Renting research revisited - Part 2

Robert Mowbray • 06/01/2020

Some twenty to thirty years ago I wrote two theses on the private rental market in New South Wales. They both documented and analysed residential tenancy law reform at that time. In a two-part series, I revisit these theses. Catch up on Part 1 here.

Cartoon shows a man holding paper reading "Labor Neg Gear Changes". The man says "This is an attack on vulnerable Australians with three investment properties"

With thanks to Matt Golding (number '7' here) ... the private rental market is shaped by both Commonwealth and State government policies.

 3. And what motivates landlords? ...

My PhD thesis (pp 199 to 201) found that the main reasons given by landlords for acquiring property were ‘purchased to let as investment’ in just over half of the properties, ‘for owner occupation but subsequently let’ in one quarter of the properties and ‘built to let as an investment’ in one in ten of the properties. See this table from the thesis recreated below.

Reason for acquiring property Frequency Percentage
For owner occupation 79 26.0
Inherited 13 4.3
Built for sale and let temporarily 6 2.0
To convert to strata title 5 1.6
To convert to non-residential use 2 0.7
Built to let as investment 32 10.5
Purchased to let as investment 156 51.3
For relatives 4 1.3
For employees 3 1
Other 4 1.3

Subsequent answers in the questionnaire provide more details on the choice to become a landlord:

• Of those who purchased to let as an investment, 90 per cent did so mainly as a form of long-term security, with only 6 per cent doing so mainly as a form of short-term investment. Again, of these respondents, 67 per cent bought for future capital gain, 66 per cent for rental return and 12 per cent to reduce tax liabilities.

• Of those who were interested in future capital gain, 89 per cent purchased the property for long-term security; of those who were interested in rental return, 94 per cent purchased the property for long-term security; and, of those who were interested in reducing tax liabilities, 84 per cent purchased the property for long-term security. Therefore, all these factors were important considerations for long-term security.

• Of those who purchased for owner occupation, 20 per cent became landlords because they were transferred for work purposes, 13 per cent because their plans changed, 10 per cent to live in after retirement, 8 per cent as a second home, 6 per cent were travelling, 6 per cent live in the house but let part of it and 5 per cent were unable to sell and let it temporarily.

• Of those who built in order to let as an investment, 88 per cent did so for rental return and 16 per cent to sell later for capital gain.

• Of those who inherited, 62 per cent let for rental return.

Except where property was specifically acquired to let as an investment, capital gain and negative gearing were mentioned in only a small number of cases. For example, the study found that only around 7 per cent gave ‘reducing tax liabilities’ as one of a number of possible reasons for acquiring their investment. Yet, comments in the open question on the abolition of negative gearing showed that many more respondents took advantage of this provision.

Around one quarter of the rental properties owned by respondents were sold prior to the completion of the questionnaire (p 207). Where the property was sold, respondents were asked to read a list of statements and indicate the degree of importance attached to that reason when deciding to sell. Table 7.6 (p 210) ranks for each type of landlord the five most frequently cited responses, where that reason was stated as being important by more than 40 per cent of respondents. Over all landlords in the sample, only around one quarter stated ‘I feared that the introduction of new residential tenancy laws would be too restrictive’. This is significant, given that this questionnaire was administered at the very time that residential tenancy reform legislation was being mooted in New South Wales (and Australia). See this table from the thesis recreated below.

Rank   Temporary landlords Investor - Type A Owner Manager
1 need for cash other investment opportunities need for cash
2 other investment opportunities rent too low didn't want to be a landlord
3 low level capital gain low level of capital gain other investment opportunities; land tax (equal)
4 rent too low need for cash -
5 other other tax provisions; rent too low (equal)

So, what do other studies say about the impact of residential tenancies legislation on landlord’s behavior?

A publication by Kennedy, See and Sutherland, entitled Minimum Legislative Standards for Residential Tenancies in Australia and published in May 1995, examined key reports on the impact of residential tenancies legislation on the private rental market and concluded (p. viii):

The existence of reforms to tenancy law is of marginal importance to the decision to invest or disinvest. Data indicates that for those States where reform legislation has been introduced, there is no discernible impact on the supply of private rental housing.

In May 2006, Australian Housing and Urban Research Institute released a positioning paper entitled Motivations of investors in the private rental market. It stated (p 20):

By international comparisons, tenants in Australia receive relatively little protection through tenancy law. … This is despite research into the nexus between tenancy law and investment in the private rental market, which suggests overall investment in the private rental sector is not necessarily affected by tenancy legislation … The vast majority of investors do not consider tenants’ rights as something that impact on their investment, because in the main, the scope and extent of legislation is such that landlords’ economic interests are not affected.

In April 2009, its final report entitled Understanding what motivates households to become and remain investors in the private rental market concluded (p 75):

The relationship between investment and tenancy law reform continues to prove weak. … [I]n this study it was almost impossible to get investors to engage on tenancy law as an issue, let alone an important factor connected to investment decisions.

Chris Martin allows us to enter the mind of a property investor in his article entitled 'Clever Odysseus: narratives and strategies of rental property investor subjectivity in Australia',  Housing Studies, Vol. 33, No. 2, January 2018, pp 1-25.

Only one study has been undertaken that asked the question: ‘When landlords say that they intend to sell, do they?’ My PhD thesis addressed this question. As mentioned, the latter followed the history of a sample of over 700 rental properties across New South Wales over 10 years. I examined sales data over a five-and-a-half year period and then compared stated intentions and actions. Of those landlords who said they intended to sell within 12 months, only one in six did sell in this period. Indeed, 30 per cent did not sell over the five-and-a-half year period. That is, a landlord’s future behaviour may not reflect their stated intentions, suggesting that policy makers and politicians should not over-react to comments by spokespersons for landlords on their responses to various policy measures. I concluded that a landlord’s expressed intentions might merely reflect a fear that their interests may be prejudiced by some policy being canvassed in the public arena. (p 250)

The above AHURI positioning paper (p 20) reports that the capacity of rental investors to sell a dwelling with vacant possession is a significant component of the private rental exchange process. (It adds that Australia is not alone in the importance of this issue.) This is not surprising given the findings of the final report (p 73): that rental investors are not driven by economics alone, but when economics are paramount, investors usually have their eye on the long-term capital growth picture. This means that the ability to sell the property with vacant possession on the owner-occupied market is crucial in order maximise capital gain.

Yes, landlord and real estate agents often claim that proposals to reform residential tenancies legislation will lead to disinvestment and therefore disadvantage tenants. You will find the property lobby, persists with this argument in the face of improved rental laws. As pointed out above, such an argument does not stand up to scrutiny. Indeed, assertions about likely disinvestment are essentially scare campaigns. Politicians are easy prey to the propaganda of the property lobby less because of any sound argument but because of the large numbers of voting landlords and industry political donations. Tax and other economic considerations are what underpin reasons for investment and disinvestment. Indeed, Australia's large number of landlords continutes to grow despite several rounds of tenancy law reform since the Poverty Commission, despite the warnings of disinvestment prior to each one.

Light at the end of the tunnel?

We are witnessing the emergence of new kinds of institutional landlords (or perhaps the re-emergence of old ones). One example is the ‘build-to-rent’ sector, where landlords claim the ease of gaining vacant possession is not important to them. Although ‘build-to-rent’ is discussed these days as an innovative new approach to being a landlord, as previously stated, a full 10 per cent of respondents to my questionnaire in 1986 reported building their property with the intention of leasing it out! (For respondents to my questionnaire, ‘Investors (Type B)’, which included ‘build-to-rent’ landlords, held a median of 15 properties (p 223).) Clearly, this model had fallen away as the economic and political conditions encouraged other forms of investment. However, the re-emergence of this type of landlord is different: they are institutional investors building often high-rise apartment blocks and sometimes for specific constituencies, for example students.  Indeed, Stephen Rowley and Amity James of Curtin University writing in The Conversation ('"Just like home". New survey finds most renters enjoy renting, although for many it’s expensive') claim that ‘build-to- rent schemes could help boost both security of tenure and supply. Australian superannuation funds are also dipping their toes into rental housing, investing members’ funds in projects that seek to improve housing affordability for some in the community, such as nurses, police and firefighters.

The claims of the build-to-rent industry and their supporters are yet to be tested in Australia in the most meaningful way - in practice. Similar models in other countries have not always delivered - so much so that in Berlin there have been mass protests leading to a referendum against the practices of large corporate landlords. Similarly advocates in the USA  have expressed concern about the business practices. We've previously published a first hand account of living with an institutional landlord in Iowa.
 

4. The state of residential tenancy law reform  ....

Unlike some of the tenant organisations in Europe, Tenants Unions across Australia do not enjoy mass membership. In large part this is because the bulk of tenants in Australia are tenants of private landlords and the types of landlords who dominate in this market are small scale individual investors with one or two properties, attracted to rental property investment by tax breaks.  The figure of 15% of households owning residential rental investment properties in 2016 cited above shows that landlords constitute a significant proportion of the population. In the current legal environment this makes organising, especially using historic tactics such as rent strikes and eviction resistance, very difficult.

I previously argued that a landlord’s ability to sell the property with vacant possession on the owner-occupied market is crucial in order maximise capital gain. And it is for this same reason that Governments are reluctant to introduce reform legislation that provides increased security of tenure. Small-scale individual investors in the private rental market usually have their eyes on the long-term capital growth picture. As demonstrated above, in Australia rental properties are enmeshed in the owner-occupied market. This means the rental investor’s ability to sell the property with vacant possession on the owner-occupied market is crucial in order to maximise capital gain. This works against the legislative provision of increased security of tenure.

Yet, lobbying for law reform that promotes increased security of tenure remains a major objective of the Tenants Union of NSW and is gaining momentum with the recent structural changes taking place in the private rental market, with a larger proportion of the population renting, especially low and middle income households.

The proportion of households renting in the private market increased by over 7 percentage points between 1991 and 2016. Read the AHURI Brief here. Besides low-income households who have absolutely no possibility of accessing home ownership, more mainstream households are renting in the private market ... rather than just the young as a stepping stone to home ownership.   Having said this, the total number of lower income rental households outpaces other households and many households are now stuck in the private rental sector for life. 

Also, the number of older renters is projected to soar. In August 2019, Rachel Ong ViforJ and Silvia Salazar of Curtin University and Gavin Wood and Melek Cigdem-Bayram of RMIT University, wrote in a The Conversation article:

On the other hand, the numbers of older mortgagors and private renters are projected to soar. Among 55-to-64-year-olds, mortgagor numbers jump from under 1 million to over 1.6 million, a 71% increase. The number of private renters rises by 54% from 369,000 to 567,000. ...

As the number of senior private rental tenants grows, governments will need to reform tenancy regulations in ways that enable housing retrofits to meet mobility needs and allow for ageing in place. Tenure insecurity in the rental sector could hinder planning for aged support services.

You will find the full report here.

How does Australia compare with the international experience when it comes to security of tenure? This brief argues that the international experience suggests that the rights of both landlords and tenants can be accommodated in a healthy private rental sector and that individual landlords can operate without undue difficulty in environments that are more strongly regulated than currently in Australia.

There’s lots of reports now on the state of the private rental market across Australia and conditions within it. Australian Housing and Urban Research Institute (AHURI) published a comprehensive report entitled  Long-term private rental in a changing Australian private rental sector in 2013. CHOICE, National Shelter and the National Association of Tenant Organisations produced publications entitled Unsettled in  2017 and Disrupted in 2018 which look at conditions in Australia’s private rental sector.

In this context, campaigning on residential tenancy law reform is making large strides. Changes afoot across Australia are summarised in the article here. And, credit must be given to campaigns such as ‘Make renting fair’ in New South Wales which, along the way, garnished the support of housing academics. You can check this out here. This campaign got so close to achieving significant legislative change in October 2018. Here are two days in the struggle for housing justice: Tuesday's hope and Wednesday's disappointment

In September 2019, the Commonwealth Government’s Productivity Commission released a report on vulnerable renters in the private market. Here are some of its conclusions:

More than 1 million low-income households (2.65 million people) rented in the private market in 2018, a figure that has more than doubled over the past two decades.

Many vulnerable private renter households struggle with rental affordability. Two-thirds spend more than 30 per cent of their income on rent ... 170,000 households have less than $250 available each week after paying rent.

While renting privately offers flexibility — desirable for many — moving involuntarily can be disruptive for low-income households, families with children, older people and people with a disability. It can heighten the risks of financial hardship and homelessness, especially if little notice is given.

Some state-based residential tenancy laws could do more to improve certainty of tenure for vulnerable tenants.

You will find the response to this report from the Tenants’ Union of NSW here.

In November 2019, we received a report from New Zealand that residential tenancy law reform is about to make big strides just over the ditch … including the ending of no-grounds eviction. You may check this story here.

In October 2019 Hal Pawson of City Futures at the University of NSW wrote for The Conversation that the [Productivity Commission] report advances the broad case that tenancy law reforms, “if well designed”, can enhance tenant welfare “without substantially increasing the cost of renting”.

In December 2019, Kath Hulse, Margaret Reynolds, Christian Nygaard, Sharon Parkinson and Judith Yates released an AHURI report entitled: The supply of affordable private rental housing in Australian cities: short-term and longer-term changes. It demonstrates strong evidence of structural change in the private rental market, with the consequence that Australia’s higher-income families are eating up the supply of cheap homes in the rental market, leaving low and very low-income households with an endemic shortage of housing. This highlights the dangers for those at the bottom of the private rental market in the absence of enlightened residential tenancy law reform.

Concluding comment ...

These two theses provide an explanation for the slow pace of residential tenancy reform since the mid-1970s through an understanding of the structure of contemporary ‘landlordism’.

However, the struggle for residential tenancy law reform is gathering pace, both in New South Wales and across Australia. More mainstream households reliant on the private rental market in the long term and the re-emergence of institutional landlords, perhaps, explain these recent moves towards greater protection. However, there’s still a long way to go!