Australia’s rental and property market in general are in a dreadful mess, according to a research paper published last week by property companies PEXA and Longview.
Their prognosis is that it can only get worse unless something is done. The system is certainly not working for tenants, but, they argue, it is not very good for owners either.
About a third of householders rent, more than 95 percent in the private market.
It is odd in a way. Economics 101 tells us that if you have lots of suppliers or sellers (property owners) in a market and lots of buyers (renters) that would generate a lot of competition and drive prices down. But that is not happening.
The research paper tells us what is happening, but we need to step back a bit to figure out why and what can be done about it.
The paper tells us some things we know but also a lot of detail which helps us draw conclusions. Tenure is insecure; suitable rental dwellings are hard to find; rental dwellings are poorly maintained; and typical leases are only for a year or less, after which the owner has the flexibility to remove a bad tenant (at least in most states) or to sell. Equally, the tenant who aspires to ownership can end a lease without too much cost.
All of the usual suspects, including this research paper, call for all the usual range of solutions: deregulate land supply more; regulate tenancy agreements more; provide more social housing, and so on. They all miss the mark.
There is something much more fundamental than tinkering around the edges of the existing system
Put simply, in Australia there is no private market for the provision of rental homes – defining a home as a place where someone can live securely in decent conditions. Everything militates against this.
In fact, the owners are not even in the market of supplying housing in the way that most businesses build their businesses by providing quality products and services at a reasonable price. Such as, say, an air-conditioning repairer or computer manufacturer.
The owners are in the business of making a profit, but mainly through the means of the very low-taxed profits from an ultimate sale, not through continuously providing a quality product.
They do not care much about getting a good reputation for being a good provider of housing. To the contrary, generally they will do everything to minimise costs, particularly maintenance costs.
On the other side, perhaps more than half of tenants are not interested in long-term rental. Renting is a stop-gap on the way to ownership. The growing portion who are interested in long-term tenancy are being completely done over.
Eighty percent of renters have had to move between one and five times in the past five years at high economic, social and psychological cost.
There is a bigger problem on the owners’ side. Rental properties are owned by 2.2 million individual investors, 71.5% of whom own just one property, 18.8% two, and 9.7% three or more.
So, we have more than 1.5 million owners who own only one investment property. Even serviced by the real-estate industry, it is a hopelessly inefficient way of managing property. There are no economies of scale.
Our ordinary experience tells about the expensive nightmare of home maintenance: tradespeople not turning up or not coordinating and endless minor maintenance tweaks to keep the place comfortable.
More importantly, all the maintenance is done as one-offs.
Compare this to a large housing entity (say, owned by a super fund) that owned all or a lot of units in a block, or a suite of adjacent houses along a street. That entity could run the body corporate and do rolling maintenance of, say, painting, carpeting, pest control, appliance replacement and so on.
That is far more efficient than working on an individual dwelling with call-out fees; inefficient delivery of one appliance and one-off rubbish removal; wastage of excess paint, tiles, and carpet and so on.
The savings would be enormous. At present, the huge inefficiency is borne across tenants and owners and partly explains why our housing system is such a long way from our Economics 101 perfect market.
The research paper shows that property investment is not all it is cracked up to be. Many owners get out to get a more peaceful life. A half of them leave within five years, further adding to insecurity of tenure and delivering yet another batch of inexperienced owners.
In sum, the system makes it well-nigh impossible for anyone to set up a long-term home in a rental, keeping pets and doing a few improvements.
The research paper did an international comparison and nearly all Australian states are worse for tenants than the bulk of European countries. Moreover, the owners do not do much better.
If you look at commercial property, on the other hand, the picture is different. Owners desperately want to attract long-term tenants. Without them, the value of the property is significantly depressed.
Commercial tenants are typically offered long-term leases: three to five years with two options to renew. They are encouraged to improve the property. Sure, there are many differences, but tenants with long-term tenure are seen as an asset not an embuggerance.
On the residential side, however, over the past 40 years, the federal tax system of negative gearing and capital-gains concessions combined with a hotch-potch of state- and local- level taxes and interventions have delivered one of the worst housing situations of any developed country in the world. It has been an illusion for property owners; a misery for tenants and a vast drain on the public purse.
Surely, we can do better than this.
Crispin Hull
This article first appeared in The Canberra Times and other Australian media on 28 March 2023.
Declaration of interest: I have been a rental property owner on and off for the past 40 years.
Economies of scale are exactly why Economics 1.0 is fallacious. In order for “market equilibrium” to occur consumers must be willing to buy more product as price falls, which has a smidgeon of reality (although exceptions are legion) and suppliers must be less willing to provide more product as the price rises, which is patent nonsense and is explained by economists by assuming diseconomies of scale, which defies commonsense and the real world.
Only biblical fundamentalists and astrologers stick as firmly to falsities as economists. We may safely ignore the first two, but the economists are a dangerous menace, not least when they are telling politicians that climate change will have hardly any effect on GDP – see the economics chapter of the 2022 IPCC Report.
“lots of suppliers or sellers” That is required for a market to work efficiently. That is definitely what we do not have. With our massive population growth supply simply cannot keep up with demand. The last figures I read from the Home Affairs department will have the population increasing by more than a million a year.
Can the Defence Housing Authority model be adapted for the residential market? DHA takes investment from SMSFs and other private investors, usually for 10 years. DHA charges 15% of the agreed rent, but investors never have to deal with tenants, nor the majority of maintenance contractors. The rent is reviewed regularly, and never goes down. During periods of vacancy, the investors continue to receive the agreed rent. At the end of the lease, the house is restored with repairs, painting, etc, and the investor is free to sell with a capital gain or re-let in the private market.
Imagine a similar entity charged with providing housing for teachers, nurses, police etc, with the power to deduct a reduced rent from the occupants’ salaries. Investors enjoy a carefree return on investment, and vital workers can be housed in areas they could not otherwise afford. As with DHA, large economies of scale would flow. Large numbers of would-be tenants are taken out of the competition in the private market, lowering rents for the rest.
What’s not to like?
Why was the Henry Review ignored by all?