I’m getting a bit tired of the media narrative which paints our sector as the problem in the housing crisis (you know the one: “greedy agents and robber-baron landlords – it’s all their fault that we’re in this mess” – that one…) we’re easy targets for journalists and politicians, and it’s all getting just a bit wearing… so I think it’s time we started to correct the story a little.
The important point to remember in all this is that property investors (or landlords, rental providers, whatever else you want to call them…) are, by their nature, in property as an investment – and the nature of any investment is to optimise income and profit, and mitigate and minimise risk.
Expecting landlords to carry all the risk while either not providing, or at least minimising, any real means for mitigation of this risk is just bad policy.
If you want to argue the social merit of housing as an investment, that’s fine, but remember that investors of all colours don’t invest to lose money or control over their asset and their own future or they’ll end up in the social housing queue as well.
The vast majority of landlords I’ve met in my years in the sector have been fair minded people who want to maintain their properties as they see them as a valuable resource, and they feel that they have an obligation to ensure that their tenant has a decent standard of accommodation not purely for the tenant, but to keep the value of the property at an optimum level.
According to the ABS, close to 90% of Australian landlords own just one rental property as part of their plan to better fund their retirement, or to help their children into the future – they don’t have huge capacity to absorb ever increasing costs, so there comes a point at which it becomes unviable for them to continue to hold property as an investment.
Yet governments seem to have a view that this is a golden goose and a source of public income through taxation and also a means of offsetting their decades of inaction on social and affordable housing, but there is a breaking point, and my great concern is that we’re approaching it very rapidly.
The “market” responds to supply and demand, and not to some imagined cartel of owners and agents who deviously manipulate stock to wring the last dollar from the defenceless public (the tenant) – it’s economics 101 that price of supply rises when faced with an increase in demand, and prices fall in response to a decrease in demand.
What we’re seeing at the moment is a response to an increase in demand in the face of a limited supply; a recent article from Owen Wilson (CEO of realestate.com.au) noted that while demand for rental properties is up 140% on what it was at the end of 2019, yet supply is down 8% on last year, and 33% on what it was in 2018.
The reasons for this are not as simple as they’re made out to be – at the same time as we’re having a surge in inbound immigration to the country with the removal of international border restrictions, we’re also experiencing a decrease in the number of available long term rental properties, so let’s have a look at some of the factors which have influenced this.
First, we’ve had a tranche of new legislation – implemented in 2020 in NSW with more coming, Victoria in 2021, Queensland in 2022 and other states very soon.
This legislation has been seen by some landlords to have created greater obligations on them in terms of the upkeep of the properties (not a bad thing in some cases), placed a regulatory requirement on the compliance aspects (again not entirely a negative), removed avenues of regaining possession of their properties or made them far more onerous in terms of proving their case, especially in Victoria where VCAT has been badly backlogged for the last 3 years and some decisions coming from hearings beggar belief and the laws.
It has led to a sense that landlords no longer have any control of their property, or that it’s so greatly diminished that it strongly favours the tenant as consumer, so numbers of landlords have elected to remove themselves and therefore their property from the long-term market, either by the sale of it, or by going to the short-term rental market (I’ll speak to this a little later).
Now, you’d think that the sale of a rental property would take the pressure off a part of the rental market as, in the main, rental properties are at the lower end of the price spectrum and therefore would appeal to a first home buyer. There is some evidence for this happening, but it’s not been proven to have had any real impact on what we’re currently experiencing – while some homes might be sold to first home buyers who then exit the rental market, the numbers of new tenants replacing them is far greater, or they’re sold to other investors who then place them back into the market and a higher figure which reflects the current state of demand, and the cohort who have bought have been replaced by the people who were forced during covid or other circumstances to move out of rental properties and into either a family home or other shared accommodation, along with those wanting some individual freedom, as well as the increase in people migrating for study and work opportunities.
Then we look to the properties being placed onto the short term market where they and their landlords are not subject to the same stringency in terms of the law as long term landlords are, plus the rental return is far and away above what could be achieved in the long term marketplace – and I’ve had conversations with a number of landlords who, even if the return were the same, would still elect to stay out of the long term market due to the factors I’ve outlined above, “it’s just not worth all the carry-on and risk Kirk” is a common refrain, so government has actually fueled the short term market by enacting laws which they thought helped the consumer (the tenant), but forgot the critical factor of the supplier (the landlord) – maybe a lesson for the future for them, the law of unintended consequence.
Then consider the costs involved in holding rental properties; we all know that mortgage rates have gone up in the last year, and this has increased the financial pressure on all of us and in some cases landlords are looking to offset some of the increases in their payments by increasing rents, this is not an unreasonable strategy and we’re in a phase where rents are already increasing so this can be justified on the basis of market forces and comparable property achieving similar higher figures; but the mortgage increases only tell part of the story – there have also been significant rises in land tax with some investors receiving assessments which have tripled in the last 3 years for no real benefit to them (one landlord I know personally, with 2 rental properties, had their land tax charges go from $8,000 a year to $37,000 a year.
That’s an additional impost of over $500.00 per week without anything of value to them to balance this and a rent increase does little to offset this. This story in not uncommon – they felt that they were pretty much either forced to sell or find alternatives to pay this massive impost.
Then let’s look at the surge in sale prices in 2022; while the selling market has cooled significantly, the temptation of a decent gain and profit in the sale price was a big factor driving some to leave the market and invest elsewhere or upgrade their own home with the proceeds; again, lessening rental supply.
Again, all this does is remove rental property from the supply chain at a critical time.
The regulators and governments of all flavours need to step up to the plate and start to engage ALL stakeholders in finding a solution or the problem will echo across our society at every level for a long time to come – we need to be looking very closely at the property taxation system and, more importantly, bringing new supply into the marketplace urgently, rather than tying it up in the planning bureaucracy.
So let’s stop casting the landlords and agencies as the bad guys – that’s just simplistic clickbait – and look at where the real problem lies.