In/formal housing - is more formality the answer?

This is the text of an address I gave to the Housing Theory Symposium 2019 on 30th May. Thank you to the organisers, Dr Jathan Sadowski whose tweet is linked below and Dr Sophia Maalsen, for the invitation. For those who were in the room, there may have been hesitation, repetition or deviation from these written notes which I have not adjusted to reflect.

The 2019 Housing Theory Symposium on in/formalism is in full swing! We have a brilliant keynote session with housing advocates @LeoPatRoss and @shelternsw, with @Planosopher launching a policy report on housing informality and vulnerability. pic.twitter.com/mnnhyHvsv8

— Jathan Sadowski (@jathansadowski) May 30, 2019

Thank you for inviting me to speak today. I’d also like to acknowledge that we have gathered on unceded lands of the Gadigal and pay my respects to elders past and present, and extend those respects to any Aboriginal or Torres Strait Islander people in the room. It’s significant we are meeting in National Reconciliation Week whose theme is Grounded in Truth – a demand for a truth-telling that will allow all the people of this land to move forward together.

Australia has historically and continues to be adept at ignoring the suffering of people who it doesn’t really consider full citizens, and even furthering injustice through that wilful ignorance. While incomparable to the racially motivated horrors of Australian-Aboriginal relations, people who rent their homes – especially at the fringes of the private rental sector – suffer shades of this ignorance and lack of truth-telling – or perhaps, a lack of listening to the truth being told. Like water, and like housing, truth can be hard to grasp.

I’m to sketch out the housing landscape - I’m going to take a pretty broad view of that brief and sketch out some thoughts on how we have forgotten many people who rent their home.

An important part of how we construct informal housing is the support of the state for it. A property owner has the full weight of government seeking to enforce their right to housing, and profit.

Renters live under a patchwork of protections. The most formal tenants have legislated contracts, though with significant scope for customisation and therefore uncertainty and informality. There are some penalties where landlords fail to comply with the terms of the Act, but these are practically never applied.

So while landlords retain the weight of government to enact evictions and recover money, the vast majority of enforcement of the Act by tenants is by tenants. And where they do seek to enforce rights, they are subject to eviction, whether actual or the merely the possibility, in retaliation. The only real moderator of behaviour is the market - the risk of vacancy. An unreliable mechanism to be sure.

This is the best case scenario. Once you leave the Residential Tenancies Act, you may be covered by the Boarding Houses Act. You may be covered by the Australian Consumer Law if your landlord is considered to be in business. You may be covered with very little protection by the Landlord and Tenant Act of 1899. A very small number are still in rent-controlled premises under the amendment in 1948. But many, even tens of thousands are covered by no legislative scheme at all.

But should we simply seek to formalise?

Many of you would be familiar with the Commonwealth Housing Commission quote from the 40s:

“We consider that a dwelling of good standard and equipment is not only the need but the right of every citizen – whether the dwelling is to be rented or purchased, no tenant or purchaser should be exploited for excessive profit.”

We have fallen a long way from the promises of those early housing policies, as imperfect as they might have been. But I wanted to remind us all that much of the work of the CHC was in slum-clearances. This was absolutely the informal housing of its time and it is striking the similarities to much of the informal housing we’re seeing today and I know will be in some of the upcoming presentations.

Public housing at arguably its peak was often built on formalising the informal. While we might say it was necessary because of the conditions of that informal housing, we also should acknowledge that sometimes the people living in the slums weren’t able to access the public housing that replaced it because it was too expensive. Formalising the informal does not always achieve what we might assume.

There’s a few more examples I’d like to touch on in this vein.

A few years ago, if you wanted to travel the world on the cheap you could do a hostel or if you knew people in the area you might be able to couchsurf. Famously, that is the origin story of Airbnb. We are watching as it evolves from an informal activity to commercial and now becoming embedded in the legal system.

Over the last 25-30 years we’ve seen community housing groups evolved from local activists and social workers responding to community needs (and government neglect) to bureaucracies embedded very much in the formal structures, utilising heavy-handed state powers to manage their tenancies and gradually losing the local, responsive nature which was the basis for many people’s support for growing the sector.

Share-housing, what some may argue is the highest form of informal housing in Australia at least, where people report forming lasting friendships and de-facto families as they step in to adulthood, is also becoming commercialised through companies like Cocoon turning the sharehouse life into a curated experience - for a price.

Boarding houses, another long-standing sector which floats between the edges of formal and informal housing, is transforming - real estate agents increasingly manage who enters the house blocking some people who have relied on the sector for years. Emerging models like the micro-apartments known as new-gen boarding houses, build-to-rent, iglu, urbanest, all arguably take different features of boarding houses at different times in their history and seek to formalise them.

But we still have a problem - so how do we address it? I’d suggest that what was missing in 1940s, and is still missing now, in all the housing types I’ve mentioned is centring the needs and desires of people living in these homes. More than infrastructure, housing is an essential service. Like water, electricity, government has an obligation to ensure housing gets to people where, when and how they need it.

Like water, if we do not get the supply of housing right, it will get to people in uncontrolled ways, providing too much to some and preventing others from getting enough. Along the way, some of it might get tainted and become unhealthy, unsafe. There will always be luxury water, sold in little bottles. But if we ensure cheap tap water continues to flow then those who need it will never go thirsty.

Negative gearing is still not your friend

The original version of this post was originally published in 2011. Since then it has been one of the most popular articles of the Brown Couch. been read by thousands of people. Negative gearing has remained a big issue for tenants - we've written more than 50 articles about it! The media has definitely taken up the debate with various mistruths debunked, again, and again, and again.
Real estate agents, arguably the main beneficiaries of retaining a policy which encourages a short selling cycle, have clung hard to their lines. Only time will tell if the next Australian government will accept evidence and remove the lurk.

Given the debate concerning negative gearing still rages we thought we'd take the opportunity to update some of the data. Some of the text has also been updated to match - apologies to the original author, Dr Chris, for any liberties taken.

One day in August, 45 years ago, a gunman walked into the Kreditbanken branch at Norrmalmstorg Square in Stockholm, Sweden, to hold up the bank. Police were called, the gunman took hostages, and a six-day siege ensued. When the police finally took the bank and the gunman and his associate, there was observed amongst the hostages a feeling of solidarity with their captors. A criminologist dubbed this feeling 'Stockholm syndrome.'


In the Brown Couch's never-ending quest for elaborate extended metaphors by which to describe the Australian housing system, Stockholm syndrome sounds like an appropriate diagnosis for our relationship with negative gearing – that is, Australia's almost unique tax arrangement that allows landlords to deduct interest payments from not just their rental income or capital gains, but from all their income, thus reducing the amount of tax they pay.

Talking with tenants, we occasionally hear them mutter ruefully about how their negatively geared landlords are making out like bandits, but then say, 'oh well, I wouldn't be able to afford to live here if it wasn't for negative gearing.'

Our political leaders feel captured too, repeatedly refusing to countenance any changes to negative gearing and, furthermore, positively supporting it. Politicians of otherwise such divergent points of view as John Howard and Tanya Plibersek (whose public position has subsequently changed) have previously defended negative gearing, claiming that if it were ever changed, rents would go up.

That's the claim: that negative gearing makes renting cheaper than it would be otherwise.
We need an intervention. Negative gearing does not make renting cheaper. On the contrary, negative gearing pushes rents up. Tenants, policy makers: negative gearing is not your friend

First, let's be clear: landlords set the rent at what they can get. If you really think that because of negative gearing, a landlord will accept less, try this experiment: pay your rent $50 short, and tell your landlord that you're helping him reduce his tax. Observe his angry reaction. Note his insistence that you must pay the going rate and if you don't, he'll find another tenant who will. Try another experiment: offer to pay more rent. See if your landlord doesn't take you up on it

The committed negative gearist who finds themselves faced with the prospect of actually making money – that is, their revenues are greater than their costs – is not going to cut their revenues just to keep posting a loss. They are going to refinance, take on more debt, and buy another property.
But, we hear you say, negative gearing works to reduce rents by expanding the supply of rental housing

Well, it certainly has expanded the supply of landlords. The popularity of negative gearing saw the number of Australian landlords grow by 85 per cent over the last decade-and-a-half, and the proportion of them posting a net loss grew from just over half to over 60% (it got as high as 70% just before the GFC).

And because, much like a giant game of Monopoly the point is to crowd out everyone else - they're using negative gearing to accumulate ever more properties. Here's the increase in people holding different numbers of dwellings. There has been a 400% increase in the number of people holding 6 or more properties who are negatively geared - increasing 4 times faster than those holding one. While being wealthy already is the best way to build wealth, negative gearing pours fuel on that fire - people holding 6 or more properties and being positively geared has increased a third as fast as those who are negatively geared.

ATO TaxStats, various years

But look what they've spent their (borrowed) money on collecting: established dwellings, not new construction. Not only has this been the driving force of investor dollars - it has also come at the expense of owner-occupied finance.

(ABS 5609.0 Housing Finance, Australia, Table 11)

So they've expanded the supply of rental housing, but only by turning dwellings that might otherwise be owner-occupied into rental. In other words, along with any expansion in the supply of rental housing goes an expansion in the supply of renters

This is reflected in the declining rates of home-ownership amongst younger households (25-44 year-olds) – and, for that matter, middle-aged households (44-65 year-olds).

(Source: Grattan Institute. Click here for more.)

These households are in the prime income-earning years of their lives, and many would be owner-occupiers if they weren't priced out by big-spending negatively geared landlords. Instead they are renting – alongside the low income households who have always rented. AHURI researcher Kath Hulse and her colleagues have charted over the period 1996-2011 the rise in the number of renters who are in the higher segments of the income scale:

Source: Hulse, K, Reynolds, M. and Yates, Y. (2014) Changes in the supply of affordable housing in the private
rental sector for lower income households, 2006–2011, Final Report No 235, AHURI, Melbourne

The chart shows very clearly that the relative growth in private renters has come at higher income groups. Starting at gross household income of around $1500 per week (in $2011), and really kicking in at about $1800pw higher income households are increasingly renting households.

Now, these higher-income renters can afford to pay more than their lower-income competitors, so their presence in the market helps push up rents. They also out-compete the lower-income households in terms of risk and general attractiveness to landlords, so if they want to save a bit of money and live in a relatively cheap rental dwelling, they very often can – which means a lower-income household, who really needs the lower rent dwelling, will have to look at renting another, more expensive dwelling.

We had been able put some number on this problem, thanks to the now defunct National Housing Supply Council. In the latest figures from 2009-10 (the latest figures), Australia had 857 000 low-income households (that is, in the bottom 40 per cent by income) who are renting in the private market... and the private rental market has 1 256 000 dwellings that would be affordable for these households. That's apparently more than enough affordable rental dwellings... except that 937 000 of those relatively cheap dwellings are occupied by households above the 40 per cent line. That left 537 000 low-income households paying a higher rent. This was up from 493 000 two years earlier.

This mismatch is well-demonstrated in this next chart showing the relative distribution of housing affordable at 30% of gross household income. We should be hoping for the red line to stay above the black line, remembering that (in an extreme example) a household earning $10,000 per week paying 80% of income on rent still has twice as much money after paying for housing than a household earning $1000 a week does before paying for housing. Affordability is a relative term.

The first points on the chart show that there are 6 times as many households as houses affordable (though not necessarily available) at the lowest quintile ranges of the population. Meanwhile the highest 65% of incomes have relatively plenty of properties very affordable to them:

It's hasn't gotten better since these figures.  We didn't have anyone looking at it this figure in exactly the same way for some time. The Hulse et al report above used a different data source, and different methodology, resulting in different numbers - still heartbreakingly high at 395,000. However AHURI and City Futures last year completed comprehensive projects which give us the shortfall of housing for low-income people by adding together all the people experiencing homelessness or living in rental stress. Again there are differences, but as close as we can get the current shortfall of affordable housing had now climbed from 537,000 in 2010 to 651,200 in 2016.

And it is not just a problem of how the relatively low-rent properties are shared around, because the number of low-rent properties is declining, too – thanks to negative gearing. As a strategy, negative gearing depends on the prospect of capital gains: the negatively geared landlord makes a profit only if the (lightly taxed) capital gain at the end of their speculative adventure is more than the total income lost to interest etc along the way. So negatively geared landlords will go for properties where there's strong expectations of capital gain... and pass on properties that are not so blessed. The latter properties, as economists Woods, Ong and Stewart point out (in a paper for the Henry Review), are the relatively low-value, low-rent properties that low-income renters seek out. Over time, as properties are bought and sold, these sorts of properties drop out of the rental sector, and as they become scarcer, they become less cheap.

We can put numbers on this too, again courtesy of one of the Hulse et al's study. Between 2001 and 2011, Australia's private rental stock grew by 407 000 dwellings. All of this growth was in dwellings that rent for more than $279 per week – and mostly more than $370 per week. Over that period, we lost 331 000 dwellings in the $278 or less price range (and all those dollar amounts are 2011 dollars, so we're comparing apples with apples). The Council provides a graph to illustrate the changing shape of the rental market, under the influence of negative gearing. Notice the bulge in properties around $200 flatten down and push up further along the scale of rents at $300 per week and then rapid rise of a new bulge at around $450 per week. We understand the 2016 figures have been crunched but are awaiting publication - we'll update these charts again then.

Gif created from source: Hulse, K, Reynolds, M. and Yates, Y. (2014) Changes in the supply of affordable housing in the private rental sector for lower income households, 2006–2011, Final Report No 235

To recap:

• negative gearing does not cause an individual landlord to charge less rent;
• negative gearing does not create net additional rental housing;
• negative gearing has contributed to more higher-income households renting, which both pushes rents up, and pushes lower-income households out of lower rent properties;
• negative gearing has contributed to low-value properties dropping out of the rental market, which pushes up the rent for those that remain in rental; so therefore 
• negative gearing is not your friend.