Why Australia’s rental system needs reform

By Leith van Onselen

Amidst the drivel of her housing speech on Thursday, RBA assistant governor, Luci Ellis, did make some interesting remarks around Australia’s rental housing market:

A range of different data sources confirm that although young people move more often than older people, the big difference is between renters and owners (Graph 8)…

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Looking just at the group of households who can be tracked through the whole life of the HILDA survey, and who didn’t switch between owning and renting at any stage, you can also see that renters were also more likely to have moved many times in that 13-year period (Graph 9).

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…we know that moving house can be disruptive and costly. So I question whether all those moves by renters were desired by those households. Many renters are happy with their current home, but are required to move because the lease expired or the landlord sold the property. If we are concerned about inequality of housing outcomes, perhaps we should focus less on the type of tenure, and more on security of tenure.

Ellis’ point about security of rental tenure is an important one. A few years back, the Tenants Union lamented the fact that Australia’s rental security is amongst the poorest in the world, making many renters second class citizens:

Australian renters experience some of the lightest-touch regulations in the western world.

Laws in other western countries offered more secure rental tenure, with longer lease terms, narrower reasons for eviction, and longer notice periods before a landlord could demand a tenant move…

Tenants in other countries also have more rights to keep a pet or make minor alterations such as small holes in the wall without the landlord’s permission, it found.

In Australia, a typical lease lasts from six to 12 months compared to two to three years in France and Hong Kong. Germany and the Netherlands offer indefinite lease terms…

Therefore, there are sound reasons to undertake reforms to improve the security of renters and to ensure access to stable and affordable housing.

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One of the great strengths of the German housing market is that it provides strong protections for tenants. Catherine Cashmore summarises the key features of Germany’s rental system as follows:

Minimum tenancies in Germany are long – often starting at 2 years, with most ‘unlimited’ – meaning a landlord cannot easily evict without good reason to do so (and then only through a court process.)

Rent increases are strictly regulated – at a minimum occurring only once every 12 months, with limits on the incremental rise over any given period. For example, as a general guideline, a maximum could be 20% over 3 years (although this varies across different municipalities.)

Reasons for eviction can include a landlord needing to use the premises to reside in, however the ‘need’ must be justified – and not simply because they would ‘like’ to do so (as in Australia.) 

Properties must be presented in good condition – painted prior to each new tenant moving in, with renters often responsible for the provision of various fixtures and fittings, such as lights and window furnishings.

If the landlord wants to sell, they must provide proof that selling without a tenant would profit their cause more so than selling with.  Therefore due to the length and roll over of tenancies, rental stock is generally sold onto investors rather than owner-occupiers, with the renter protected from eviction.

Bonds equivalent to 3 months rent are placed in interest bearing accounts, so renters don’t lose out on the rate they could expect to achieve if the cash was deposited in a normal savings account.

Long-term tenants are permitted to decorate accommodation and change the decor to suit their own tastes, promoting at least the feeling of ‘ownership’ over that of a temporary dwelling.

Property investors can expect a 7% yield, which at current borrowing rates is, particularly attractive to larger off shore equity firms and this sector is growing. 

I will add that because renting is the dominant housing choice in Germany (see below chart), the political system is highly sensitive to tenants’ rights and perceived threats to the status quo typically receive prominent media attention and political responses.

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Also, because renters enjoy secure tenure (and housing supply is fairly responsive), Germans have little incentive to rush into owner occupation. As such, Germany doesn’t suffer from the ‘panic buying’ and speculation often present in bubble housing markets, like Australia’s.

While other aspects of the housing system should also be reformed – such as property taxation, planning, land release, immigration levels, etc – tenants’ rights should definitely be added to the list, especially given the collapsing home ownership rate among younger Australians.

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Comments

  1. If you give tenants proper rights then surely that diminishes the landlord’s feudal rights to lord it over them, and therefore the value of their investment. So…never going to happen.

    • Sadly accurate, our current landlord treats us like shit and for some reason thinks he’s doing us a favor by allowing him to rent his run down abode. You see he has to pay a lot of land tax and land tax is bad mmmkayyy he doesn’t make enough money out of “this investment” even though it’s had a capital gain of 100% increase in value over the last 3-4 years. But that doesn’t help him unless he sells, apparently. Which is true, but no reason why he won’t fix shit either..

      • There are still some old school landlords about who value good tenants and look at property as a long term investment for income. However as yields have dropped, capital gains driven speculators have taken over. To them tenants are there to cover the costs while the property appreciates in value, and they need the ability to give them the flick at a moment’s notice, if they choose to sell, or spot the opportunity to raise the rent and give themselves more “income” to leverage into another property. Also with very low yields on offer net needs to be as close as possible to gross, so avoid costs like repairs etc, like the plague.

      • I agree Dan, my mum is a landlord herself and has a few investment properties which she bought many many years ago (as part of an inheritance, so never negatively geared – didn’t like the idea). She treats her tenants with respect, fixes things and even has allowed them to stay when behind on rent and let them catch up again due to hardship on their end etc.. She doesn’t jack the rent up frequently or get greedy either.

        So there are still good landlords out there, but I feel that Inner West Sydney has become a hot spot for speculative flippers who are just looking for 1 year leases, in run down shit shack abodes and have no interest in fixing anything. I’ve been to multiple inspections over the last 12-24 months looking for a better place to live and found within the same price bracket the same story.

        Basically I’d be jumping from frying pan to fire. Move up a price bracket or 2 and things become a little better but I’m trying to save a deposit, not blow all my income on rent.

      • As a “landlord” (can’t get over that moniker, but anyway), I would be happy to take a few $ off for the sake of longer term leasing stability. However, per other comments here, that’s probably not the norm of landlords, who are on a tight rope to servicing mortgage debt.
        I am happy for one year leases because anything longer than that in Australia doesn’t exist. My wife, European, cannot fathom this!

      • Primarily a reason to move is because most rentals are intolerable.
        I hate where I rent in Albert Park, a block from the water and expensive. I am renting for the first time since I was in my twenties. I hate the indignity of 3 monthly inspections where my laundry cupboard is opened and my washing inspected. and a vulgar landlord who pushed his way in and was very excited to have me pay his ‘investment’ off. Architect designed with a half dishwasher and no room for a dinner set nor a cutlery drawer. 30 cm deep wardrobe. oh and marble kitchen bench etc. bathroom where you have to sit sideways to fit your legs and have to stand under the shower head to turn on the water. Typical architect.
        Still looking for home to buy, stock constantly falls as decent liveable homes are ‘architect’ renovated with twinkling ceiling lights of hell and extended and left overs tiled.
        Cant rent a wholesome 2 bedroom with sunny garden either. Neg gearers are out there buying madly and I see the houses at auction and then for rent unchanged.

    • The German system is feudal creating.

      The system focusses on preserving renting as a way of life.

      If you like renting then fine…but if you want to own your home then ask yourself why there are only about 41% of home owners in Germany.

      It is largely due to the excessive regulation.

      • If we were like Germany I would still be renting. We only bought because we have a dog and we don’t want to move every 6 months.
        The feudal problem you are worried about is not solved by owning. I still have regular payments to my bank and my house price included a large portion of economic rent paid to the previous landholder just all at once instead of over many years.

        Germany has a high instance of renting because they haven’t dealt with land-rents so prices are still high and with renting not horrible most people choose that over paying too high prices to own.

      • Not sure where the too high prices are Glissom. The story above says a 7% return. That implies relatively much lower prices than in Australia.

  2. This will happen sooner or later due to collapsing home ownership rate among younger Australians as per UE above, the latest fad of Rentvesting, younger people starting with an investment property first instead of a PPOR…
    Completely agreed with all the above and any Landlord with common sense would agree on most of the above points anyway.

    • This will happen sooner or later due to collapsing home ownership rate among younger Australians as per UE above, the latest fad of Rentvesting, younger people starting with an investment property first instead of a PPOR…

      Pretty sure FHBs buying somewhere and living in it the minimum required time for the grants, stamp duty exemptions, etc, then moving out(/back in with parents) and turning it into an investment property already been commonplace for a good 5+ years.

      • except that he said “starting with an investment property first instead of a PPOR” which is the direct opposite of what you voiced

  3. Bad renter’s position is a huuuuge stimulus to buy.
    and since it has been ‘the best” time to buy for the last 20+ years… why waste public resources on what is a mere stepping stone for good citizens and a nightmare for deplorables whom reject to borrow $1mil for slum

    German model, as an example of near-utopia would douse desire for rental property purchase for most.
    Not a bad thing. Rental investment should be a tightly regulated industry, not a quick way to perceived richness at the expense of the tenants.

    • 7% yield, steady income – sounds pretty attractive for a lot of investors, especially super funds who have a long term view. Not so attractive for Mr and Mrs Fast Bucks who don’t care about yield and are after a quick capital gain.

    • in addition the german system used to allow the ability to substitute the security on the mortgage loan once it’s been created. That is, if you can find another equivalent valuable asset you can have that held as security instead of the deeds of your house. Some german mates of mine in 2008/2009 bought bank notes/commercial paper at circa 25 cents in the Euro and were able to substitute those notes for par value instead of the deeds to their property [same bank where mortgage was held at was same bank issuing notes, so just a collapse of asset and liability]. Not a bad system if they let you do that, 25% x original mortgage value for a house, all day long!!

      Edit: have asked big four bank loan staff here but get a blank look and a reply “why would you want to do that?” so unsure if the same potential exists here. I can see the bank paper trading way below par when the next crisis eventuates. You’d have a few week window to do the same here when it does.

  4. As yield decrease, the incentive for the landlord to provide swevice for the tenant also decreases. A house being rented out right in Sydney will get less than 3% yield unless you’re running an illegal boarding house.

  5. Tenants have relatively few rights in Australia because there is not much demand for tenant rights. This is because renting has been seen as a temporary thing you do when you are young until you buy. Putting up with the dickhead landlord or his real estate agent manager is a rite of passage when you are young and renting a share house in the inner city. (With minor exceptions, the only life long renters are people in public housing and nobody cares about them.)

    It’s very chicken and egg. But if we are going to have masses of influential, articulate, high(ish) income earners who are forced to rent into their 40s and beyond, then the political pressure for tenants’ rights will follow.

      • BankWatcherMEMBER

        @travis In the same boat for various reasons. Owner has largely left me alone for 10 years and rent is cheap, but I’d love to be able to make small improvements, and would if I knew I was likely to still be there in another 5 years.

  6. Yep it’s a pain in the arse. I rent a house with 4 of my mates and while we’ve been lucky to avoid moving for 4+ years now, we’ve had to push shit uphill to get maintenance done the whole time.

    A tenancy act review has just been completed in Vic so hopefully something good comes out of it. A mate worked on the review, in their submissions REIV still thinks landlords don’t have enough power.

    I went to an affordable housing seminar run by urban planning and economics consultants SGS. One of the panel members reckoned that until residential tenancies are made to be longer and more stable, we just won’t see institutional investors get involved in the sector for the stable long term returns, which is sorely needed to make the rental market deliver a competitive service.

    From my experiences, landlords are rank amateurs who just like the power they have over tenants. Anyone with a good business acumen could run right over the top of these cowboys.

    • Damn straight and we’d be better off with corporations running rental property here than mum and dad investors etc.. At least things would be done to a standard. Instead I’ve got penny wise pound foolish running the ship at my joint. With all the recent storms in Sydney I was worried the roof on the garage would collapse and fall onto my only real assets, my classic cars.

      All because Timothy Tightarse won’t fix the roof.

      • ask him for the policy number on the house insurance. Signal shot straight across the bow that you will simply cut him off from the inevitable insurance claim by going straight to the insurer to claim against it. Worth asking at that time if his insurers know its NOT his PPOR. PPOR insurance coverage voided the moment you derive income from the property ie. the moment you rent it out.

    • scootytootyMEMBER

      From my observations Aussie landlords are mortgaged up to their eyeballs and can’t afford much more than the repayments.

    • Yes I noticed that the rental system in E/States is different that here in WA. In Melbourne (2014) we were travelling around Australia & wanted a lease on a unit in Southbank for 6 mths. The unit was in one of the most prestigious buildings -had been on market for months with no takers & I was able to arrange for a 50″ TV. – – -BUT – -they only would give us a 3 mth lease ! (I suspect it’s because they want to put the rent up every 3 mths!) This was so stupid -but was actually lucky for us as the agents turned out to be real a/holes & we left happily after 3 mths to continue our journey.

      In WA we have been leasing for 14 years now & in 5 different properties.
      Most leases have been for 2 years at a time.
      We negotiate what we want before signing lease. New patios, Sun screens etc have all been supplied –Plus ALL leases we signed included our clause: No increase under 12 mths & No increase after that to be more than Govt CPI.
      So longer leases are possible you just have to stipulate.

  7. A falling home ownership rate means a growing constituency for reforms such as these. The Victorian government is already talking about it, and of course the propertocracy says the sky will fall if anything changes.

    Home ownership is the bulwark of landlordism. Therefore, inevitably, the Feds will do something to shore up home ownership.

  8. I would also like to see some clause around rental increases. A longer lease with either built in increase based on inflation or a fixed price over the lease period would be a lot more desirable.

  9. Professional investors (super funds and the like) would welcome long leases with fixed annual increases because it would take the risk out of the income stream. Better for them, better for the renters – provided they are happy to rent the same place for years on end, as Europeans are. Residential property is an asset class for serious investors just waiting to happen.

  10. You can’t always have the best of both worlds. Should we aim for a country which has more secure rental terms, but a lower home ownership rate?

    I am not certain the shorter rental periods is landlord driven as much as it tenant driven, I know personally I would not want to lock into a longer term rental agreement (12 months max), but could see it would be different for families with children.

    • Have requested a 2yr lease many times. Never once even entertained at the outset. have gone on to stay way beyond 2 years multiple times.

      So there you have it. An anecdote.

    • As a protected tenant, there is no reason to reject a longer tenancy lease as it becomes predictable and property is maintained well.

      Short lease stems from rental demand and it is at the benefit of the landlords-of-later-days.
      It allows weeding out the tenants that demand repairs or minimum human right: if you do not like it as is, someone else will.
      As is, no party has motivation for longer lease.

      I would not mind to get into a longer predictable lease where property is well maintained as if the owner would live in it and at or above the minimum standard, German style or close.

    • The solution is to require the landlord to give longer notice (e.g. 12 months) than the tenant (e.g. 4 or 6 weeks) for no-fault termination of a lease of otherwise unspecified duration. The landlord, who can pay an agent out of the rent, does not need protection against the need to find a new tenant in a few weeks in order to maintain the rental stream. But the tenant DOES need protection against disruption of (e.g.) study plans that have booked out the next several months.

      • “That would be reasonable (a longer warning period).”
        It’s six months in ACT, but because it’s “without grounds” landlords tend to use this type of notice to mask their real reasons, even where a notice with grounds could be issued. So tenants never get to test the grounds when landlords use them for spurious or vexatious reasons.

  11. innocent bystanderMEMBER

    It’s a culture thing
    I’ve had about 10years landlord experience in my time and always offered a long lease, no tenant was willing to go longer than one year and even then I had some want to terminate early.

    Most landlords are only interested in capital gain and are loathe to do maintenance. There are some rare exceptions.
    Its a culture thing.

    One of the main reasons why tenants get treated so badly is the quality of the property managers.
    R/E agents tend to have a rent roll because it leads to listings when owner wants to sell. Not so much the cash flow it provides, tho they do milk it.

    Maybe one way is to legislate that property managers and agents have to be separate businesses.

  12. Dale SmithMEMBER

    This type of residential tenancy is more a kin to a commercial lease in that the property is bought and sold with a tenant in place and with that a yield, both which give the property its value.

    The tenant is unperturbed when the property is bought and sold. The owner/s of the property are professional investors and not amateurs practicing on their tenants like so many residential landlords.