For Whom the Bell Tolls

Matthew Bell, an economist at Australian Property Monitors, reckons we've just had 'the year of the renter', and now we should get ready for 'the decade of the landlord.'

Says Bell:

Renters were the winners last year when median asking rents for both houses and units in Sydney rose by just $10 per week, up to $460 a week for houses and $420 a week for units. Such growth of just over 2 per cent was well below the longer-term trend of 6-7per cent annual growth, and down heavily on the 12-13 per cent growth rates experienced in 2007 and 2008.... It is hard to see this continuing.

It won't continue, according to Bell, because of improved employment prospects, rising interest rates, population growth, undersupply of housing, low vacancy rates - the usual suspects.

Here's a few things worth keeping in mind when reading Bell's forecast:

First of all, always remember that APM is a business and they're flogging a product: specifically, data about property prices, packaged up in reports for the discerning investor/speculator. To move this product, they've got to get people thinking now is the time to buy a property. Depending on the circumstances, they make the pitch in one of several different ways. Usually the line is: rents just keep going up and up, you better get into the market (and buy an APM property report before you do). This year it seems to be: it was a lean year for landlords last year, but rents are set to go up and up, so get in on the ground floor (and buy an APM property report before you do).

So, whatever their talents, APM have an interest in predicting great things for landlords. No surprises there - and it's not unique to APM. All the other forecasters have an interest too.

Now, more specifically about APM: when Bell talks about rents, he talks about 'asking rents', which are what APM reports on by monitoring agents' 'to let' ads. As discussed previously, 'asking rents' are different from the rents tenants actually sign up to (last time we called these 'new agreement rents', and these are what Housing NSW reports on in the Rent and Sales Report, using data from the Rental Bonds Board), and these are different again from the rents that all tenants - new and longstanding - pay ('established rents', which can be derived from the Census and the Consumer Price Index).

In that previous discussion, we saw how median 'asking rents' were a lot higher than median 'new agreement rents': on average over several quarters, they were higher by $45-50 per week. This meant, we suggested, that exuberantly greedy landlords and agents had lost the plot and were overshooting what the market could bear.

I wonder if what happened over the past year is that landlords and agents felt less exuberant and overshot less - that is, they narrowed the gap between asking rents and new agreement rents. We get an indication of this looking at the Rent and Sales Report and the CPI. Keeping in mind that the available figures are not directly comparable, these sets of data show rents increasing through 2009 – new agreement rents up 3.9 per cent (Sept 08-Sept 09) established rents up 5.7 per cent (Dec 08-Dec 09) – not as much as in previous years, but still more than APM's 'asking rents' measure indicates. Nor is it exactly consistent with APM's line that tenants have had a year off from rent increases and are ready to pay them again.

Another thing to keep in mind about APM: there's an issue with their figures changing from report to report. We noted this last year: then, in so many of their reports the figure they gave for the 'asking rent' for the same time one year previously was lower than the figure they actually reported at that time; this made the increase in asking rents over the period appear larger. This time round, the figure APM gives for the median asking rent for Sydney units one year ago (that is, December 2008) is $10 more than the figure they actually gave in December 2008. This change makes the increase in asking rents smaller than it would otherwise have been – which is in keeping with APM's line this time about tenants having a year off from rent increases.

(There might be an innocent explanation for APM's changing figures – if there is we'd be pleased to hear it. Without an explanation, people might draw their own conclusions from the fact that direction of each of the changes – whether down or up, and consequently whether the increase in asking rents is larger or small – always assists the line APM is taking at the time.)

UPDATE: Our take on the draft Bill, in brief

The Good

Residential tenancy databases. Finally: the draft Bill proposes legislated rules about residential tenant databases that will apply to landlords, agents and database operators. It will oversee how listings occur and how to find out about a listing, and provides for the resolution of disputes. Given the importance of this reform, it is vital that the legislation gets it right.

Co-tenants. Under current laws, a departing co-tenant cannot end their liability for rent and other costs, while other co-tenants remain. The draft Bill would allow the termination of a co-tenancy, and the severance of liabilities, by giving notice to the landlord and remaining co-tenants.

Domestic violence. Where a final Apprehended Violence Order excludes a violent co-tenant from their premises, the draft Bill would automatically terminate their tenancy. The tenancies of other co-tenants would remain on foot. This proposal will enable the rental liabilities of victims and perpetrators of domestic violence to be severed.

Rent arrears. While landlords would be able to commence termination proceedings more quickly, tenants would be assured that if they pay their arrears, their tenancy will be saved – even if the Tribunal has already ordered termination. Tenants facing eviction for arrears would not be tempted to keep their money for a new bond, and landlords would be better equipped to recover arrears.

Break fees. Tenants who move out during the fixed term of a tenancy would be liable to compensate the landlord with a pre-determined ‘break fee’. This is much less complicated than the current “breach/loss/mitigation” model. The proposal is controversial – the draft Bill seems to create a statutory right for tenants to unilaterally end a fixed term tenancy. It should simply seek to codify the manner in which appropriate compensation is calculated. It would be unfortunate if this reform is abandoned on account of this controversy.

Terminations by tenants. Tenants would be able to end a tenancy with no penalty if they are offered a social housing tenancy, or take up residence in an aged-care facility, during their fixed term.

The Bad

Access to premises for sale. The Bill envisages landlords and tenants making agreements about days and times to show a property to prospective purchasers. But any negotiations would be undermined, by giving landlords access on 24 hours’ notice without limiting the number of visits, as well as fines of up $2 200 for tenants who refuse to give ‘reasonable’ access. Agreements will only happen when landlords’ rights of access are restricted and they have a reason to negotiate for more. These proposals are a step backwards, and will lead to more disputes between landlords and tenants.

Uncollected goods. The time allowed for collecting goods at the end of a tenancy would be decreased to just 14 days, before a landlord can dispose of them. The draft Bill would give a former-tenant a right to compensation if the landlord disposes of goods unlawfully – but given the options for a landlord to dispose of goods may include giving them away, this could well be meaningless.

Unfinished Business

Terminations ‘without grounds’. Renting in NSW will remain unnecessarily insecure, as landlords would retain their current ability to end tenancies ‘without grounds’. Notice periods would be increased, but the Tribunal would lose its discretion to take ‘circumstances of the case’ into account during termination proceedings. Under these proposals, termination notices without grounds will always end a tenancy. The law should be trying to discourage landlords from using notices without grounds, not making them more attractive.

Exclusions. Those renters who are kept out of the current Act – particularly boarders and lodgers – will continue to be excluded by the draft Bill. These exclusions highlight the urgent need for occupancy legislation that covers all marginal rental housing in NSW.

Real estate agents stuck in the Age of Unreason

...and we're back. Happy new year, Brown Couch readers.

In the news today: how changes proposed in the draft Residential Tenancies Bill are 'the key to chaos', because they will require agents and landlords to act not unreasonably if tenants ask their consent to subletting or making minor alterations to the premises.

All manner of doom and woe is predicted by the Real Estate Institute should such a measure come to pass: landlords 'will not be able to afford the risk of renting and sell up, leaving Sydney's already tight market shorter still.' (What, they're going to knock the houses down when they go?) The viability of the rental property sector, the REI seems to be saying, depends on the ability of landlords and agents to act unreasonably; that is to say, without recourse to rational thought.

(Rene Descartes. 'I think therefore I am not a real estate agent'.)

Actually, the changes proposed in the draft Bill are not terribly revolutionary - in fact, they are really quite modest and in some respects allow landlords and agents to continue acting unreasonably.

Here's what the draft Bill says in relation to tenants' requests to make alterations:

• if the alteration would be more than 'minor or cosmetic', the landlord may refuse consent, including unreasonably. In other words, in these cases landlords would retain their current right to refuse to give the request any thought and reject it out of hand, or to reject it for daft reasons (eg my astrologer says the proposed alteration is inauspicious; the tenant was wearing a green shirt when he asked, and that's an ill omen).
  
• if the alteration would be minor or cosmetic, the landlord may refuse consent, but not unreasonably. If the tenant disagrees with the landlord's decision, they can apply to the Tribunal to have the dispute resolved (which is better than the tenant simply going ahead and doing the disputed alteration).
  

Here's what the draft Bill says about tenants' requests for consent to transfer their tenancy or sublet the premises:

• if the transfer or sublet would be for the whole tenancy (ie all the original tenants would be moving out and an entirely new lot of persons would be moving in), landlords may refuse consent, including unreasonably.
• if the transfer or sublet is only partial (ie one or more of the original tenants would be staying on with the new person moving in), landlords may refuse consent, but not unreasonably. The draft Bill goes on to expressly provide that it is reasonable to refuse consent where the landlord would not have accepted the proposed new person for a tenancy in the first place. As with minor or cosmetic alterations, disputes about refused consent may be resolved by the Tribunal.
  

All in all, this amounts to a pretty gentle introduction to the Age of Reason for landlords and agents.

Seasons Greetings

Having completed the TU's submission on the draft Residential Tenancies Bill – download your copy here – your Brown Couch correspondents will now decamp to their respective banana lounges for a few weeks.

On behalf of N.C. and myself, may I wish you all the very best of the holiday season. We look forward to seeing you again on the Brown Couch in the new year.

In the meantime, please enjoy the following Christmas-cracker-worthy jokes, japes and wheezes from that famous manual of mirth, the 1977 NSW Housing Commission Estates Management Field Officers' Handbook.

Ho ho ho. Plus, the sixpence in your pudding: some sage advice to housing officers from that same tome:


See you next year.

Housing speculation culture studies: 'The Castle'

The boffins from the Brown Couch's Institute of Tenancy Culture Studies are still hard at work on the TU's submission on the draft Bill, so regret that their next eagerly-awaited study of tenancy culture has been delayed.

Instead, the Institute is very proud to host a very special guest lecturer, Prof Ross Garnaut, who will present some of his recent work in the allied field of housing speculation culture studies. Ladies and gentlemen, Prof Ross Garnaut.

(Prof Ross Garnaut)

And the subject of Prof Garnaut's study is: The Castle.

*

In 1997 a low-budget Australian movie dominated the national box office. The Castle cost $500 000 and took nineteen days to shoot. The movie's title was drawn from the platitude 'Each man's home is his castle'. Its major theme was an examination of the rights and value pertaining to home ownership.

(The Castle)

The lead character, Darryl Kerrigan, was an iconic figure of Australiana: working class, egalitarian, down-to-earth, someone who might have been described as 'a good bloke'. He was played by the lanky, laconic Michael Caton, whose moustachioed credulity encapsulated Australia's most adored self-image. The film held an ironic mirror up to Australia. On display were those dimensions of the nation that did not fit with with its self-image of giving everyone a 'fair go'.

The Castle's launch coincided with changes that curtailed the realisation of traditional, passionately held goals of home ownership. That great Australian (or American or British) dream was mutating into volatile and dynamic asset trading. There is no better symbol for this shift than the subsequent career of Michael Caton. After the success of The Castle, he was recruited to host a major television series called Hot Property. In a case of life ignoring art, the man behind Darryl Kerrigan, the embodiment of passionate owner-occupation, became the face of asset speculation. The program offered tips on how to buy, renovate and sell property. This theme grew so strong with passing seasons that in 2000 it was renamed Hot Auctions. This was the very opposite of the quaint owner-occupied culture venerated in The Castle.

What drove this transformation?

Anglosphere house prices had boomed before. They had surged in the late 1980s as corporate freewheeling stoked growth within economies that had experienced recent financial liberalisation. However, the rise in prices was soon brought to heal by high interest rates and then the early 1990s recession.

But the boom that emerged in the mid 1990s went much further. It was described by The Economist in 2005 as 'the greatest bubble in history'. The Economist estimated that from 2000 to 2005, global housing more than doubled in value to more than $70 trillion. From 1995 to the various peaks in 2006-07, median house prices grew by a total of 139 per cent in the United States, 261 per cent in the United Kingdom and 169 per cent in Australia.

The housing market was supercharged by a swing in perception away from home ownership for a roof over one's head, and towards home ownership as investment. The swing towards housing speculation was given a special boost when the US, UK and Australian governments altered capital gains tax laws within two years of one another. The changes made it much more advantageous to receive income from capital gains than from the sale of the services of one's brain or hands.

*

Thank you, Prof Garnaut. For further reading, see Ross Garnaut's very accessible and almost instant analysis of the global financial crisis and beyond, The Great Crash of 2008.

(from Melbourne University Press)

The draft Bill: a preliminary view from the Brown Couch

As promised, here’s the TU’s preliminary guide to what’s proposed in the draft Bill. (Please note: these are the TU's preliminary views only, and they might change as we continue to cogitate on the draft Bill... and as we hear the feedback from our colleagues and constituents – in other words, you).

Access to premises. The provisions for landlords accessing premises to show them to prospective purchasers are, in our view, probably the most disappointing and troublesome of the draft Bill. It envisages landlords and tenants making agreements as to the days and times for access, which is fine, but then undermines any negotiations by giving landlords everything they could want: access on 24 hours’ notice, without limit as to the number of visits, plus a big stick – fines of up $2 200 for tenants who refuse to give reasonable access. We think agreements as to access will only happen when landlords’ rights of access are restricted and they have a reason to negotiate for more. There’s a couple of other access provisions that could do with tightening up too.

Alterations. Tenants would still have to get their landlords’ written consent to make alterations and install fixtures, but where the alteration is minor or cosmetic, the landlord may not unreasonably refuse. Tenants would have to make good any damage or loss of value when they leave, and they would also lose their current statutory right to compensation for fixtures they’ve had to leave behind… but clever landlords know how to avoid that liability anyway. All in all, the draft Bill’s provisions are probably a little better.

Break fees. Tenants who break a tenancy early by moving out in the fixed term would be liable to pay a ‘break fee’ of four or six weeks’ rent (depending on how early they’re breaking) instead of the rent lost until a new tenant moves in, plus the landlord’s readvertising costs, reletting fee, etc. The break fee has the potential to deliver a windfall to landlords – particularly the six-week fee, which is too high – but a flat four week fee would be more straightforward than the current situation and, on balance, good for tenants.

Co-tenants. Big improvements for persons who are on tenancy agreements with one or more other tenants. Under current laws, a co-tenant who moves out cannot end their liability for rent and other costs; the draft Bill would fix this absurdity by allowing a co-tenant to give a termination notice to the landlord and the remaining co-tenants. The draft Bill would also improve the process for transferring tenancies when a new person moves in to replace a departing co-tenant and allow, in special circumstances, a co-tenant to apply to the Tribunal to terminate the tenancy of another of their co-tenants.

Domestic violence. Where a final Apprehended Violence Order excludes a person from premises of which they are a co-tenant, the draft Bill would automatically terminate their tenancy while leaving the tenancies of other co-tenants on foot. A very sensible reform that helps victims of domestic violence get their tenancy arrangements sorted out.

Exclusions. Those renters who are kept out of the current Act – for example, boarders and lodgers – are out of the draft Bill too. There’s one exception to this: educational institutions are excluded from the current Act, but not the draft Bill – though we anticipate they will be excluded later by regulation. The draft Bill would exclude some additional groups of renters too, such as residents of refuges and crisis accommodation, serviced apartments and sharehouses. In the case of sharehouse residents, only those who have written agreements or who have become tenants by transfer or Tribunal order are covered, otherwise you’re a lodger. The exclusions make more urgent the need for occupancy legislation that covers all marginal rental housing.

Holding fees. The deposit many prospective tenants pay in an attempt to hold or reserve premises to let will actually mean something under the draft Bill: if a landlord accepts a holding fee from a prospective tenant, it will be up to the prospective tenant as to whether or not to go ahead with the agreement. Makes good sense.

Long-term tenancies. Tenancy agreements with a fixed term of 20 years or more would be allowed to leave out many of the usual terms, like those relating to repairs. An interesting development, but of little practical importance: virtually no one – landlord or tenant – is interested in a 20-year fixed term tenancy.

Rent arrears. Landlords would be able to commence termination proceedings more quickly, but tenants would be assured that if they pay the arrears, their tenancy is saved – even if the Tribunal has already ordered termination. On balance, this is an improvement for tenants, and landlords too – at the moment, if they get a termination order, many tenants won’t pay the arrears and will use the money instead to move and set up their next tenancy. The draft Bill would see more tenancies saved and more landlords paid. Win-win.

Rent control. No, just kidding. We've searched high and low and there's nothing in the draft Bill that can justifiably be called rent control.

Rent payments and receipts. Some useful reform here: tenants would be able to request a statement of rent payments from their landlords, and landlords would have to provide at least one method of rent payment that does not impose a cost on the tenant – so tenants can say goodbye to those rent card companies that charge tenants for the privilege of collecting their rent.

Residential tenancy databases. Finally: legislated rules about tenant databases (sometimes known as tenant blacklists) that apply to landlords, agents and operators of databases, that set out how a persons may be listed, and that provide for resolution of disputes about listings through the Tribunal. These are some of the draft Bill’s most welcome provisions – but we know at least one tenant database operator cannot see a regulatory loophole without diving through it, so we’ll be suggesting a number of measures to tighten these provisions up.

Social housing. All the current special provisions relating to social housing are incorporated, virtually without change, in the draft Bill… except the drafters have omitted the grandfather clause that prevented pre-July 2005 social housing tenants from being given termination notices on grounds that they were no longer eligible. We think it’s an oversight and will be asking that it goes back in.

Terminations by tenants. Some useful new grounds for termination by tenants during the fixed term of a tenancy: the tenant has been offered social housing; and the tenant is to go into aged care. The draft Bill provides another new ground – that the premises are for sale, and the landlord did not disclose the sale before entering into the tenancy agreement – but this is too narrow to be useful: we think tenants should be able, without qualification, to give a notice of termination if the premises are put up for sale.

Terminations ‘without grounds’. One of the more disappointing aspects of the draft Bill. Landlords would retain their current ability to give notices ‘without grounds’, which makes renting unnecessarily insecure. Notice periods would be increased from the current 60 days to 90 days (and from 14 days to 30 days in the case of notices at the end of a fixed term), which is good for tenants, but the Tribunal loses its little-used but important power to refuse to order termination – that is, termination notices without grounds will always end a tenancy (one exception: the Tribunal retains its discretion where the tenant has been in occupation for 20 years or more). The law should be trying to get landlords away from using notices without grounds, not making them more attractive.

Uncollected goods. If you’re evicted, the draft Bill does not give you long to get your goods out of the premises – just 14 days before the landlord can dispose of them as they see fit (including dumping them at op-shops). Fortunately, personal documents must be stored longer – 90 days – and the draft Bill does give a former-tenant a right to compensation if the landlord disposes of goods unlawfully. We think the draft Bill’s protections for tenants’ uncollected goods should be backed up with some penalties, but overall it would help restrain some of the abuses that currently go on when goods are left behind after termination.

BS Shrapnel

Forecasters to the real estate industry, BIS Shrapnel, are in the media today with a prediction that rents will increase 20 per cent over the next three years.

At the Brown Couch we are not in the business of making predictions, but we are blessed with the power of hindsight. Let's look back to what BIS Shrapnel were predicting for 2009 this time last year...

"In Sydney, the number of new medium and high density dwellings being completed is forecast to fall to a 20 year low in 2009, pushing the vacancy rate to below one per cent,” explains [BIS Sharpnel Managing Director, Robert] Mellor. “Rental properties will remain in short supply, and the national average rental growth is forecast to rise to 10 per cent in 2009, up from the current rate of 8.2 per cent, according to the Australian Bureau of Statistics rental index.”

10 per cent. Over the year to September 2009, Sydney rents actually went up 6.6 per cent (the national figure is a little lower - 6.2 per cent). BIS Shrapnel was out by a factor of 50 per cent.

Tricky business, forecasting.

(Asterix and the Soothsayer.)