2018 Renting World Cup - Group Stages

Australia has been performing better than expected at the FIFA World Cup in Russia and we've been watching, cheering and hoping we'll find a path out of the group stages. But how would we perform if countries were being judged on the way renting works in each country? We decided to try and find out!

There is not a lot of information for many countries in the World Cup, so sources are a little sketchy. We apologise in advance for any errors. For a more serious comparison of Australia to other countries, check out this recent AHURI guide. We've based the group stages on the rating given by property investor website Global Property Guide, which judges almost all 32 countries on a scale from "Extremely Pro-Landlord" to "Extremely Pro-Tenant". We have converted that to a number scale of 1 to 5. For tie breakers we've referred to the amount of public housing in the country. The full groups stage list is here. We don't necessarily agree with every referee's decision here, but that's the fun of sport!

Click for full-size!

Here is each group, zoomed in for easier reading.
Group A: Russia and Egypt make it through, leaving Saudi Arabia and Uruguay behind. Russia with a strong public housing presence looks like they may go far in the tournament.

Group B: Spain was the clear winner out of this group, with Iberian rivals Portugal only a point behind. Morocco and Iran both left to consider whether pro-landlord systems was the right playbook.

Group C: Denmark and France dominated this group, with Australia left at the bottom of the group behind Peru. Hopefully in 4 years time we'll have sorted some of the problems that kept us down this time!

Group D: Iceland and Croatia shared top spot in this low-scoring group, Iceland taking the number one spot with a relatively high 12% public housing. The group also saw the first 1 - Extremely Pro-Landlord score for Nigeria. The country actually has some strong protections on paper, but they fail to deliver when it matters.

Group E: 3 teams competed for the top spot in this pro-tenant group, but Serbia and Switzerland's higher public housing meant they edged out Costa Rica. Football powerhouses Brazil were left in last place with very few protections for tenants.

Group F: Sweden dominated this group beating out the more famously pro-tenant Germany for top spot. Mexico equaled Germany's score but Germany scraped through to the round of 16 with a higher public housing. South Korea was left behind perhaps judged unfairly for their unusual jeon-see system which sees tenants pay rent for 10 years up front.

Group G: Belgium easily won this group, with England only just holding off Panama and Tunisia. England managed to scrape through on their significant public housing numbers, but with this stock under threat, will they do the same next time?

Group H: Poland and Colombia were lucky to make it to the next round in another low-scoring group. Senegal managed to beat Japan to avoid bottom of the group status. Japan has fallen a long way since the turn of the century with GPG moving them from pro-tenant to extremely pro-landlord in the last two decades.

See you next week for the finals, tenancy fans!

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More news from down the Hume

There's been massive news out of Victoria over the weekend, with the Andrews Government pledging to make renting fair!

The announcement refers to an "unprecedented package of tenancy reforms" that includes doing away with the Victorian equivalent of unfair evictions, preventing discrimination against tenants with pets, and cracking down on rental bidding. All of these sound pretty good to us here on the Brown Couch, and we look forward to seeing further details as these proposals are implemented by amendment to Victoria's Residential Tenancies Act 1997. Early details are available here.

Of course, not everyone was happy with this announcement. ABC online reports:

The Real Estate Institute of Victoria (REIV) said the changes would force up costs, which would be passed on to renters. 

"Rents will go up, people will leave the market, there'll be less supply and that's only going to push people out of the rental market and make it more difficult for those who are seeking to rent premises cheaply," chief executive Gil King said.

But our colleague from the Tenants' Union of Victoria, Mark O'Brien, wasn't having any of it:

"Every time there's reform of the residential tenancies law, the institute claims it's the end of the world as we know it and that's never what occurs," he said.

O'Brien's view is supported by a great deal of research, which suggests property investors tend to be motivated by financial considerations rather than tenancy laws.

Still, it's a line the investor lobby and landlord advocacy groups like to trot out at times like this and we expect a similar conversation will emerge in New South Wales when at last the results of our own review of renting laws make their way towards Parliament. We've been expecting this would occur before the year is out, but now that's looking unlikely. This means we've still got time to convince our own government they should be following Victoria's lead to make renting fair - you can lend your support to our claims here.

But it also means our own landlords' and real estate agents' groups will have more time to practice their lines about tenants' rights leading to all sorts of doom and gloom for renters. "Careful what you wish for," they might say. "The changes will force up costs, rents will go up, people will leave the market, there'll be less supply and that's only going to push people out of the rental market and make it more difficult for those who are seeking to rent premises cheaply".

The thing about all this is that there's not much stopping rents from going up as it is. For a quick refresher on why this is, have a look at our earlier post about why rental affordability continues to deteriorate.

But back to the specifics of the claim. The Real Estate Institute of Victoria seems to have skimmed over their suggestion that rents will go up to offset an increase in landlords' costs. Perhaps they've cottoned on that such claims are a furphy, because even though most landlords would go out backwards without them rents are a function of what tenants can pay rather than what landlords' choose to spend when buying and holding property. Or perhaps they just don't think the Victorian proposals will add significantly to their costs so they've steered clear of any further detail. Either way, they've put their emphasis on the slightly different argument of "people will leave the market, thereby reducing supply".

We should keep an ear out for this one in New South Wales, too. It's the idea perhaps that fair renting laws will take all the fun out of property investment, so landlords will take their money and spend it on other, much simpler things. Keep in mind the same argument was made when our current laws were drafted in 2009/10, and the private rental market was hands down the most likely place for a property in New South Wales to turn up in following sale or construction between the 2011 and 2016 Census events.

Still, given the prices property owners could expect at the moment it stands to reason some might be tempted to cash out. Some might even use the prospect of law reform as a cover for their decision. Rest assured they'll be factoring in capital gains before all else, and nobody likes to sell before hitting their targeted windfalls unless they really, really have to.

Those who do sell will be doing immediate damage to their sitting tenants - just as any landlord does when selling for any other purported reason. That is, unless they sell to another investor who is not so concerned about law reform (or other purported reason), and will keep the tenancy going. Given it's mostly an investors' market at the moment this scenario is becoming more and more likely. But, on the off chance an investor cashes out by selling to a first home buyer, the net impact on supply will be zero if the buyer is leaving the private rental market in order to take up home-ownership. And if a whole lot of investors suddenly decide to sell up all at the same time, prices might start to come down a little and first home buyer activity might find some renewed vigour.

It's the landlords who take their properties with them when exiting the market that are the real problem. These are likely to be in the very small minority, since most landlords run at a loss for tax purposes, and rely on any rental income to cover their main costs which includes the interest on their loans. Nevertheless, this risk could be easily countered with a vacant property tax, the likes of which the Victorian Government has also recently proposed. The revenue from such a tax could be used to fund new social housing dwellings.

Despite what we can expect to hear from the investor lobby in the coming months, the NSW Government would do well to start taking notes on Victoria's tenancy law reform proposals.

Tenants’ Union welcomes Labor’s flagged shift on renters’ rights

The Tenants' Union of NSW has released the following statement about reported changes to the NSW Labor Party's Sustainable Communities platform

NSW Labor has flagged a new policy agenda that could change the game for renters, says Tenants’ Union NSW.

Over the weekend, the NSW Labor party’s conference recognised a growing number of families rent their homes in New South Wales, and pledged to modernise rental laws to provide certainty, balance and fairness in the rental market. Early reports suggest this could include placing limits on rent increases, ending unfair evictions, and strengthening rights for renters with pets.

“These would be significant reforms, they’d be welcomed by renters right across New South Wales,” said Ned Cutcher, Senior Policy Officer with the state’s peak body for renters. “The Tenants’ Union of NSW has been calling for this kind of reform for years and it is extremely encouraging to see the discussion taking prominence.”

Mr Cutcher was quick to point out that the NSW Labor party changing its platform at conference time, while in opposition, does not necessarily lead to reform.

“The timing is good because the Government has still not brought in the changes it promised over a year ago, following a statutory review of our renting laws,” Mr Cutcher said. “We’re obviously following that pretty closely, and now we’ll be watching to see how Labor responds when those changes are brought through.”

“We know the NSW Greens have a strong renters’ rights platform so it makes for some healthy debate in Parliament when the time comes.”

Mr Cutcher said a limit on the frequency of rent increases would bring New South Wales into line with the rest of the country, but ending unfair evictions and strengthening rights for renters with pets would be genuine innovations in the Australian context.

“All over the country tenants can be evicted without a good reason, and all over the country families are prevented from making decisions about keeping pets because their landlords say no. For the growing number of renters across Australia these rules seem pretty harsh,” Mr Cutcher said.

“We’d love to see this change in New South Wales and we’ll happily work with NSW Labor to help develop these policies.”

For that matter, we’d love to work with Minister Matt Kean and the NSW Government on this all the more.

Rental affordability deteriorates, again

Hot on the heels of the Anglicare Rental Affordability Snapshot for 2017, the SGS Economics and Planning, Community Sector Banking and National Shelter Rental Affordability Index for December 2016 reveals what most Sydney-siders and New South Welsh-folk already know: the squeeze on rents is getting tighter.

Picture by thepurpah

The headline finding is that Sydney's rental affordability is as bad as ever, having plunged to a record low towards the end of last year. The average household now pays around 29% of their income on rent - meaning that renters with even reasonable wages are heading towards a form of housing stress, if they're not already there.

Unsurprisingly, the least affordable suburbs are harbour-side. They include Elizabeth Bay, Rushcutters Bay, Potts Point, Woolloomooloo, Double Bay, Milsons Point, Kirribilli, Darling Point, Point Piper, Edgecliff and Woollahra. For a dual income household with kids, bringing in $140,000 a year, a three bedroom home in any of these iconic suburbs would be unaffordable (30%-38% of income) or severely unaffordable (38%-60% of income), according to the index. For a single working parent earning around $70,000 per year, a 2 bedroom home in most of these suburbs would come in at the unaffordable range. Rent for an unemployed person looking for a single bedroom unit would be extremely unaffordable (60% or more of income) in all of these suburbs.

There's still some hope for working families. The dual income couple with kids might find a three bedroom home with an acceptable rent (20%-25% of income) around places like Hornsby, Epping, Lidcombe, Lakemba, Earlwood, Kogarah or Miranda. A single working parent might pay an acceptable rent for a two-bedder around Liverpool or Penrith.

But there's no such hope for the single unemployed person. Rents for one bedroom homes remain in the extremely unaffordable range for this cohort, throughout the entire Greater Sydney area. Even if three or four unemployed folk decided to pool resources and go in together for a sharehouse, rents for suitable properties remain extremely unaffordable until about Blacktown, Liverpool or Engadine. Further out they become severely unaffordable, but that's as far is it goes across the remaining suburbs.

Things improve for dual income households with kids once you get past the limits of Sydney, with the rest of New South Wales showing rents for three bedroom homes as generally acceptable, affordable (20%-25% of income), or very affordable (less than 20% of income). Of course, that's based on an annual household income of $140,000, which might be harder to come by in some of the further flung parts of the state, so take that with a grain of salt.

Single working parents will also do better outside of Sydney, subject to the same caveat: two bedroom homes for a household with an income of $70,000 per year will be acceptable, affordable or very affordable in most parts of New South Wales. Wollongong, central Newcastle and Byron Bay are the exceptions.

Where available, single bedroom homes remain severely unaffordable or extremely unaffordable to an unemployed person receiving an income support payment, right across the state. For those prepared to share, a two bedroom place might be moderately unaffordable for anyone on an unemployment benefit (25%-30% of income) around Wellington, Parkes or Cobar. If you can find a third person, rent for a three bedroom home might be acceptable in Cobar. Of course, your income payments might take a bit of a hit if you leave Sydney for one of these towns, as your chances of finding paid work will be somewhat diminished. You'll probably have your payments cut for up to 26 weeks after moving to an area with lower work prospects so don't forget to factor that in...

Why is this happening?
Conventional wisdom is that prices go up when supply doesn't keep up with demand, but there are a number of indicators telling us things are a little more complicated when it comes to rents. For a start, contemporary discussion around housing affordability tends to focus on the supply and demand of housing as a financial asset, rather than for its purpose of providing shelter. "Housing demand" has become something of a proxy for "mortgage demand", and "housing supply" is geared towards meeting the needs of mortgagors rather than home-makers - even if at the micro level these are often the same thing.

A quick look at where the current demand for residential property finance is coming from reveals a whole lot of it is going to investors.

Aust. property lending monthly ('000), investment (red) v owner occupation (blue), Jun 2001 - Feb 2017. Source: ABS

Evidently there's been more money pulled into the rental market than for owner-occupation over the last little while. In other words, the rental market is currently enjoying the lion's share of supply. But we can't assume this puts us on a path to affordability because the vast majority of supply into the rental market is coming from investors purchasing established dwellings rather than new builds.

NSW property investment lending monthly ('000), June 2001 - Feb 2017, established (red) v new (blue) dwellings. Source: ABS

Much of the increase in rental market supply comes at the expense of supply for owner-occupiers. Potential first home-buyers are particularly impacted by this, and they're remaining in the rental market for longer. Increasing rental market supply is absorbed by a more-or-less corresponding increase in demand for rental housing. But as we can see from the blue line above, investors have been putting larger amounts of mortgage finance towards new construction over the last little while. New construction delivers supply to meet "mortgage demand" - not just the demand for shelter - which should be putting downward pressure on rents. But, as the index shows, it's not.

Our latest Rent Tracker report shows this as well, indicating that rents have gone up in Sydney even where large amounts of new supply has been brought into the rental market. Based on the number of new rental bonds lodged, Rent Tracker doesn't distinguish between new rental supply coming from construction compared to that which comes from increased investment in established dwellings. But checking this against data from the NSW Department of Planning & Environment we can see that a great many new dwelling completions across Sydney are in the form of new apartments. These are most likely being purchased by investors.

New dwelling completions, Sydney. Source: NSW Dept L&E

With a high proportion of one and two bedroom units turning up for rent over the last few months, despite families with children making up the highest chunk of demand for rental housing, it's evident that this kind of investment is not being driven by what households really need. Rental supply is not being driven by renter demand, because housing supply is being driven by mortgage demand.

That's the story with new construction, but it's also the story with increased rental market supply in general. Investors aren't pulling established dwellings away from owner-occupiers because they want to provide housing for people who can't afford to buy, but because they hope to grow their wealth. The allure of wealth, after all, is what is driving demand for mortgages. Aided by tax settings that expedite the debt-to-wealth strategy - negative gearing and capital gains tax discounts - investors are encouraged to buy property based on prospects for profit rather than any measured demand from renter households. They're buying more expensive property as higher price tags come with faster and bigger gains. They're leaving the cheap stuff to developers who can turn it into more expensive property in order to meet investor demand...

Over time, this has changed the shape of the rental market. Affordable rents are a thing of the past.

Volume and rents ($/2011) of Australian rental properties over time. Source: AHURI

For that matter, we don't measure demand for rental housing like we used to. Back in the olden days the National Housing Supply Council - now defunct - used to report on the affordability and availability of rental housing. Then, as now, there was a shortage of properties available for rent to households on the very lowest incomes, for much the same reasons that we can see today. But it's easy to imagine that if this work had continued with appropriate levels of government support, we'd have a much clearer understanding of our rental affordability challenges and how to tackle them once and for all. Instead we've allowed things to get much worse.

Last week's Federal Budget has pinned a lot of hope on measures to increase supply. This includes the renewal of the National Affordable Housing Agreement, to be renamed the National Housing and Homelessness Agreement (NHHA). Under the NHHA the Australian Government will work with the states and territories to increase the supply of (mortgage driven) private rental housing through measures such as planning and zoning reforms. With the latest Rental Affordability Index in mind, we'll take a closer look at these Budget measures in a later post. In the meantime, parties to a new National Housing and Homelessness Agreement would do well to consider monitoring both rents and demand for private rental housing across the income spectrum, to ensure this Budget's impacts are being properly accounted for down the track.

Airbnb and the rent in Sydney

Today we released our report into the impact of Airbnb on the rent in Sydney. You can check out the full report here: https://tenants.org.au/tu/airbnbsydney2017. Let's have a closer look at some of the findings.

One of the interesting numbers we've examined is the number of Airbnb listings that are actually active in any given month. While it's true that people keep creating more and more listings on Airbnb, that doesn't always tell us the really important number - how many are active, and therefore what impact these listings are having on the rental market.

We really can't explore some of these issues due to the lack of data around housing in Australia. We don't know which properties are rented homes or owner-occupied, and this makes it difficult to read a lot into the numbers.

We can be clear that simply being listed on Airbnb does not mean a property has been removed from the rental market and there are two clear examples we can imagine to illustrate the point. Imagine a 2 bedroom unit in Bondi. The occupant lists the place on Airbnb for the week between Christmas and New Year's while they go away and visit family. If the occupant was an owner-occupier then this property wasn't available for rent, and Airbnb hasn't changed anything about that. If the occupant was a renter, then this property has also have not been removed from the rental sector - it is still in it.

The Greater Sydney area 

Whether it is owned or rented, what is more relevant is how often a property is booked. This chart covering the whole of Sydney from August 2014-August 2016 illustrates that there actually is a large number of listings on Airbnb which don't even receive one booked night in any given month. This suggests a large number of people have listed their property in the lead up to summer, booked it perhaps for a few nights over summer, and have no intention of listing the place again.

We can clearly see the summer bump both in December 2014 and December 2015 - far more activity then, than for the rest of the year. What is interesting though, is that the numbers of listings with 8 or more nights booked in a single month (or roughly 100 nights in a year) is much more constant throughout the year. This effect is very clear in our three hotspots with really large summer bumps in beach-side Bondi and Manly, and a still sizable but reduced bump in inner city Darlinghurst.

All of this leads us to think that for the majority of users, Airbnb activity is sporadic. However more commercial operators of course act differently, and are looking to maximise their occupancy all year round, leading to a more consistent level of activity. Regulation of short term lets should look to effectively control commercial operators, and ensure that their activity in short term lets does not produce harmful effects on residential tenants.

For the full report, including interactive maps - check out tenants.org.au/tu/AirbnbSydney2017

Celebrating Anti-Poverty week with smashed avocado on toast

Welcome to Anti-Poverty Week 2016. Everyone is encouraged to help reduce poverty and hardship by organising or taking part in an activity during the week (October 16-22).

He might not have meant to, but Bernard Salt got us off to an early start on Saturday, over at The Weekend Australian. Salt penned a provocative piece about how “Middle-Aged Moralisers” - a term with which he identifies - don’t like hipster cafes. He set off a small Twitter storm for his trouble. Quite aside from their poor quality furnishings and their complex approach to gender rules on toilet doors, Salt drew the most ire for his observation that hipster cafes are charging $22 a pop for smashed avocado on toast, and that young-people-who-haven’t-yet-bought-houses should not be paying for such frivolities. Instead, they should be directing all that hard-earned towards a deposit for a home-loan.

Now some might argue that the day young hipster-folk stop trading smashed avocado lunches is the day the Australian economy dies, and poverty comes a-calling for us all. But Salt does have a point. According to a study released by the Australian Council of Social Services yesterday, one of the surest ways to avoid poverty in Australia is to own your own home. Only 15.5% of the three-million Australians living below the poverty line in 2014 were home-owners, while 59.7% were renting.

Saving your money to buy a house may seem like a good wisdom, but many in the “haven’t-yet-bought-houses” category have already sat through that lecture. Amid confusion about whether the number of first home-buyers entering the market is very low or even lower, Salt's screed is just another reminder of the impending poverty of old age.

For those apparently well-off enough to feel the stigma and shame of not-buying-houses, rising property values are nothing to cheer about. Many who can’t afford a home today probably won’t be able to afford it again tomorrow, and will experience increasing levels of poverty and inequality as they struggle to meet rising rents. Even having a job is no guarantee of the good life - in 2014, about a third of Australians living below the poverty line were wage earners. But for those who can’t get a job, and those whose working days are behind them, the cost of housing will always be the biggest barrier to financial wellbeing.

So, for the three-million Australians who already live below the poverty line, and the countless others who will join them in the fullness of time, doing something about housing affordability will make a critical difference. Building much more Social Housing, inserting meaningful Affordable Housing targets into our planning laws, and fixing our various tax settings would be a good start.

Even if we did all of this today, slowing the growth of housing costs would take some time. Making a couple of quick changes to our renting laws would also help: allowing tenants a genuine option to challenge unreasonable rent increases, so they may respond to landlords' price signals in a manner other than moving out; and removing landlords' ability to end tenancies without a reason so that tenants will have some security in their homes for as long as they meet the terms of their agreements, and their properties remain available for rent.

In the meantime... the smashed avo looks pretty good today, if you can afford it.

International Tenants Day 2016

Happy International Tenants Day readers!

This years theme asks Is control of rents outdated, or a necessity - worldwide?

International Union of Tenants' Secretary General Magnus Hammar offers some thoughts on the theme:

The regulation of rents has many names in different parts of the world; rent control, rent regulation, rent stabilisation, rent certainty, etc. But in reality, they all mean basically the same: The real goal of rent regulation is protecting the moral rights of occupancy. Long-term tenants who contributed to their homes being a desirable place to live have a legitimate interest in staying there.

Magnus Hammar of IUT speaking in Sydney, 2012

Rent regulation is a response to the power imbalance between landlords and tenants, which creates an opportunity for landlords to exploit tenants that certainly exists in tight housing markets. One of the most important benefits of rent regulation is that organizers can go and form tenant associations and have tenants to collectively take cations against landlords who arbitrarily increase rents, who send out illegal eviction notices, or who do not deal with leaks, mould or other insanitary conditions.

In the lead up to the 20th congress of the IUT in Scotland, they have also published a report from tenants' organisations around the world. It gives a taste of the different experiences, as well as the many common struggles, that affect tenants all over the world.

So from us to you, on this International Tenants Day, may your rent always be fair, your move never forced, and your Tenants' Union always strong!

The rent myth: measurement and supply

Domain are running an interesting article today, suggesting it's only a matter of time before apartment rents start to dwindle and we can all live happily ever after.

It starts:

Record high-rise building in Sydney has yet to provide any relief for renters, with apartment rents jumping sharply in the June quarter, data shows. 

The median weekly advertised rent for an apartment in the harbour city is now $520 a week, just $5 cheaper than houses, according to Domain Group’s Rental Market Report released on Thursday. 

But experts are predicting the trend will turn around as a record surge in apartment developments are built, mainly owned by investors looking for tenants.

This raises a couple of points worth exploring.

The first is the way organisations like the Domain Group measure rents - they check the property pages to see how much landlords are asking. This gives a skewed view of rents, as landlords don't always get what they want, and rents are not always quite as high as these reports suggest. Not only can this paint a misleading picture of life on the treadmill, but it can lead to inconsistencies in the reports themselves. For instance, the Domain Group's report from June 2015 had house rents at $530/wk, but by September this had been revised down to $525/wk. The latest report has kept house rents at $525/wk for that period but says they are now at $530/wk, showing an increase of 1% over the year. We're not sure why they do this exactly, but it happens from time to time. No doubt they have their reasons.

A much better way to measure rents is to look at how much tenants are actually paying, and it's possible to do this in New South Wales by checking the bonds that are being lodged with the Rental Bond Board. Our Rent Tracker series does just that - it's worth a look if you're ever wondering how actual rents have been moving in your area.

The second point is that building new blocks of apartments does not automatically reduce the rent - especially not before they're finished. To be fair, the Domain article does acknowledge that the bulk of new building has not yet been finished, with First Home Buyers Australia's Taj Singh saying:

Despite the record levels of apartment building … a lot of the new supply will be coming onto the market later in 2016, with most of the supply to come on the market 2017.

Singh is right - it really is too early to say how "record levels of apartment building" will impact on rents across the board. But we can look at parts of Sydney where the private rental market has grown, and see what the effect has been there. Looking at the number of bonds lodged between 2010 and 2015, as well as how much rents have increased over that time, tells us that a growing rental market does not always bring the rent down:

• Camden saw a 57% increase in the number of bonds held, and rents went up by 21%
• Botany Bay saw a 52% increase in the number of bonds held, and rents went up by 45%
• Auburn saw a 41% increase in the number of bonds held, and rents went up by 20%
• Maitland saw a 36% increase in the number of bonds held, and rents went up by 9%
• Blacktown saw a 34% increase in the number of bonds held, and rents went up by 19%

By comparison, the following areas saw much lower growth in the rental market:

• Blue Mountains saw a 1% decrease in the number of bonds held, and rents went up by 25%
• Leichhardt saw a 1% increase in the number of bonds held, and rents went up by 20%
• Waverley saw a 2% increase in the number of bonds held, and rents went up by 21%
• Mosman saw a 3% increase in the number of bonds held, and rents went up by 23%
• Manly saw a 3% increase in the number of bonds held, and rents went up by 30%

An article from the AFR earlier this year looked into this in some depth from the perspective of a Chatswood bound house-hunter - it begins: "A long queue is usually a sign something of value is at the end of it. That wasn't the case in Sydney's Chatswood on Saturday". It's worth revisiting.

There are two problems at play here. The first is that it would take even more "record levels of apartment building" to make up the required shortfall, and the second is that new supply is usually dropped into the mid- to high-end of the market, coming at the expense of more affordable homes that have been demolished to make way for something new.

We'll have a closer look at these two problems a little way down the track.

Will rents rise if Australia votes for tax reform?

We've heard that some people - let's call them real estate agents and a couple of prominent politicians - have been saying rents will rise if Australia votes for tax reform. We thought we'd better check this out.

We've already looked at how negative gearing and capital gains tax discounts distort the rental market at a macro level - you can read about that here - so it's hard to know exactly what these soothsaying ne'er-do-wells are getting at. Affordable rental housing couldn't really disappear from the market any faster than it already does. And if the current reform proposal does get up, existing arrangements will not be affected, so current landlords would not be able to use the old "suddenly I am paying more tax, and I must pass this unexpected cost on to my tenant" excuse.

Still, we can't shake this feeling that, should it come to pass, landlords could try to use a new tax regime as a screen for putting up the rent. Real estate agents' bottom lines would benefit from higher rents, and because they favour the status quo they have nothing to lose from cultivating an expectation that change means rents will increase...

One of the first claims you'll hear a real estate agent fall back on is that rents took off after Paul Keating made some adjustments to negative gearing back in 1985. If it happened then, they say, it will happen again. Never mind that the claim has been contested and discredited time and time again - see, for example, this 2003 article from Ross Gittins, which discusses rents rising in Sydney and Perth in the late 1980's, but not in other parts of the country; or this more recent piece from the ABC's Fact Checker, which reaches a similar conclusion before quoting a 1987 Cabinet Submission:

With the notable exception of Sydney, conditions in the residential rental property market are not unusually tight. The evidence suggests that local influences, rather than tax measures, dominate in metropolitan rental markets.

The Fact Checker article goes on to examine some of the "other influences" that could have been contributing factors. It cites high interest rates as well as high prospective capital gains in other investment classes, making residential property a less attractive option. But one of the influences that hasn't been mentioned is the impact on rents of residential tenancies legislation at the time.

Keen followers of renting law reform will know that tenancy agreements in New South Wales were not regulated by the Residential Tenancies Act 1987 until it commenced in 1989. This means that back in 1985, putting the rent up in Sydney was much easier than it is today. Landlords would simply offer a rent increase, and if the tenant didn't accept it they'd usually get a notice to quit and have to move out. But some other states - notably Queensland, Victoria and South Australia - had brought in new renting laws somewhat earlier. Which means that rent increases were better regulated in other parts of the country while Keating was tinkering with tax, and Sydney rents were doing their thing...

Of course, renting laws still vary from state to state, and tenants in some states may again be better equipped to handle wholesale rent increases than in others. Even so, to the extent that rents are now regulated, they are still very much tied to "the market". Landlords set the rent based on what tenants are prepared to pay, and if a tenant challenges an excessive rent increase it is generally decided by a tribunal with market comparisons in mind. But the important thing is that such a challenge is possible, and tenants should not hesitate to exercise this right if the need arises. This right was not available in Sydney in the mid-1980's.

Landlords who claim they will set rents according to tax policy, rather than market factors, should have cause for caution. Rents continue to reflect a fine balance between vacancy rates and tenants' incomes, and landlords cannot move the market by sheer force of will. Thankfully, those bad old days are over.

Nevertheless, we expect there will still be some landlords, real estate agents and politicians who continue to insist that tax reform will result in rent increases. Here are a couple of useful points to keep handy, just in case you ever find yourself in conversation with one:

Rents are not tied to other costs
Rents increase faster than the general cost of living. We'd have thought this was common knowledge, but SQM Research's recent report suggests perhaps it is not - they've suggested Labor's tax reform proposal could lead to "an acceleration in rents above and beyond the CPI rate". But here's what rents already look like against CPI, over the last quarter of a century:

Rents v CPI, from the TU's Rent Tracker (coming soon!)

There's been plenty of "above CPI acceleration" in there, even without tax reform.

We also know from tax data that rents increase faster than landlords' costs. We explored this in our report 5 years of the Residential Tenancies Act:

... landlords collect significant amounts of income from their tenants each year. In the 2009-10 financial year landlords declared $9.7billion in rental income for properties in New South Wales. This increased to $12.1billion in 2012-13. An increase is to be expected given the growth of the sector, but even so this represents approximately $2,175.00 more rent to landlords in 2012-13, per property, than in 2009-10. The average costs declared by landlords over the same period rose by $880.00 per property.

So we can conclude - rents go up because they can, not because they need to, and certainly not in response to any particular cost factors for landlords.

There's no room in the market for higher rents
Rents go up because they can, unless for some reason they can't. At some point, rents become unaffordable, and tenants cannot continue to pay them. When this happens, tenants are forced to find homes in a more affordable area, or they're forced to share a home with others. In their 2013 report Long term private rental in a changing Australian private rental sector, Stone, Burke, Hulse and Ralston found that families with children now make up the largest group across Australian private rental markets. These households may not be inclined to share, which means landlords need to keep rents within their reach so as not to price them out.

None the less, the report also shows that the fastest growing group is shared households. Tenants are increasingly responding to high rents by pooling their resources and living together. Further research suggests that share housing is not the domain of young people alone, with a marked increase in the number of people over 40 recently using the share house finding website flatmates.com.au...

Meanwhile, the Rental Affordability Index continues to reflect the grim reality of high rents across the country. The RAI reveals that under current conditions, low-income households typically need to pay 50 to 85 per cent of their income on rent. And as we showed in another recent post about rents, even a modest - and much needed - increase to Commonwealth Rent Assistance couldn't open the gate for higher rents.

If tax reform happens and the rent goes up, who's going to pay it?

Landlords really, really need the rent, and so do their banks
Even though rents are no reflection of costs, it's really quite expensive to be a landlord. As we discussed in our Tenants' Guide to Tax Reform, their biggest expense comes from the purchase of a property in the first place. According to tax data, the interest payable on loans amounts to more than all other expenses combined, even with record low interest rates:

Landlords' expenses ($billions) Source: ATO

That's not surprising when you consider that banks have been lending, on average, more than $550million to Australian landlords each month for the last year.

If landlords were to increase the rent beyond what the market could bear, or even beyond what the market can anticipate, many would start to experience periods of vacancy. Even a short-term loss of rental income could have serious consequences for landlords - at best it would affect cash-flow arrangements and compromise their ability to meet a mortgage commitment without making other sacrifices; at worst it would lead to mortgagees calling in bad debts.

So, all things considered, if you come across a landlord, real estate agent or politician who insists tax reform would lead to higher rents, we reckon you should call their bluff.

Battlefield: rent

A number of large and powerful real estate agencies look set to recommend landlords increase your rent if Australia votes for changes to negative gearing and capital gains tax discounts on July 2nd. We're not sure how else to read the "Negative Gearing Affects Everyone" campaign that's recently attracted media attention.

The agents will smite you if you vote for tax reform

The campaign suggests that "should current taxation arrangements for property be changed, as many are suggesting, rents could be expected to rise substantially". It provides nothing to support this theory, other than a couple of lines about supply and demand:

Because the incentive to buy property to rent out will be severely curtailed, fewer people will buy residential investments, meaning the supply of rental stock will contract: fewer houses means higher rents charged to those who don't own their own homes.

Nobody can argue with these fundamentals, right? Well...

When you're thinking about taxes, housing supply and rents, it's important to remember these two things:
1. Where rents and real estate are concerned, supply and demand dynamics get complicated by the tax system.
2. No matter what federal tax settings look like, the only way your rent can go up is if your landlord serves you with a valid notice of increase.

Let's explore this.

This "incentive to buy property to rent out" that the real estate agents' campaign refers to is, of course, capital gains. According to the campaign authors, the way to keep our rents down is to ensure that property values continue to go up. The idea is obvious enough - increasing property values draws more people into the housing market to buy investment properties, so more properties become available to rent. That's supply taken care of, right?

Well, no, because around 90% of money lent to landlords each year goes to purchase established dwellings. The majority of "new" supply into the rental market is actually existing housing that's just being recycled - moving in from the owner-occupier market or just transferring from one landlord to another. Even if it is new to the rental market, it probably isn't a new home, in which case it can't really be considered new supply. It's just borrowing from Peter to pay back Paul.

But even if we pretend not to notice this glaring hole in the real estate agents' logic, they still have a problem with their argument. The idea that rising prices can put downward pressure on rents is not just counter-intuitive - it's also demonstrably wrong. And it's not merely a question of ever increasing prices (landlords' expenses) dragging up rents (landlords' income), it's about which properties find their way into the rental market, who ends up paying to live in them, and how much they are willing to spend.

In short, it's the the type of supply and demand you're getting in the market that matters. Negative gearing and capital gains tax discounts actively distort the market by affecting supply and demand.

This happens in a couple of different ways.

First, these tax settings affect the supply of rental housing, by manipulating investor demand. The "incentive" to buy properties to rent causes landlord's to pick and choose their purchases based on the prospect of gains. Or, as the real estate agents' campaign authors have put it in another part of their website, to make "strategic investments":

If negative gearing is abolished on all but newly-built dwellings, investors will no longer be able to buy strategic investments, looking to acquire high value properties in prime locations that will realise the best gains over time.

We've talked about what this kind of "strategic investment" does to the shape of the rental market before, but here's a quick reprise: landlords don't buy the cheap stuff because the prospects for gains just aren't the same. 15% of 100 is better than 15% of 10, even at the same rate of growth. Rents at the lower end of the market are increasing faster than rents at the top, because affordable rental housing is actually disappearing from the market.

The shape-shifting private rental market: driven by gains

For six long years Anglicare's Rental Affordability Snapshot has told us what this means for low income households. In the latest snapshot there were only 902 properties advertised across Sydney at what could be considered affordable for a family whose income is made up of a minimum wage and some Family Tax Benefits. 902 properties, or 6.4% of what was advertised for rent during the snapshot period. For a single person on Newstart allowance, there was not a single property advertised during the snapshot that could have been considered affordable. Nada. Zip. Nothing.

National Shelter's Rental Affordability Index provides a somewhat more rigorous analysis. In it's inaugural release in November 2015 it noted that New South Wales faces "rental unaffordability across the board, and a dire situation for low income households".

Second, these tax settings affect the demand for rental housing, by reducing the supply of affordable housing to buy. Negative gearing encourages landlords to carry month-to-month losses by reducing their pay-as-you-go tax liabilities, while capital gains tax discounts increase the chances of these losses being fully recovered in the long-run. Thus landlords can afford to take on greater amounts of debt than their competition, the owner-occupier. They outbid would-be owner-occupiers for properties they do not intend to live in, using them instead to build wealth. This pushes prices higher, faster (and encourages more people to follow this investment strategy if they can).

This is generally understood to be a problem for first-home-buyers, and it is this concern that seems to be driving the current political discussions around tax reform. What these discussions fail to address is that most of these frustrated home-buyers are making homes in the private rental market in the meantime, as tenants. They're earning a decent enough income and can manage the high rents, even if they can't keep up with landlords bidding against them at auction. Then there are those who have simply given up on home-ownership: as house prices scale new heights, they simply wonder how they could ever come up with a deposit in the first place. They're still earning decent money, though, and they're contributing to demand for rental housing while dragging up rents because of what they can afford to pay.

Our housing market dynamics have been working to these conditions for many, many years. They are entrenched. Giving our federal tax settings a few necessary tweaks will not result in immediate or drastic change. Fundamentally, tax reform will not reset the incentive for buying and renting out property. Instead, it should alter the way capital gains are achieved, providing for more tenant friendly "strategic investment" by landlords. The system would adjust. New, more functional dynamics would emerge. But this would take time.

Nobody should expect wholesale rent increases in the short term, unless landlords strategically decided to put them up. We'll come back to that soon, for further discussion.

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.

Renting laws in review: repairs and rents

Two of the biggest discussions to be had in the current review of our renting laws are tenants' rights when it comes to getting repairs and maintenance done, and rent increases. So, here we go...

***

The basic principles of how repairs to a property work under the Residential Tenancies Act will be familiar to most. All landlords have a basic obligation to maintain the rental property in a "reasonable state of repair". When a repair issue becomes apparent, the tenant must inform the landlord, who must then carry out the necessary repairs unless the tenant has caused the need for repair themselves. This is the case even if the repair issue pre-dates the tenancy agreement.

Repair issues can be an un-holey mess for tenants

Of course, what appears straightforward from the stuffy confines of a statute book is often anything but. Perhaps the most common tenants' complaint is that the landlord is well aware of an issue but still declines - even outright refuses - to arrange for repairs. This is an issue of compliance rather than an improper division of the parties' obligations under the law, and tenants may apply to the Tribunal for a remedy where required.

But any tenant willing to bring a repairs matter before the Tribunal is also forced to wrangle with what amounts to a get out clause allowing landlords to evade responsibility. Section 65 of the Act provides that the Tribunal may only determine that a landlord is in breach of their repairs obligation if they "failed to act with reasonable diligence to have the repair carried out."

Potentially, this allows a landlord to abandon this most basic obligation where efforts to act responsibly have failed. Or, more specifically, they may avoid being found to be in breach of the repair obligation. The irony is that this is most likely to occur in cases where a repair is somewhat difficult to see to, which are also the cases where a tenant will be in need of a remedy the most. But if a landlord is able to avoid the Tribunal finding they are in breach  of the repair obligation because of the "reasonable diligence" defence, no remedy can be obtained.

Also ironically, the Tribunal has discretion over what remedy to order in repairs matters. It is open for it to order that no action must be taken after finding a landlord has failed to carry out a repair, if it finds the circumstances of the case warrant it. In such cases, tenants should be entitled to another remedy, so we say this part of section 65 needs to go.

***

Rent increases, though never popular amongst those made to pay them, have been brought into sharper focus recently by the renting affordability issues affecting so many in New South Wales. The many complexities of this issue are something The Brown Couch has considered at length - most recently here and here.

But for most tenants, the law on how and when the landlord may up the rent are simple.
- No increase is allowed during a fixed term of less than two years unless it is detailed in the agreement.
- For fixed terms of more than two years, one increase every 12 months is allowed.
- A landlord may increase the rent for a periodic (i.e. 'week to week') agreement an unlimited number of times by providing the tenant with 60 days' written notice.
- A tenant can also apply to the Tribunal for an order voiding an increase, on the grounds that it is excessive.

The tenant is burdened with proving that the increase is excessive, and the Tribunal may not consider a tenant's capacity to pay the increased amount in its deliberations. Obtaining such an order is notoriously difficult and time consuming.

Are rent increases the Bane of your existence?

We think tenants deserve additional certainty, as well as protection from retaliatory or otherwise wanton rent increases - in a time of widespread rental unaffordability more than ever. Rent increases should be limited to once per 12 months for all tenancies, rather than the tiny minority of agreements with a fixed-term of more than two years.

Provisions around excessive rent increases also require reform. We would like to see the evidence burden reversed for large increases, so that when a landlord issues notice to increase the rent above the rise in the Consumer Price Index, they would be required to demonstrate that the increase is not excessive. Tenants would retain that obligation for increases below the equivalent CPI rise.

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Given their near-universality in the tenant experience, we're sure these issues will be the focus of many a submission to the Government's ongoing review of the Act. But for anybody who hasn't yet had their say, make sure you grant them a mention. Submissions can be made by email to policy@finance.nsw.gov.au, or by post to Statutory Review of Residential Tenancies Act 2010, Policy and Legislation, NSW Fair Trading, PO Box 972, Parramatta NSW 2124.

Want to help a cash-strapped landlord? Pay more rent!

We were alerted to the news of Sydney's latest 'biggest rent hike in xxx years' with a tweet from Domain editor Anna Anderson:

This is not good news for Sydney renters..http://t.co/wI7xMQzZC9 @Domaincomau @TUNSW #rentals #landlords #Sydney pic.twitter.com/vDKoG4Du9L

— Anna Anderson (@AnnaDomain) October 8, 2015

The article cites Domain Group's latest data, which puts Sydney's median rents at $530/week - an increase of 3.9% over the year. Other news outlets - citing other data - have Sydney's median rent at $592/week, with a growth rate of just 1.9% p.a. Go figure.

Or better yet, check out our rent tracker series to see why these data sources don't always give us the whole story...

But whichever way you look at it, the rent is pretty damned high.

Now that we're in agreement on that, let's take a closer look at the way the data gets reported.

Domain calls on the Domain Group's senior economist, Dr Andrew Wilson, to explain. He says it's all about an "undersupply" brought on by changes to the way investment loans are structured. Higher interest rates and higher upfront costs, he seems to suggest, are either passed on to tenants in higher rents or they result in a loss of rental supply as potential investors opt out. This, coupled with "strong immigration" to Sydney, will put the squeeze on rents for some time to come.

Business Insider provides another analysis, with RP Data's Cameron Kusher telling an impossibly different story:

The major factors contributing to slower rental growth are the construction boom across the capital cities coupled with slowing population growth, along with low mortgage rates and the heightened level of activity from investors.

It's hard to know which kool aid we should prefer here, or why they can't just talk to each other and get their story straight... Have artificial barriers to investment suddenly caused a reduction in the supply of willing landlords, or is an increase in new dwelling construction and investment activity taking the edge off capital gains? Either way the result may be the same - a slower market for speculators, with landlords going for yields rather than gains.

But in a market where prices are not supposed to go down, increasing yields means fishing for higher rents. And for many, this will be a simple matter of survival. Without the prospect of strong capital gains, many landlords will be unable to wear the ongoing losses. Those not in a position to sell up and cash out may see no option but to try to increase the rent. The Domain article picks up on this, when quoting Parramatta real estate agent Edwin Almeida:

A lot of people are cash-strapped and need higher yields to substantiate their property purchase.

This begs the question - with rents always going up and up and up, what gets our landlords crying poor?

The answer is simple: unaffordable housing. Landlords need to borrow extreme sums of money in order to purchase property. As prices go up, so does the amount of borrowed money flowing through the housing system...

... and, as we've discussed before, it costs an awful lot to service this debt. In fact, paying the interest on loans is the single biggest expense that landlords must cover - this absolutely dwarfs every other major cost. Rents go some way towards covering that expense, but in recent times landlords have traditionally relied on capital gains and preferential tax treatment to make their costly investments worthwhile. It stands to reason they'd become skittish when gains start to look a little less assured.

All the same, perhaps rents have continued to rise faster than they've needed to. Data from tax returns shows that NSW's landlords received $2175.00 more in rent per property in 2012-13 than they did in 2009-10. But their expenses, over that time, increased by a much smaller amount - an average of only $880.00 per property. This is in spite of property values increasing dramatically, giving landlords plenty of gains to bank on without having to dip into their tenants' pockets for higher rents.

Please do remember this, and have a nice warm, fuzzy feeling when your landlord comes a-knockin', cap in hand, because they need a little help to substantiate their property purchase...