Monday, May 7, 2018

The bond is too damn high

Paying the bond is a real hardship for many tenants. Tenants move on average every 2 years, and for many its much more frequent than that! NSW Rental Bond Board data shows of tenancies ending in 2016 and 2017 more than 50% of tenancies ended after less than 18 months, and a full third ended in less than 1 year. That is a lot of people moving home!

To make matters worse, there is often a cross over period between tenancies where a renter has had to pay a bond on the new place, before the bond from the previous home has been released. Tenants also run the ever-present risk that an agent/landlord will make a claim on their bond - whether or not there appears to be any merit to the claim.

However, it is also important to note that the stats suggest that most tenants receive their bond back in full, or with very minor payments to the landlord. Over the two years 2016 and 2017 there were more than half a million bonds released from the Rental Bond Board - 57% of them returned to the tenant in full and 75% of tenants received more than half the bond back.

Of the bonds where some amount was claimed by the landlord, 41% were for an amount of less than $500.

Several companies have recognised the issue of bonds as a pain point for tenants and are pushing the boundaries of the law and math to try and work out how best to insert themselves into this process. For people who don't have the money for the bond there are currently pay day lenders, bond loan specific companies, and bond insurance products. Now come bond “surety” (or “guarantee”) products where the company promises to pay the landlord if there is a compensation claim at the end of the tenancy. Though not technically loans they function in the same manner - you have money in your pocket that you would not have had before, and you pay fees which effectively constitute interest on that amount.

Some bond surety companies have even attempted to promote themselves as a response to housing affordability. The ACT government has apparently rushed to allow at least one such company, Snug, to operate their BondCover product, to the dismay of some in the territory. We examine Snug’s BondCover in a companion piece also published today looking at whether BondCover works well for tenants. In this piece, we’ll focus on the broader issues raised.

Are bonds a tax?

Snug has taken to pointing out recently that bonds are an extra tax on renters. This is true. Bonds do create a kind of tax - but they are levied by landlords who require their payment as a condition of securing a home. While their stated purpose is to act as an assurance for the landlord, the effect of that payment is to cost the tenant the potential benefit of doing something else with the money. As bonds are refundable, strictly speaking the tax is 100% of the potential for using that money for something else rather than the bond itself.

These are known as private taxes – a cost which someone with no alternative is forced to pay to a private entity. For a further introduction to the concept of private taxes, we recommend this article on the subject from economist Philip Soos.

It is clear to us that Snug’s BondCover makes this private tax burden heavier, not lighter. The current rental bond board system doesn't solve the problem, but does change the private tax to something approaching a public one, which allows the benefit of the tax to be shared beyond only the landlord.

Snug's BondCover seeks to convert this back to a private tax, with the benefit mostly flowing to them. In the companion piece we meet a tenant, Jen, who finds that she is even worse off than if the landlord kept the bond themselves - here is a simplified version of a chart showing by how much Jen is worse off if the bond is in the Rental Bond Board or under BondCover.

So what does this bond tax currently pay for? The Rental Bond Board in NSW has $1.4 billion in bonds, which is then invested in a portfolio by TCorp, NSW Treasury’s investment arm. The interest the Bond Board earns on these bonds is spent on various aspects of infrastructure around renting – mostly Fair Trading NSW’s tenancy-related activity such as administering the Rental Bond Board, and administering complaints as well as funding the tenancy-related parts of the NSW Civil and Administrative Tribunal.

A small portion (about $6million a year) is used to partially fund the Tenants’ Advice and Advocacy Program which assists more than 25,000 tenants a year, and we at the TU receive some of that funding for our role in supporting the services.

We might spend the interest earned on tenants’ bonds differently if it was up to us. There are legitimate questions about the benefit tenants receive from this investment. But it is unquestionably better value than the traditional alternative which gave all the benefit to the landlord. Giving it and more to Snug instead doesn’t seem a better deal for renters.

Tenants will generally be distinctly worse off. Rather than the landlord demanding a fully refundable bond paid to the Rental Bond Board which costs the tenant potential interest, BondCover is an non-refundable amount which costs the tenants both actual fees and potential interest.

So, are there any other ways to reduce the hardship caused to tenants by bonds?

The NSW state government, and other state and territory governments, already has a solution available to them. For several years now, people who are eligible for social housing have been able to pay for their bond in installments over 12 months or more on an interest free loan.

Word from Family And Community Services who administer the program is that this is a highly successful program. It is a low cost, high impact program that effectively reduces the strain on households during their too-frequent moves.

We could consider this a pilot program, and expand its eligibility to every tenant in the state. Most tenants will not need it, but for those that do, it would be a very simple solution. With modern application processes the administrative costs for government are minimal and even if they are passed on to tenants it would be at a fraction of the cost of Snug. Fair Trading NSW could even use the money already sitting in the Rental Bond Board accounts to cover the loans – a true win-win.

Of course, we could also reduce the number of moves by ensuring the private rental market is not the insecure nightmare many experience (by the way, we've got a pretty good idea how to make that fairer too) – or even expand our public housing stock to ensure everyone who needs a home, has one.

Now that would be a real market disrupter.

Disclaimer: As discussed in this piece, the Tenants' Union of NSW receives some funding from the interest the Rental Bond Board earns on tenants' bonds. Details of what the bond interest money is spent on are detailed in the Rental Bond Board's annual reports.

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