Monday, May 7, 2018

The bond is too damn high

Paying the bond is a real hardship for many tenants. Tenants move on average every 2 years, and for many its much more frequent than that! NSW Rental Bond Board data shows of tenancies ending in 2016 and 2017 more than 50% of tenancies ended after less than 18 months, and a full third ended in less than 1 year. That is a lot of people moving home!

To make matters worse, there is often a cross over period between tenancies where a renter has had to pay a bond on the new place, before the bond from the previous home has been released. Tenants also run the ever-present risk that an agent/landlord will make a claim on their bond - whether or not there appears to be any merit to the claim.

However, it is also important to note that the stats suggest that most tenants receive their bond back in full, or with very minor payments to the landlord. Over the two years 2016 and 2017 there were more than half a million bonds released from the Rental Bond Board - 57% of them returned to the tenant in full and 75% of tenants received more than half the bond back.

Of the bonds where some amount was claimed by the landlord, 41% were for an amount of less than $500.

Several companies have recognised the issue of bonds as a pain point for tenants and are pushing the boundaries of the law and math to try and work out how best to insert themselves into this process. For people who don't have the money for the bond there are currently pay day lenders, bond loan specific companies, and bond insurance products. Now come bond “surety” (or “guarantee”) products where the company promises to pay the landlord if there is a compensation claim at the end of the tenancy. Though not technically loans they function in the same manner - you have money in your pocket that you would not have had before, and you pay fees which effectively constitute interest on that amount.

Some bond surety companies have even attempted to promote themselves as a response to housing affordability. The ACT government has apparently rushed to allow at least one such company, Snug, to operate their BondCover product, to the dismay of some in the territory. We examine Snug’s BondCover in a companion piece also published today looking at whether BondCover works well for tenants. In this piece, we’ll focus on the broader issues raised.

Are bonds a tax?

Snug has taken to pointing out recently that bonds are an extra tax on renters. This is true. Bonds do create a kind of tax - but they are levied by landlords who require their payment as a condition of securing a home. While their stated purpose is to act as an assurance for the landlord, the effect of that payment is to cost the tenant the potential benefit of doing something else with the money. As bonds are refundable, strictly speaking the tax is 100% of the potential for using that money for something else rather than the bond itself.

These are known as private taxes – a cost which someone with no alternative is forced to pay to a private entity. For a further introduction to the concept of private taxes, we recommend this article on the subject from economist Philip Soos.

It is clear to us that Snug’s BondCover makes this private tax burden heavier, not lighter. The current rental bond board system doesn't solve the problem, but does change the private tax to something approaching a public one, which allows the benefit of the tax to be shared beyond only the landlord.

Snug's BondCover seeks to convert this back to a private tax, with the benefit mostly flowing to them. In the companion piece we meet a tenant, Jen, who finds that she is even worse off than if the landlord kept the bond themselves - here is a simplified version of a chart showing by how much Jen is worse off if the bond is in the Rental Bond Board or under BondCover.

So what does this bond tax currently pay for? The Rental Bond Board in NSW has $1.4 billion in bonds, which is then invested in a portfolio by TCorp, NSW Treasury’s investment arm. The interest the Bond Board earns on these bonds is spent on various aspects of infrastructure around renting – mostly Fair Trading NSW’s tenancy-related activity such as administering the Rental Bond Board, and administering complaints as well as funding the tenancy-related parts of the NSW Civil and Administrative Tribunal.

A small portion (about $6million a year) is used to partially fund the Tenants’ Advice and Advocacy Program which assists more than 25,000 tenants a year, and we at the TU receive some of that funding for our role in supporting the services.

We might spend the interest earned on tenants’ bonds differently if it was up to us. There are legitimate questions about the benefit tenants receive from this investment. But it is unquestionably better value than the traditional alternative which gave all the benefit to the landlord. Giving it and more to Snug instead doesn’t seem a better deal for renters.

Tenants will generally be distinctly worse off. Rather than the landlord demanding a fully refundable bond paid to the Rental Bond Board which costs the tenant potential interest, BondCover is an non-refundable amount which costs the tenants both actual fees and potential interest.

So, are there any other ways to reduce the hardship caused to tenants by bonds?

The NSW state government, and other state and territory governments, already has a solution available to them. For several years now, people who are eligible for social housing have been able to pay for their bond in installments over 12 months or more on an interest free loan.

Word from Family And Community Services who administer the program is that this is a highly successful program. It is a low cost, high impact program that effectively reduces the strain on households during their too-frequent moves.

We could consider this a pilot program, and expand its eligibility to every tenant in the state. Most tenants will not need it, but for those that do, it would be a very simple solution. With modern application processes the administrative costs for government are minimal and even if they are passed on to tenants it would be at a fraction of the cost of Snug. Fair Trading NSW could even use the money already sitting in the Rental Bond Board accounts to cover the loans – a true win-win.

Of course, we could also reduce the number of moves by ensuring the private rental market is not the insecure nightmare many experience (by the way, we've got a pretty good idea how to make that fairer too) – or even expand our public housing stock to ensure everyone who needs a home, has one.

Now that would be a real market disrupter.

Disclaimer: As discussed in this piece, the Tenants' Union of NSW receives some funding from the interest the Rental Bond Board earns on tenants' bonds. Details of what the bond interest money is spent on are detailed in the Rental Bond Board's annual reports.

Does BondCover have you covered?

In this article we take a look at a product known as bond surety, or bond guarantee – Snug’s BondCover – and whether it is a good deal for renters. The ACT government has apparently made regulation to allow Snug and other products lawful in that territory, to the dismay of renting experts there. See our companion piece also published today which discusses the rise of these products and offers some ways of thinking about the issue of bonds.

What is Snug’s BondCover?

In Snug's BondCover model the landlord agrees for there to be no 'bond' for the tenancy. Instead, the tenant pays between 5% and 9% per annum fee either as an annual, monthly or weekly fee to Snug (along with an initial administrative set up fee). In exchange for that fee Snug issues a certificate guaranteeing to the landlord that if there is any breach at the end of the tenancy for which a bond claim would ordinarily be made, Snug will pay it out.

To receive coverage by Snug, they must judge you as having a good tenant history and the landlord must also agree to the arrangement.

At the end of the tenancy, if the landlord makes a claim which the tenant doesn't agree with and it's under $500, Snug will assess the claim by the landlord and pay out if they think it's appropriate. It is not clear what expertise Snug has in assessing these kinds of claims. They are backed by IAG insurance though in our experience insurance companies aren't necessarily well-versed in tenancy law either.

If the landlord’s claim is over $500 the landlord will need to make an application against the tenant in the relevant court or Tribunal (in NSW the Civil and Administrative Tribunal or NCAT). Snug will pay the landlord according to the orders made by the Tribunal.

If Snug pays out to the landlord, they will attempt to recover the money from the tenant. If the tenant disagrees with Snug's assessment for under $500 Snug would need to take the tenant through the Local Court. Dealing with disputes in the Local Court tends to be more costly and difficult than dealing with disputes in the Tribunal – which is designed to be more accessible and less formal for tenants.

We understand the Snug contracts attempt to ensure that if they pay out money to the landlord you will owe them the money, even if it can be proven that they paid out incorrectly. For instance a landlord might apply to the Tribunal and be successful initially, but after Snug pays out the Tribunal decision might be overturned. It will be interesting to see how that pans out in practice.

Snug's selling point for tenants is that they will have their money in their hands, to do something more productive with it. Snug asked its potential customers what they would do with the money. 68% said either save or invest. 6% said spend it on a holiday. The other 27% of responses weren't made public.

Material on Snug’s Facebook page appears to encourage people to spend their bond money instead on very risky investment strategies like trying to find the next Amazon. This would be astonishingly poor financial advice for anyone who needs to be concerned with the affordability of their housing.

There are some transparency issues with Snug’s product. When using the example given on Snug’s website (a bond of $1,500), two different prices are given for the same bond amount. The first, static pricing example says $110 for a 2 bedroom. But when you start getting a quote in the second its jumped up to $140 for a 1 bedroom. We haven’t attempted to gain a full quote.

The fee is between 5-9% which is really a large range. It would be good if there was some transparency on how these fees are actually calculated. Clearly the number of bedrooms makes a difference. What else does?

The fee reduces over time as various loyalty bonuses are applied - but note the fine print: you appear to start with an all new administration fee and the higher cost, except for a 5% “no claim” discount, with each new property.

So is Snug’s BondCover worth it?

Let’s take the example from the website and use the example of a $1500 bond for a 2 bedroom apartment that a tenant, let's call her Jen, is going to move in to. To give Snug a bit of help, let's also assume we know Jen is going to get to stay for 3 years (a very long period for most tenants at present – only about 20% manage to stay for 3 years or longer). Jen takes her $1,500 and instead of putting all of it in the Rental Bond Board, she gives $110 of it to Snug. Now she starts the tenancy with $1,390 in her pocket. How much would Jen have to earn on the $1390 to avoid being worse off with Snug?
Assumes interest compounds daily, and tax is paid on interest earned at 2017-18 rates on additional income for a lone person household earning $60k pa - just under the income needed for rent to be considered affordable at $375 per week
After 3 years, Jen would have needed to have achieved returns of 8% a year just to cover the snug fees. In various parallel universes, some Jens who put their money into managed investment funds tied to the stock exchange will have achieved that – but many won’t have. They aren’t at all reliably performing at above 8% returns per year. The Jens who kept their money in high interest bank accounts would be topping out at about 3% pa at the moment, so those Jens are more than $100 worse off. The 6% of Jens who went on holiday effectively paid $223 extra for their tickets.

To explore the issue fully, we also ran the numbers where Jen would be with the money without having to pay a bond at all, and if the landlord held the bond (as they used to before the Rental Bond Board was implemented).

Jen is actually worse off in terms of productive use of her $1500 using Snug than just handing the whole bond over to the landlord.

Who is the real customer of Snug’s BondCover?

So, apart from Snug, who really benefits from this BondCover scheme? Ultimately, BondCover will need to be of benefit to either landlords or their agents if Snug is to run a successful business. It is landlords, not tenants, who choose whether a bond is taken and thus whether BondCover is required. Consider - if a landlord says they want BondCover and the tenant says they don't, the tenant might choose not to move in but you can be pretty sure someone else will. If the tenant says they want BondCover and the landlord says they don't - then there is no BondCover for that tenant.

You might think it could prove difficult to convince landlords to trust a start-up merely promising to have cash available, since landlords already have ready access to cash set aside specifically for the purpose of reimbursing them for any costs at the end of the tenancy. There are two clear advantages for the landlord and their agent.

Unlike a Tribunal member, Snug needs to consider its relationship with the landlord in order to ensure return business – the customer is always right and in this case, landlords are the real customers, even though they are making tenants cough up to pay for it. There will be a real incentive for landlords to make even more claims that come in just under $500, since that avoids the need for Tribunal scrutiny. Even if the claim is unsuccessful it saves real estate agents and landlords both time and money. We would expect to see more, not less, claims made on tenants’ bond money.

The second is that it appears Snug now pays referral fees equal to the first year's fee to real estate agents who sign their landlords up. This has code of conduct implications for real estate agents who need to disclose this kind of payment system in NSW, but it certainly could be enough to grease some wheels.

Is BondCover legal?

No. Not in NSW.

You don’t even need to take our word for it. The Snug website claims that BondCover is legal in all states where it is offered. It isn’t offered in NSW, and there’s a lobbying attempt to have government change the law, so you can be pretty sure it isn’t legal here.

There appears no good reason why a government would make a product like this legal – the math just doesn’t work out for tenants.

Disclaimer: As discussed in the companion piece, the Tenants' Union of NSW receives funding from the interest the Rental Bond Board earns on tenants' bonds. Details of what the bond interest money is spent on are detailed in the Rental Bond Board's annual reports.

Friday, May 4, 2018

Fair renting laws: An idea whose time has finally come?

In 1975 the Henderson Poverty Inquiry handed down its final report. One of the major recommendations in the Law and Poverty section, and the only major one which was not implemented, was ending the practice of landlords evicting tenants without a good reason.

Listen to Brendan Edgeworth, Professor of Law at UNSW speaking on ABC Radio National last year.

Is Australia finally, 43 years later, on the verge of accepting the need for change? In just the last few years we have seen a growing recognition of the issue. A number of campaigns have started - the "Make Renting Fair" campaigns in both NSW and Victoria collectively bringing together more than 160 organisations across the two states including NGOs, faith-based groups, unions, councils and tens of thousands of individual tenants and supporters.

New South Wales

Late last year the social housing and homelessness sectors launched their national Everybody's Home campaign - and included in their platform is ending no grounds evictions. While some of the organisations involved in Everybody's Home have been campaigning on this issue for some time, it is significant that it showed for the first time the public support of community housing landlords for ending no grounds evictions.

The Sydney Alliance recently included renting questions in an opinion survey in Penrith and found that 82% of residents disagreed that landlords should be able to evict tenants without giving any good reason).

Now in the last few days, GetUp! has launched their Future to Fight For campaign, with 7 broad-reaching changes including a platform of very positive housing reforms. The platform includes implementing a broad based land tax, increasing public housing, and amongst a range of tenancy law proposals - an end to "no grounds" evictions.
With more tenants than ever before, and more attention to the issue of a fair renting system - are we finally seeing the voices of tenants and their supporters growing loud enough to create real change and bring Australia's tenancy laws, if not into the 21st century, at least in to the 1970s?