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.