Friday, September 26, 2014

How landlords think, and how it shapes the rental market

'Landlords hit by glut of apartments'! That's a recent headline from the Fin Review; we enjoyed reading it literally.

As Ned said over on our facebook page, the article is an insight into how landlords think – landlords like Hugh Eriksson, marketing executive, North Shore local politician and landlord, who reportedly has 'bent over backwards to keep rents near to stable', such is the glut of apartments from which tenants may pick. Why, this young pup landlord has 'even allowed pets'! Oh, the humanity.

How landlords think affects more than just your ability to choose whether you'll keep a pet, important as that is. How they think affects the shape of the rental market. As we saw in those charts from Judy Yates, if there's a glut of rental housing, it is not at the low-cost end of the market, which is very tight indeed, but further up the scale of rents.

And how landlords think affects not just affordability, but also the security of rental housing.

Eriksson says this about his thinking as a landlord:
“You don’t just buy property for rent – you buy it for the capital growth,” he says.

Rent is money that tenants promise to pay, week after week, under legally enforceable contracts, but when it comes to capital gains, there's no such promise; pursuit of them is really just gambling on someone coming along, at some point in the future, who is willing to pay more. So why is Eriksson – like so many other landlords – so interested in capital growth?

It's because in our tax system, rental income (and income from work, interest, etc) is taxed at the full marginal rate – while capital gains are taxed at only half that rate.

Yes, we tax the proceeds of speculation – gambling, really – at half the rate of the proceeds of work, bank savings and rental income. Go figure.

About 1 266 000 Australian taxpayers have gone and figured, and borrowed to buy properties that rent for less than what it costs to own them (because of interest, more than anything). Two-thirds of landlords are in this situation, which is known as negative gearing. They are gearing, or leveraging, into the prospect of lightly-taxed capital gains – so they hope – while losing income.

In an internationally unique act of generosity, our tax system makes those loses easier to take by allowing the costs of rental property speculation to be deducted against other (non-rental) sources of income. This means landlords can wear bigger costs and push their leveraging harder.

The tax system also gives their hopes of capital gain a boost by not taxing at all any capital gains on housing used for owner-occupation at. This spurs people with money to spare to spend it on their own housing – housing that they may buy from another owner-occupier, or a from landlord looking to realise their capital gains.

So, from the point of view of the speculator landlord, the best prospects for capital gains are with properties that owner-occupiers might buy, particularly owner-occupiers who are trading up and speculating in their own housing. That means relatively high value, 'premium' properties, or as premium as the speculator can get. Think established locations, which tend to have established properties, and properties that are renovated or fit to be renovated.

As Erikkson says:
“You use the rent to cover the ­holding costs while you get the DA approvals for renovations.”
Once the renovations are done, he sells. “You get your capital gain that way,” he says.

You also get expensive and and chronically insecure rental housing that way.

Expensive because speculator landlords are buying relatively high-value, high-rent properties, and passing on the low-value, low-rent stock when it comes up for sale. And they're getting those higher rents too, because they're not really adding to supply in net terms (that is, as they're growing the amount of properties in the rental market, they are also growing the number of renters), and the growth in renters is coming from higher income households who can afford to pay higher rents. These households might actually be getting quite a bit of choice between nice houses in nice parts of town – enough choice, even, to be able to get their landlords to 'bend over backwards' on rent increases and pets. (Mind you, many of them would still probably rather be owners.) But for low-income renters, the low-rent properties they need have become scarcer, and less cheap.

And it's chronically insecure housing because it is is owned to be sold, particularly into the owner-occupier market.

These are the unhappy results of the way landlords think about owning rental properties. To change the rental market for the better, we need to change landlords' thinking, and to do that we need to change the rules that encourage speculation in housing. 

1 comment:

  1. May I ask, does the blogger of the Brown Couch own property?


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