The shell-less snails of Taipei: Colebatch

Tim Colebatch follows up his recent excellent article on housing and tax with another on the consequences of a housing bubble – this time looking at lessons from Taipei, where the so-called 'snails without shells' – young persons priced out of the owner-occupied housing market – are protesting unaffordable housing.

(Snail and friends in unaffordable Taipei.)

Colebatch's article also refers to another recent controversy: whether Australian house prices have been pushed up by foreign buyers, which reportedly had been given a filip by the Federal Government when it relaxed the regulation of such purchases by the Foreign Investment Review Board last year.

Here at the Brown Couch we watched with amusement as the TV current affairs shows tried to report this one, not sure whether to appeal to the presumed racism of their audience (ie 'cashed-up Chinese are buying all our houses – boo!'), or their presumed greed as house-price speculators (ie 'cashed-up Chinese are buying all our houses – hooray!').

The Government is now moving to tighten the regulations up again. The Urban Taskforce, the developer lobby group, liked the relaxed approach. Its Chief Executive, Aaron Gadiel explained:

a renter will not be fussed if their landlord lives in Australia or overseas – they just want a home. By allowing foreign investors to purchase new housing, more apartment development is made possible, which in turn means more homes available to renters.

Fair enough – up to a point. This position holds only in relation to investment in newly built housing, not purchases of existing stock. It is not clear that overseas landlords have done any better than their Australian counterparts in building new stock, rather than just buying and bidding up the price of homes already in existence.

The Housing Debt Mountain

This afternoon Steve Keen commences his long walk from Parliament House to Mount Kosciuszko, turning a losing bet about house prices into a campaign against the mad financing – and daft government policies, like the First Home Owners Grant – that makes housing unaffordable.

(Mount Kosciuszko)

(Mount Debt)

The Brown Couch wishes that the wind is at his back.

Congratulations, Murdochs

Double congratulations from the Brown Couch to glamorous Sydney couple, Lachlan and Sarah Murdoch.

(The Murdochs)

Congratulations first on the announcement today of the birth of their third child... and secondly on the news that they have entered into a two-year fixed term agreement for Coolong, the handsome Vaucluse pile. The Murdochs are tenants.

(Coolong)

Better do the condition report very carefully.

The Murdochs are one of the 40 per cent of New South Wales renting households with dependent children. In fact, at the 2006 Census, 16 per cent of all New South Wales residents living in rental housing were children aged under ten.

Subletting: how the draft Bill would work

The REI has been banging on about the subletting provisions of the draft Residential Tenancies Bill again. They just don't get it. As a service to confused agents, here's how the subletting provisions would work.

For the purposes of the exercise, I'll need to employ a couple of educational aids. Meet Tina Tenant and Sally Subtenant:

(Tina Tenant (left) and Sally Subtenant (right))

Now meet Lenny Landlord:

(Lenny Landlord)

Let's begin.

Scenario 1: Tina is thinking of subletting to Sally without Lenny's consent.
The draft Bill says: she better not. If she did, Tina would be in breach of her tenancy agreement. Lenny could, if he so chose, give a notice of termination on this ground. (This is the same as the current law.)

Scenario 2: Tina is going overseas for six months. She asks Lenny if she can sublet the entire premises to Sally while she is gone.
The draft Bill says: Lenny can refuse consent – no ifs or buts. He can refuse even if it is unreasonable to so. (This is the same as the current law.)

Scenario 3: Tina wants Sally to move in with her. She asks Lenny if she can sublet the spare room to Sally.
The draft Bill says: Lenny can refuse consent, but not unreasonably. (This is a change from the current law – and a pretty minor change at that.)

Let's look more closely at what the draft Bill says about 'reasonable refusal'.

Scenario 3a: Tina asks Lenny's consent to sublet the spare room to Sally. Lenny knows about Sally – and he would never give a tenancy to her if she applied for one.
The draft Bill says: Lenny can refuse consent. The draft Bill expressly provides that a landlord may refuse consent to a subtenant if the landlord would not have approved that subtenant for a tenancy.

Scenario 3b: Tina asks Lenny's consent to sublet the spare room to Sally. Lenny says 'no no, I don't care who it is, I'm not even going to consider it.'
The draft Bill says: Tina may not go ahead and sublet the spare room – that would be a breach. However, she may, if she so chooses, apply to the Tribunal for an order allowing her to sublet the spare room. The Tribunal will decide whether Lenny's refusal was unreasonable.

This is what the agents have been making so much noise about. Not that big a deal, is it?

Caught in the cogs of the tax regime: Colebatch

Just a note directing Brown Couch readers to the terrific piece on housing affordability and tax by The Age's Tim Colebatch.

While housing is a tax shelter, more and more money will flow into it. That money will keep bidding up prices, pushing them further out of reach of aspiring home buyers.... Remove the two big tax distortions of the market. End the exemption of the family home from capital gains tax. End the tax break for negative gearing - or limit it to new homes built by the investor. And, at the very least, require temporary residents to report their property purchases, so we can know whether we have a problem or not.

Follow that link!

More praise for the draft Bill - the view from over there --->

After much sleuthing and snooping around, we’ve finally stumbled across our very own copy of the Real Estate Institute’s “preliminary submission” on the draft Residential Tenancies Bill 2009. (Hint: It’s now on their website!)

Given what’s been bandied about in the press over the last couple of months, we could have guessed what’s in it. But, in case you missed the earlier dispatches, here’s what’s getting their goat:

- The Institute is concerned that the “break-fee” concept will so unsettle existing power dynamics that tenants will use them as a threat, to badger landlords into silly things they shouldn’t have to worry about – like fixing things, and not putting the rent up too often…

- The Institute is concerned that having to have a reason when refusing to allow tenants to sublet – and not having complete control over their tenants’ choice of flatmate anymore – will take all the fun out of being a landlord…

- The Institute is concerned that being unable to refuse, without a reason, the planting of a shrub, the painting of the back fence, or the hanging of a picture in the living room, will suddenly result in the construction of a new billiards room out the back, and a second toilet downstairs – all without council approval!

- The Institute is concerned that a minor adjustment to the law about challenging rent increases is nothing short of rent control.


We have to admit, these concerns seem rather baseless to us here at the Brown Couch, and we have our suspicions that the Institute is simply trying to push some political buttons. Aforesaid issues aside, they have actually covered very little ground considering the nature and number of reforms currently under consideration. Instead of offering valuable insight into whether or not the proposed changes might work, they’ve treated us to a rather gruff lecture on why new laws will make life miserable for us all – and it’s not without its share of vitriol and blame.

According to the Institute, “ the NSW property market (upon which the Government is heavily reliant for revenue) must be attractive for both NSW and external investors”. Fair enough… But research consistently shows that the rights of tenants and landlords are pretty far down the list when it comes to decisions to invest (or disinvest) in property. For that matter, there are plenty of other, more appropriate ways to make the NSW property market an attractive place to park your money. The Residential Tenancies Act is not the place to try and meet this objective.

Linked to this idea that investment is discouraged by regulation is the idea that landlords should not have to bear the risks of their investments. In 2007, and again in 2009, the Institute said, “Investors select an investment for return, and is (sic) not driven by a desire to provide housing.” It’s fair to assume, then, that landlords are in it for the capital gains… Tenants, on the other hand, are far less likely to be entering into rental agreements on their accountant’s advice – they’re just looking for somewhere to call home. Landlords do not become landlords in order to give tenants what they need. Landlords become landlords in order to make a profit. How unfortunate, then, that houses are so fiendishly expensive, and that their only real value is in their capacity to house…

The Institute would have us believe that proposed changes to the law will increase landlords’ risks. With increased risks come increased costs. With increased costs come increased rents… What the Institute fails to point out, though, is that each anticipated “new” risk already exists for landlords. Tenants live in houses, and living in houses causes wear and tear. Sometimes tenants don’t live in houses, but landlords still have to pay their mortgages. Sometimes tenants move away unexpectedly…

The simple fact is that investing in real estate is a risky, and costly, business. Between buying and selling, most landlords are going to be out of pocket, and will quickly go broke if they don't have the cash-flow to cover their expenses. Tenants assume their own risk, too - that of making a home out of a property they have no real control over. Landlords can convert their risk into huge wads of cash, if they manage it well. Tenants can't.

Devising new and innovative ways of reducing the cost of being a landlord is of course a worthwhile pursuit. But really... Insisting the Residential Tenancies Act be used to pass foreseeable but unwanted costs onto tenants is hardly the way to go.

Finally, the Institute seems to think that repeating the mantra "it's not fair" over and over again will somehow make it so. Apparently, "landlords and property managers are sick and tired of a tenancy system which is heavily biased in favour of tenants". But this critique of existing tenancy law doesn't stand up to scrutiny. Generally speaking, the most sought after Tribunal order for landlords is to recover possession of premises. This can be enforced by the Sheriff (using reasonable force, if necessary). For tenants, the most sought after Tribunal orders are for repairs and maintenance, or for observance of peace, comfort and privacy. Neither of these can be enforced, and remedies such as compensation can be hard to obtain if the landlord won't play by the rules.

Fixed term agreements

Another chart from the ABS's treasure trove of data on Housing Mobility and Conditions, this time on the proportion of tenants who have a fixed term agreement, and the lengths of those fixed terms, for each Australian State and Territory and Australia overall.

(Source: ABS Housing Mobility and Conditions 2007-08, table 29. Click on the image for a better view.)

It's interesting to speculate as to the reasons for the variation between the States and Territories – particularly New South Wales having both the lowest rate of fixed term agreements and the lowest rate of 12-month fixed terms.

Because tenancy agreements usually begin with a fixed term, part of the explanation may be mobility and turn-over of tenancies. Elsewhere in the ABS's data, the two jurisdictions with the highest rates of fixed term agreements – the Northern Territory and Queensland – are shown to also have the highest average number of moves by households... but then again, New South Wales is about average on that score, not last.

Another reason might just be the different practices of agents in different jurisdictions. I know the Tenants' Union of Queensland is concerned that agents there are increasingly asking tenants near the end of a fixed term to sign up to another – and threatening them with termination notices if they don't – apparently the idea being that tenants who move will do so in breach of a fixed term and therefore be liable to compensate the landlord for loss of rent until a new tenant comes along.

I'm inclined to think that there's no one reason, and there may be just as much variation within jurisdictions as between them.

On the other hand, though, one could also say that the graph shows a strong consistency between the various States and Territories – in particular, that very few tenancies are for terms other than six or 12 months. In the debate about housing affordability, you often hear suggested that wouldn't it be good if there were more long fixed term tenancies. As the graph shows, it's an idea that has virtually no basis in current practice.

And for good reason: long fixed terms can be burdensome and expensive for tenants, as more and more Queensland tenants are apparently finding out, and in a rental market that's dominated by small landlords (most Australian landlords own a single property) who don't trade on their reputations, you'd have to be brave to enter into a long fixed term with a landlord you did not already know well.

And long fixed terms don't fit well with the objectives of all those small-holder landlords either – I'm sure many don't want their sole asset tied up with a long fixed term, especially if their main game is to sell when it suits them, including into the owner-occupied market.

That's the main cause of the insecurity of renting, and it cannot be fixed without a fundamental reform the structure of ownership of rental housing. That's quite a job. In the meantime, we seek a much more modest reform to our renting laws in the name of security – abolition of 'no grounds' terminations, and their replacement with certain prescribed reasonable grounds for termination. This sort of reform would not entail or effect a change in landlord's investment objectives, but it would prevent unfair, abusive, discriminatory or retaliatory terminations and give all tenants at least a little more peace of mind.