Who wants an affordable rent?

Private market rents and low-incomes don't mix. We'd like to say this is a recent phenomenon but Anglicare's annual Rental Affordability Snapshot - which has consistently shown affordable rental properties for low-income workers and those receiving income support are practically non-existent across Sydney and other major Australian cities - is now in its sixth year. But the latest report, released today, shows rental affordability continues its decline across regional New South Wales as well.

We're sad to say the problem is entrenched. But is it intractable?

We're often told that the way to improve housing affordability is to increase the supply of housing. Take this comment from NSW Treasurer, Gladys Berejiklian, in the AFR earlier this month:

While we are open to further tax reform, including looking at stamp duty, we believe that the most effective way of tackling housing affordability is to increase supply.

If we apply this logic to the private rental market, what might be required is an increase in the supply of residential property investors who are willing to buy newly constructed dwellings. Now, as we know from our most recent exploration of tax data, an increase in investment does not necessarily mean an increase in the number of landlords, as the rate of second, third, fourth, fifth and sixth-time investors is growing faster than the rate of first-timers. But we also know, and it is well established, that around 90% of new lending and finance to landlords goes towards the purchase of established dwellings rather than new builds. Even so, there are blocks of new units going up all over Sydney and surrounds right now, but as Anglicare's Rental Affordability Snapshot reminds us, rents aren't coming down. Other research confirms the supply of housing does not put downward pressure on prices.

Source - Prof. Peter Phibbs, Shelter NSW seminar New Directions for Housing Fairness"December 2015.

This calls for an exploration into what drives landlords to buy - and the early verdict is that it ain't cheaper homes. It's more expensive ones. Property investors want house prices to rise because they're buying into a kind of superannuation scheme, hoping to replace wages and salaries with rents and access to "financial products" as their portfolios grow in value. Our whole housing system is geared towards the provision of wealth, rather than the provision of homes. Homes for people with a little less money in their pockets? No, that's not what housing is for.

Our federal tax settings are a case in point. Much has been discussed throughout this election year about negative gearing and capital gains tax discounts, and their impact on house prices and rents. What's not been talked about is the impact these tax settings have on our housing system more generally, and the assumptions upon which they feed. Negative gearing and capital gains tax concessions are just the type of policy settings that encourage an increase in the supply of residential property investment. But whether it is for the first, second or sixteenth time, or in new or established homes, the reasons for investment are the same. It ain't cheaper prices and affordable rents.

Of course, the banks deserve a mention for their part in this housing system, because it's where most of their lending business comes from. As landlords lodge their tax returns each year, we can see their most significant holding cost - and the reason why landlords make consistent losses on their property investments, despite charging unaffordable rents - is the payment of interest on loans. That means our tax system, which subsidises these landlords' losses, is also a boon for the banks.

Throughout all this discussion, tenants have rarely gotten a word in. We'd like to see this oversight addressed, because we make up a significant proportion of the population. Reports such as Anglicare's Rental Affordability Snapshot provide a good opportunity to talk about rents, and what it really takes to find your way in an unaffordable housing system. We can use these moments to remind landlords, journalists, economists and policy-makers that the private rental market is not just the nation's cash cow. It's where we live.

Getting passed on

Any Brown Couch readers ever had an interest rate cut 'passed on' to you in the form of lower rent?

No? Didn't think so.

Maybe we need to get the Federal Treasurer to include that message in his pre-RBA Board meeting media messages. For the past week Wayne Swan has been in the media saying that there would be 'absolutely no excuse for the banks not to pass on any rate cut that was delivered by the Reserve Bank'.

OK, so he wants to put what pressure he can on the banks – there's no harm in that, is there? Actually, we think there is, when it distracts the government from our real problem with debt, and particularly housing debt. The really important problem is not interest rates, but the huge size of the debt on which interest is levied.

(Source: RBA Chart Pack – Interest Rates, October 2011)

(Source: RBA Chart Pack – Household Sector, October 2011)

But it is the banks' interest rates that have caught the government's attention, so that its reform agenda is directed to increasing competition amongst lenders – including by encouraging new sources of credit (and there's been about $14 billion worth of tax-payer funded encouragement so far, through purchases by the Australian Office of Financial Management of residential mortgage backed securities).

The risk is that lenders will compete not only through lower interest rates, but also by drumming up more business through reduced lending standards – hence more debt, and more risky debt.

What the banks really need is not the supposed discipline of the market, but the discipline of regulation, that actually gets at the amount of debt that households, and the economy, is carrying. Countercyclical captial adequancy requirements, perhaps? New controls on credit, such as maximum loan-to-valuation ratios? For more, have a look at the Joseph Rowntree Foundation's recent report on 'Tackling Housing Market Volatility' in the UK, around pages 35-40 or so.