Unintended consequences.

I wanted to write an outline to what I think will happen to the rental market now that we have had a change in State Government.

We will have changes to our tenancy laws. A landlord’s ability to give Notice to Quit to tenants will be curtailed but the primary message in this newsletter is that the changes planned will ultimately increase rents and hurt a lot of tenants as well. That’s the Law of Unintended Consequences.

Where to start?

Towards the end of 2019, the Coalition Government changed the Residential Tenancy Act so that rents could only be increased once every 12 months. At the time of the change, rents in Sydney had been drifting down for more than three years.  The idea of a runaway rent market was a fantasy. All too often, we assume problems are conquered when in fact they are just in remission, waiting for the right circumstances to reappear.

According to SQM Research, the average advertised rent for a unit in Ryde has increased by 48% from March 2022 to March 2023. Before you gasp and shout ‘that’s insane’, just know this. Over the last ten years this same rent index has grown at a rather sedate 3.7% per annum. The rental market is moving back to the long-term trend; this is a correction; the system isn’t broken!

Now back to the law of ‘one rent increase every 12 months’. Firstly, that law hasn’t reduced the amount of any increase, it’s probably increased the amount of any increase. In the past we could move rent up in smaller bites, wait 6 months and then step the rent up again. Now there is no way to be flexible.

Secondly, a lot of owners have found that having increased the rent just 3-6 months ago, they still end up being way below market. Faced with the financial pressures of rising interest rates, some Landlords are opting to give notice to their tenants and then re-rent the property at whatever the current market will pay. That might sound mercenary, but for some landlords, financial pressures have meant they give notice to vacate and rerent it or they sell and get out.

Less freedom to say ‘no more’   

Suppose a tenant was challenging to get along with or they weren’t looking after the property as well as we would like. In such cases, we can bring the relationship to an end. An owner could say to a tenant, ‘I don’t want to continue doing business with you’.

In Victoria and Queensland, they have limited a landlord’s ability to issue a ‘no grounds, 90-day notice’. NSW Labor’s policy platform is the same.

Let’s look at Brisbane. Last year the number of properties rented out in Brisbane fell by 17.8%. That’s not the number of properties advertised for rent; that’s the total number of properties being rented. At the same time, Queensland has had record immigration, with an extra 14,000 people moving to the state. The tenants’ union in that state is asking for rent control. Initially the Deputy Premier said they would prefer not to intervene. Now they are ‘actively considering it’.

I suggest the Queensland Government can’t cure a lack of housing by capping rent increases.

New Zealand as an example  

In New Zealand, the story is more extreme. The Government did what our politicians have been too scared or sober (depending on your political leanings) to do. They got rid of negative gearing. Their intention was to make housing more affordable by stopping investors from buying property. NZ now has twice the homeless population rate of Australia and the highest amongst OECD countries.

House prices in NZ are falling, but tenants aren’t buying in the numbers the idealists thought they would. People who need a home to live in can’t simply go and get a loan to buy a house just because an investor isn’t wanting to buy it. They need a deposit and an income that a bank will lend on. Simply stopping investors from buying doesn’t fix a saving and income problem.

As The Sydney Morning Herald suggested,

‘Australian governments might be wise to pay attention to what has happened in NZ, to think of it as the ‘Kiwi in the Coal Mine’ if you like.’

Certainly, Governments can make it easier for wealthier tenants to buy their first property, but they must be careful. Remember the financial crisis in 2008? The US removed many of the financial controls on bank lending so that it became too easy for people to get loans to buy property. We all found out that giving mortgages to people who can’t afford to pay them back never works out well for the economy or the borrowers they thought they were helping.

I’m not suggesting Australia will do the same thing as New Zealand. Paul Keating (now there’s a name you don’t hear anymore) abolished negative gearing back in the 80s. While he still allowed investors to claim borrowing expenses against the rental income, any shortfall had to be accrued and deducted from future income. New investors had to wait until their property’s net income was positive or when they sold before they could deduct the losses from previous years. Within a short time, he reversed the law.

There is a heap of debate about why he changed his mind. Many economists and political platforms still argue for the abolition of negative gearing. They argue that Paul Keating’s experiment didn’t fail, and everything was going well. The problem they suggest was that pressure groups like high-income earners and the Real Estate Institute were telling fibs and making the public and the politicians scared. How about that? Paul Keating’s problem was a lack of self-confidence!

Don’t expect Land Tax to get fixed

And even when Governments don’t change things, things still change.

Land Tax is an excellent example. The land tax percentage and the system of property values were designed years and years ago. The Valuer General used the concept of Unimproved Capital Value of a property which often sat at about half or even less the property’s actual value. No one complained until someone took the NSW Valuer General to the High Court of Australia. The High Court ruled that these values were rubbish. The Valuer General was told to look at actual market values, which is why your Unimproved Capital Land Value is going through the roof. The land tax percentages haven’t been changed, so land tax is now a massive cost to anyone with a house for rent.

With the change in Government, you can expect Land Tax to remain in the Too Hard basket. Where the Liberals were changing it to a broad tax system that would have meant more people paying far less and abolishing stamp duty, the new Government will more than likely leave it how it is.

And leaving it how it is will no doubt cause more landlords who rent out houses to reconsider the return on the asset and sell up.

Social housing

Neither side of politics can fund the volume of social housing needed to look after all the vulnerable members of our society. 30% of households across Australia rent. Government housing makes up a small percentage of that supply.

Everyone relies on private landlords providing housing to those that don’t own and are nota able or ready to buy their own home. Both sides of politics and every level of society needs housing.

When Mr Keating reintroduced Negative Gearing, one of the strongest lobbyists wasn’t the Real Estate Institute, it was the NSW State Government which was Labor. Rental accommodation was drying up in the areas of Sydney that were traditional Labor Voters lived.   I think that will happen again. It’s the lower income tenants that suffer first from rent rises and reductions in housing.

Market economics always has the last say

The rental market in Australia is very close to the theoretical definition of a Pure Market Economy.

Pure Markets have many sellers and buyers. In this case, I’m talking about landlords and tenants. No one gets to set the market price; every tenant is in competition with other tenants looking for property and every landlord is in competition with other landlords leasing their properties. The market is constantly adjusting to balancing demand and supply. And that adjustment, as many people now realise, can be incredibly quick and without regard to an individual’s situation or capacity.

There is one significant difference between a Pure Market and our rental market. Pure Markets, by definition, do not have any Government interference.

I don’t think government intervention is necessarily bad. In many ways, I prefer them intervening and creating laws that stop things running amuck. Imagine being back in the 60’s when to get a tenant out of your property required employing a solicitor and going to court to prove a contract breach. It was a nightmare and costly.

The Rental Market is, at its most fundamental, an investment market that provides rental accommodation as a by-product, not as its primary goal. No owner buys an investment property and says, ‘Now I can give someone a home’. A tenant is an income stream and a maintainer of the property.

Mistakes in predicting the impact that changes in laws will have on markets often happen because  people think about the ‘average’ person.

If laws change and make it harder to kick a tenant out or limit an owner’s ability to increase rent, will the average landlord sell?  No, they won’t but the average landlord isn’t the issue.

Like any group of people, there are those that think and behave very close to average and there are those that don’t. And it’s this second group that drive the change in the market.

Brisbane dropped nearly 18% of rental property driven by a myriad of financial and legal changes affecting property. The owners of the remaining 82% absorbed those changes. If the politician had talked to the public before bringing in the new laws, they would have been rightly confident that the vast majority of landlords would be ok. But it wasn’t the 82% of landlords who absorbed the changes in the market that have caused Brisbane’s rental crisis. It’s the 18% that didn’t.

There is no us and them

A lot of political/tribal thinking likes to suggest there are good people on our side and bad people on the other. The market is neither good nor bad, its ambivalent. It isn’t driven by heartless landlords not caring about the little people. The market doesn’t care about heartless landlords either, it just doesn’t care; full stop.

And it has absolutely no interest in what any individual thinks. It only reacts when things aren’t in balance. There is massive danger in believing your pet theories. You will find evidence to support and ignore evidence that challenges.

In Queensland the Greens are calling for rent control to fix Brisbane’s rise in rents. They are far more confident the problem is driven by Landlords that are bad and profiteering and far less convinced that the problem is a reduction in supply (fallen 17.8%).

Poker is both a game of chance and skill. Players’ behaviour is often studied and researched by psychologists. One key difference between professional gamblers and amateurs is that professionals close out a hand far quicker. The Amateur is more likely to keep putting money in the pot hoping that the next card will make the loosing hand a winner. The mathematical possibility of that happening is real, the mathematical probability of it happening is not. So very few of us can back up and reverse course when we have already sunk time and money into our plan and theory.

A Government’s ability to guide the rental market is far less God like and far more Priest like. They can make an appeal to the congregation to do the ‘right thing’ but at the end of the day they are bystanders. Every change of law intended to make the system work ‘fairer’ invariably changes how each of us see the alternatives, the risks, and the benefits. Some decide to get out, the market balance moves, and some tenants end up worse off.

We are dealing with a market mechanism that doesn’t care about what we want to happen.  My logic and predictions may be right or wrong, that isn’t as important, only what happens is. Paul Keating was able to step away from his reasoning, or ego, and the beliefs he and others held about negative gearing and see the evidence that others were getting hurt. I fear the ones who will get hurt are the ones those well-meaning politicians are convinced they will be helping.

Author: Stephen Jackson