing that a tenant can confidently predict is that as the property and the fixtures within it age, repair and maintenance issues will come up more often. And they may cost more to fix.

Alternatively a tenant could look at how much has previously been spent annually on repairs for rental homes. The most recently available data on this is from the Australian Tax Office from 2013 – 2014. It indicates that around 75% of NSW landlords did repairs to their rental properties during this period and on average they spent around $1,200 (if you are keen to look at these numbers in closer detail you can download the 2013 - 2014 ATO tax statistics on rental income here). This tells us how much landlords claimed as deductible repair expenses during this period (so a rough guide to how much was actually spent by landlords over the year), but might not be the most accurate indicator of how much should have been spent on repairs each year.

Renters often call up their local Tenant Advice and Advocacy Service because their landlord is avoiding or attempting to minimise the amount they spend on repairs for a rental property. Perhaps a more accurate figure then comes from an older source – the ABS Australian Social Trends report on ‘Housing Stock: Housing condition and maintenance’ from 2002. This reports that on average an owner-occupier household spent $1960 each year (i.e. this is the amount home owners spent repairing the home they live in). Allowing for inflation this would suggest tenants could more reasonably expect to pay around $3,115 every year on repair and maintenance costs.

These figures are averages. So while some tenants who agreed to take on repair costs during their tenancy might expect to pay less, some could be facing considerably more.

Of course, tenants will be hit harder by repair costs than their landlords were. Repairs undertaken by landlords for a rental property can be claimed as a deductible expense against a landlord’s taxable income – so landlords effectively pay less to repair the property than a tenant would.

And the impact of taking on repair costs in tenancies would not be felt equally by all tenants. Low income tenants would be disproportionately hit by repair and maintenance costs. They generally rent older, lower quality housing - but while their housing or the fixtures within it might be of a lower standard, it won’t necessarily cost them any less to repair or maintain the property. In fact they will likely face repair and maintenance costs more frequently, and have to pay more for these repairs (ABS 2002).

Let’s look at some common scenarios regarding repairs while renting. What could each of these end up costing a tenant?
                                             
Problem: Your phone line or internet is playing up        
Costs start from: Phone technician (Telstra?) call out costs start at around $150

Problem: Toilet clogged up or leaking
Costs start from: Plumber call out costs start at around $150

Problem: Gas oven won’t light
Costs start from: Electrician call out costs start at around $150

Problem: hot water system’s broke
Costs start from: Electrician call out costs start at around $150

Problem: Cockroaches start creeping out of the woodwork
Costs start from: Professional pest control packages start from around $149

Problem: Lock not locking
Costs start from: Locksmith call out costs start at around $135

These are just the starting costs. In each example a spare part, or additional labour could be required. Perhaps a fixture (dishwasher, ceiling fan, oven, etc) needs to be replaced altogether – so just start adding on the dollars from there.

Many tenants are already close to or at their budget limit for housing costs in rent (especially given the current lack of affordable rentals across NSW). Tenants may not have the financial resources to attend to repair and maintenance issues as and when they occur. Perhaps not even for the duration of their lease. Instead they may be forced to live with housing in a state of disrepair throughout the remainder of their lease, and then be hit up with a very large bill to complete these repairs when they move out.

Tenants certainly want more security. They want stability so they can confidently make a home for themselves and their family in their rented housing. They shouldn’t be forced to trade away established rights at considerable cost just to get this.

Monday, November 28, 2016

Airbnb doesn't put rents up, landlords do

Over the weekend a story broke regarding a tenant who was evicted and later found that their former home had been listed on Airbnb. We thought this a good opportunity to give a preview of some of our research into the impact of Airbnb in Sydney.


Domain reports that after his eviction, Nicholas’s landlord listed the property on Airbnb at up to “three times the rent”, partly by listing separate rooms rather than the whole of the premises, but partly simply by making the nightly rate far more than could have been made from weekly rent. One element of our research into Airbnb is looking at how much business the Airbnb host really needs in order to replace the equivalent rent for that property.

As anyone who's rented in Sydney lately knows, our rents are extraordinarily high. Unsurprisingly then, our research finds that Sydney Airbnbs have to actually be booked for significant amounts of time in order to replace the rent. Of the top 10 Sydney post codes where entire homes are listed on Airbnb, 9 would need paid up bookings for well more than 6 months of the year.


This is about in line with research carried out by the city of San Francisco in 2015 which recommended the Mayor's proposal of limiting listings to no more than 120 days. It does not make financial sense for a landlord to remove a private rental from the market unless they could be assured of Airbnb bookings at least within cooee of the rental replacement number.  San Francisco has subsequently adopted a limit of 60 days.

The recent inquiry into short-term lettings in NSW has also recommended a limit of sorts, where an Airbnb host would need to seek council approval before using the property on Airbnb over a certain number of days. A common number discussed was from the City of Sydney, which suggested 100 days in a year should be the limit.

Across Sydney, there are very few listings which go over 100 days, and even fewer who come close to replacing the rent.



Readers of the property pages know that not all property owners, or landlords, always act in the most economically rationalist way. The host of Nicholas' former home is a bit unique as far as Airbnb hosts go – from the info on Airbnb it appears he manages 3 other properties around Sydney, all divided into multiple listings. He also links to his TV appearance regarding his commitment to the ‘sharing economy’. It's entirely possible that this host, and others, would choose to list properties even if they didn't happen to be more profitable than the regular rent.

But let us step back and consider who - aside from tenants, of course - would be so upset if someone was evicted in order for a landlord to take another tenant at a much higher rent. We suspect the response would largely be “let the market decide!”, “it’s the landlords right” and "who can blame them if that's what the tenant is willing to pay?" It is curious then that a landlord responding to a market demand for short-term lettings does not attract the same type of response.

Could it be that concern for this particular tenant is a little on the shallow side? Why do we only hear about the evils of property owners extracting maximum value from their investments when it's actually something else that's bothering us? We understand there's a party going on across the hall that it seems everyone else was invited to, and no doubt that can be frustrating... but for tenants it's been someone else's party all along.

Of course, Nicholas couldn’t have been evicted to make way for Airbnb at all without NSW's tenancy laws that allow for terminations without a good reason. From the article it appears that Nicholas was misled into believing that the owner would be moving back in themselves. This kind of disappointment is well known to tenants as a consequence of no grounds notices.

Those dismayed at this story must recognise that no complaint about the impact of Airbnb can match the impact of our unfair and one-sided housing system. We do not mean that Airbnb has had no negative impact – but whatever impact exists is a direct result of the way our housing system has been designed, and the values that we place upon it.


Wednesday, November 23, 2016

Full houses

Vancouver is currently in the process of implementing an empty homes tax to try to make sure that the city uses its existing house stock more efficiently. As one of the most unaffordable cities for housing in the world, Vancouver's mayor is desperate to bring these costs under control and is prepared to try inventive policies to achieve it. Sydney is more unaffordable than Vancouver, so it's unsurprising that when Jessica Irvine asked economists and planners whether the idea would work here, she found little opposition.


In Vancouver, all property owners will need to declare whether the property is vacant, and if it is, then the owner will pay an annual tax of 1% of the property's value. The median value in Vancouver is $1million Canadian (roughly equivalent of Australian dollars), so the tax on a median dwelling would be $10,000.

A vacant dwelling is defined as a property that is not either a principal place of residence, or a property that is rented for more than 180 days in a year, in periods of at least 30 consecutive days.

Owner-occupiers and others already have to make a yearly declaration that they reside in the property in order to receive the exemption from paying land taxes, so this extra paperwork isn't much of a big deal. If an owner fails to declare their property's status, it is deemed empty, and the 1% tax applied.

There is a good incentive, then, to declare the property "not vacant". Perhaps some owners will be tempted to fib, and make the claim even if the property is vacant. To address this, the city will conduct both targeted and random checks of properties each year to assess the validity of such claims. If a declaration is found to be false, the fines can be $10,000 a day. The cost of administering the scheme, including enforcement, is budgeted at $1.5million.

Of course, there are exemptions - 8 of them. Properties may be vacant without attracting the tax if:
  • The property is undergoing major renovations, or is under construction or redevelopment (with permits).
  • The registered owner (or other occupier) is undergoing medical or supportive care.
  • The owner is deceased and grant of probate or administration is pending.
  • Ownership of the property changed during the previous year.
  • The property is subject to existing strata rental restrictions.
  • The registered owner uses the property for six months of the year for work purposes but claims principal residence elsewhere.
  • The property is under a court order prohibiting occupancy.
  • The property is limited to vehicle parking or the size, shape or inherent limitation such that a residential building cannot be constructed.
These exemptions and the nature of enforcing a scheme like this leaves open the possibility of a property owner taking steps to avoid the tax. One obvious way would be to keep properties furnished to give them that "lived in" look, and sign sham tenancy agreements with people who charge less than $10,000 a year for their trouble.

Vancouver is doing this to address something up to 20,000 possibly empty homes. They've identified around 10,000 homes as empty, and there are another 10,000 they're not so sure about. Many will get exemptions. So the possible revenue from the tax is up to $200m, and it's likely a lot less than that. But even if the city only receives this tax from 3,000 median homes that's $30m odd more than the administrative costs of the program. The process would hopefully have made the other 17,000 property owners think about what they're doing, and perhaps bring some back into the rental market.

Vancouver is quite small, half the size of Adelaide, so 20,000 homes is quite significant. Proportionally, it's about on par with the roughly 80,000 empty homes that Prosper Australia finds in Melbourne each year.

With vacancy rates for rentals across Sydney stuck below 2% for many years now and rents at all time highs something needs to change. Addressing the problem of wasted property is a good idea. It is a better supply-side solution than naively relying on developers to deliver tens of thousands of apartments all at once to create a market shock, rather than staging releases to ensure maximum prices, and having little impact as population grows to meet the new supply.

An even better idea is a broad-based land tax which encourages the productive use of all properties, not just empty ones. Land tax is very easy to collect (and hard to avoid), and is more reliable than stamp duty as a revenue source for government. But an Empty Homes Tax could be a good first step towards a fairer approach to housing taxation.

Tuesday, November 22, 2016

Who would benefit from long fixed term tenancies?

Questions raised in the recent review of the Residential Tenancies Act included "what incentives would encourage the use of longer term leases?" and "what are the key challenges for landlords in offering longer term leases?"

For our part, we offered in response a reprise of an old Brown Couch favourite: long fixed terms are not the solution. Tenants would be better served by expanding the list of grounds upon which tenancies can be brought to an end, and getting rid of the "no grounds" provisions that allow landlords to end tenancies without a good reason.

But the review concluded with a report recommending:
The Act’s provisions in relation to no grounds terminations should remain unchanged. The Government should consider other ways of improving security of tenure in the rental market, including through facilitating the use of longer fixed term leases (recommendation #17).
... and:
That the Government give further consideration to other changes that could be made to the Act to further incentivise the use of longer fixed term tenancies (recommendation #16).
It was with these recommendations in mind that the Minister for Innovation and Better Regulation, whose portfolio includes Fair Trading NSW and the administration of the Residential Tenancies Act, recently convened a round table meeting to discuss options for long term residential tenancies. The Tenants' Union scored an invite, as did the Property Owners' Association, the Real Estate Institute, and a number of other interested parties.

Despite our reservations, we entered the discussion with an open mind. We hoped some useful and interesting ideas for reform might emerge, given the growing acceptance that the private rental market is doing such a poor job of delivering secure homes for those who live there. Instead, we got raw insight into what landlords would be looking for in exchange for long fixed term tenancies: more money/reduced costs, minimal loss of control, and a right of veto. Anything short of that, and apparently landlords would all go on strike.

In other words, landlords won't be compelled to offer secure tenancies - they'll only do it when it suits them, and interested tenants would have to make it worth their while. It's almost as though they know they've got tenants over a barrel, and they can sense a way to juice them for just that little bit extra...

This might include asking for a higher rent, or being allowed to levy extra charges, in exchange for a long fixed term tenancy. Or it might include asking tenants to trade off some of their established rights, like agreeing to attend to the property's repairs and maintenance needs for the duration of the agreement. The law already allows for some "mandatory terms" to be varied in agreements that are for a fixed term of 20 years or more, but to date nobody seems interested. It is hoped that landlords might offer longer tenancies, and tenants sign up to them, if such terms could be varied for a more realistic five year fixed term.

Our worry is that optional long fixed tenancies, with reduced rights for tenants, would be offered on a take-it-or-leave-it basis. Tenants seeking properties at the higher end of the market might be able to strike a decent enough bargain for themselves, securing a long term tenancy by virtue of their relative economic wellbeing - but of course that is already possible. Those in need of low cost housing, probably considering properties with higher repairs and maintenance needs, will be in less of a position to bargain. They could find themselves locked into long term agreements they don't necessarily need, and lumped with costly obligations that would be difficult to fulfil. They might be slugged with a hefty repair bill at the end of the tenancy, if they fail to live up to the landlord's expectations about how the the property would be maintained. For that matter, they might still have their tenancy ended without grounds once the long fixed term is up.

But even if we could ignore that possibility, we can't ignore this basic proposition: landlords would have a scheme that requires households to purchase a secure tenancy. Only some households, though, and only at the landlord's discretion. Others would have to stick with rolling short fixed terms or insecure periodic tenancies, and the ever-present fear of eviction without grounds.

It appears the New South Wales Government may give serious thought to this option.

So... something to think about in the meantime: what's a secure tenancy really going to be worth?


Wednesday, November 16, 2016

Cathy Come Home

We're all only a few paycheques away from the street, and the Ken Loach directed Cathy Come Home illustrates the point powerfully. Today marks 50 years since it was first broadcast as the BBC's The Wednesday Play on 16th November, 1966 and Cathy Come Home makes a timely addition to the Institute of Tenancy Culture Studies.
Cathy, Reg and the kids
Although it was based in England of the 1960s, the issues resonate strongly here today. Families make up increasing numbers of tenants. Insecure tenancy laws and precarious employment situations mean more families than ever live with the fear and the risk of losing their homes in the private rental market. Housing policies which rely on a poorly regulated private rental sector to house vulnerable people can only exacerbate that vulnerability.

The chief lesson taught by Cathy Come Home appears to remain unlearned 50 years after the film's release. Perhaps it is that we have forgotten it is both unfair and ultimately ineffectual to expect the people surviving the effects of a society's structural failures to simply overcome. This is as true in housing and homelessness as it is in gender issues, employment, or our ongoing relationship with Aboriginal and Torres Strait Islanders. The original owner-occupiers of Australia are now mostly living in rented housing and, recalling the final scenes of Cathy Come Home, children are being removed from Aboriginal families at far higher rates than any others.

The full film is available here, and runs for a little over an hour:




Tuesday, November 15, 2016

Credit where it's due: post script

Back in early October we noted the Minister for Social Housing had taken heed of warnings against plans for rental bonds for public housing tenancies, and opened up the plans for discussion.


We said:
FACS Housing has expanded the handful of non-government housing peaks it has asked to comment on a draft operational framework, and the Minister for Social Housing himself has invited several of us to meet with him to discuss our concerns.
This, we said, was an indication that when it came down to it, Government was prepared to stop and listen to concerns about the scheme... to the Minister's credit.

Yesterday Minister Hazzard's office circulated a note, giving an update on the development of the policy. It confirms the Minister will put the rental bonds scheme on hold, "to allow for further review of the framework". This in an indication that rental bonds for public housing tenancies may yet become a reality - in keeping with the Minister's commitment - but not this time around, and not in the manner proposed. For now, at least, it's back to the old drawing board.

This is excellent news. Cheers, Minister!





Tuesday, November 8, 2016

Regulated real estate agents

On the weekend, Fair Trading NSW released a list of recommendations to reform the real estate and property services industry. The Minister for Innovation and Better Regulation, Victor Dominello, has called it "the most significant review in 20 years" and said "the profile of the property sector has changed considerably over that period."

"Because only one thing counts in this life: Get them to sign on the line which is dotted."
Alec Baldwin as "Blake", Glengarry Glen Ross (1992)
It certainly has. In fact, even in the last five years, the change to the sector has been pronounced. More and more people are living in rented homes for longer, and - on current housing policy settings, at least - many of us can expect to rent for life.

So we might assume an Industry Reform Paper will have a strong focus on the relationship between real estate agents and tenants, right?

Well, no, actually.

The primary role for a real estate agent is to act in the interests of their client, and that's not you. It's your landlord. But agents do play a role in shaping landlords' expectations and experience of your housing, and this informs their instructions. This in turn affects your expectations, and how you experience your housing as a tenant. So the rules that apply to real estate agents do have an impact on you, in a round-about sort of a way.

And just as there's a growing number of tenants in New South Wales, there's also an increase in landlords and the services that cater to them. So let's take a quick look at the proposed reforms to see what use they might be...

There's a strong focus on licensing and qualifications, and continuing professional development for real estate agents. This would impact agents at all levels, regardless of the work they are engaged in. From the outset, a certificate of registration would require more training than is currently the case - from 4 "units of competency" to 7. Holders of such a certificate would not be able to enter into contracts or authorise trust account transactions, so would not be able to manage tenancies without the assistance of a more qualified supervisor. At the other end of the scale a new "licensee in charge" category would be established, under which all other agents within a real estate business would need to be supervised.

On this, the Reform Paper says:
[A] training review found that, although the Property, Stock and Business Agents Act clearly requires licensees in charge to properly supervise staff, in practise such supervision is often non-existent, and certificate holders frequently work with little or no supervision or support. The review found that the unsupervised activities of certificate holders pose a risk to consumers, and recommended that the education requirements for certificate holders be increased from 4 to 7 units. The review recommended that the extra units should focus on minimising risks to consumers and improving knowledge of and compliance with relevant laws.
Thus, there is potential for real estate agents to become better equipped with knowledge and understanding of tenants' rights. But the downside of that is that tenants' rights could, in many respects, be a whole lot better... so - it's good news, really, but we won't be getting too carried away about it. We'll use it to fuel our advocacy for stronger renting laws.

There's also some focus on greater accountability for real estate agents. This would include requirements to publish and update agency fee structures - good for landlords and home-buyers - as well as improved provisions about disclosing "material facts". This means telling potential buyers about quirks and quibbles with properties they have on their sales lists - such as whether there are any known health and safety risks, whether a property has been the scene of a violent crime within the last five years, or ravaged by fire or flood.

This would make it harder for the landlord of a newly acquired property to breach their obligation to a prospective tenant under the Residential Tenancies Act, not to "knowingly conceal a material fact" of a similar kind - although currently that obligation is not enforceable. We've been given some hope on this after the review of the Residential Tenancies Act recommended a sensible change to fix this, but we're yet to see it introduced... (we've got our fingers crossed that this and some other changes will be introduced sometime in the first half of next year).

Under the rubric of "conduct and accountability" is an interesting suggestion that developers who engage in property sales off-the-plan, but who are not required to be licensed real estate agents, could be regulated by reference to the number of properties they sell in a year. Such an approach could also be applied to self-managing landlords who could be exempt from consumer claims on the basis that, as housing investors, they are not "engaged in business or commerce" and are therefore not subject to consumer claims law beyond the Residential Tenancies Act.

Finally, the proposed reforms would allow Fair Trading to temporarily suspend a real estate agent's license or certificate of registration while an investigation against their conduct is underway. If this one gets through - and we hope it does - it would give each and every real estate agent in New South Wales pause to stop and think about their behaviour before doing something very silly. That's assuming Fair Trading makes full use of their powers, of course.

All in all, the proposed reforms look sensible and sound - as far as this sort of thing goes. We're happy to give them a polite nod on their way through, and we'll keep an eye on what comes of them.