How to set a fair rent during COVID-19

Leo Patterson Ross • 02/04/2020

We heard this week of a landlord calling a local Tenants’ Advice and Advocacy Service complaining that the service had advised tenants to attempt to negotiate the rent. Despite this being the Prime Minister’s advice, this landlord was shocked at the concept. Of course tenants and landlords are always able to negotiate the rent - there is no barrier to negotiating the rent down, and there are some instances where the Residential Tenancies Act 2010 where the rent is reduced because of a reduction in use or services. The rent on the contract is still the rent that's payable until you can come to some agreement.

Despite it being a tricky concept for some, there’s a lot of people trying to negotiate their rents right now. We’ve been told by the Real Estate Institute of Australia that of course agents will negotiate down rents – (although unfortunately Australia is seeing examples of agents requiring tenants to impoverish themselves before considering any such thing). We’ve also had lots of landlords on the internet in our comments section and on twitter tell the world that they can’t afford to reduce rents, but can afford to leave the property empty.

So, what’s the truth? Of course it’s somewhere in the middle. One of the things we have known for many years is that Australia’s landlords are not well suited to the business of providing housing. They are heavily indebted, often needing government assistance to even pay off the mortgage. A lot of people both landlords and tenants are very worried about the rent. There are enormous petitions calling for a complete suspension of payments, reflecting how worried people are. What is absolutely necessary is a real and genuine attempt to work out what is actually needed to keep everyone home and safe during this health crisis. What would ‘hibernation mode’ look like?

We’ve had a look at the ATO’s tax stats to try and help out. We’ve taken the most recent 4 years worth of claims for tax relief lodged by landlords for NSW properties, adjusted them to today’s dollars and averaged them to get a pretty good idea of the average costs faced by landlords.

 

Here’s what we’ve included in each category and how many investors actually claimed it.

  • Mortgage - interest on loans and borrowing expenses (not principal) (73% of investors)
  • Costs of access (council rates 93%, water charges 83%, land tax 16%)
  • Depreciation (for plants and equipment 62%, for capital works 73%)
  • Property maintenance (Repairs and maintenance 74%, Cleaning 13%, Gardening 11%, Pest control 10%)
  • Body corporate fees (40%)
  • Property management (74%)
  • Sundry expenses (sundry rental expenses 56%, Advertising for tenants 11%, Stationary and communication 35%, travel expenses 27%)
  • Insurance (73%)

You can see some of the obvious points where costs can be reduced – that mortgage bill absolutely dominates. Remembering these are averages, and include both positively and negatively geared properties. So for some those interest payments are even higher! For the purpose of the exercise however, mortgage costs are something we can strike out anyway – these should be put on hold, and we think the banks can offer greater relief than they have so far by not capitalising the interest on the loans during the period.

We then looked at the other various costs we think can be removed from the mix for landlords by government intervention (for instance council rates, water charges) or that will be claimed regardless of current income (because they’ve already been paid for – like capital works). These are the big three costs from above. Now we start to get to a much more manageable rent for people experiencing the reduced incomes in a Covid19 world. But we recognise this is an inexact method – it doesn’t account for different sized properties. We think it’s still useful to consider what costs are actually necessary in Australia’s Covid19 hibernation.

The typical property maintenance bill is $5530 per year and some level of maintenance is claimed by three-quarters of investors. This seems like the foundation for necessary expenditure – we certainly don’t want homes to be maintained at a lower level than usual, though with physical distancing rules this may be unavoidable. Maintenance also provides work for tradies – we’ve long been concerned that our unstable and unfair property market is actually costing tradies millions of dollars of work a year. Maintenance on their own title should have a little more expenditure on maintenance because homes in strata or community titles have some maintenance costs transferred to the body corporate. This is also true of insurance costs – the building insurance in particular is held by the body corporate instead of the individual lot owner. Either way building insurance, unlike landlord insurance is required for mortgages. That only three quarters of landlords claimed any type of insurance is interesting and a bit worrying. For this reason, we’ve left out body corporate fees, and we’ve added 10% to both the property maintenance and insurance costs to ensure that the amounts are reasonable.

We’ve left in property management fees – this is a tricky one to judge, because some property management fees are for finding a new tenant (which is unnecessary for the purpose of hibernation) or weekly commissions which might reduce if the rent comes down. But we’ve left it in, because these are speculative – and the rent is still very affordable. To some degree these fees also reflects actual labour spent on managing a property – this is a cost that exists whether management of the property is managed by the owner themselves or a property.

Here are others that we can take out – not going to be much travel expenses during Covid-19!

So here is the pot of money with adjustments

 

So what does that translate to as a weekly amount?

$235 per week is about a third of the (average) rent reported by the investors ($623 per week - note that this is much higher than the median rent of $470pw. Hibernation rent is only 50% of that). This is fairly affordable on Jobseeker + Coronavirus supplement. Worth repeating – this is the average cost necessary once all barriers are removed. There will be properties that have significantly lower costs as well as higher ones. But we hope this exercise might get the juices flowing about how we might all think about a 'hibernation mode'.

 


For the latest info see our Renters' Guide to COVID-19.

Renters Guide to COVID-19