By Joel Dignam, Executive Director, Better Renting.
Coronavirus has changed everything for renters and landlords. In a matter of weeks, a huge number of people have lost work. Renters were particularly affected, as they were more likely to be in insecure employment. Property investors had to face the possibility that their reliable income stream, derived from the waged labour of renters, might be drying up.
In a number of blog posts, I hope to consider the immediate government response but also what we need to see in the medium and longer-term. But as context, this post is a foreword of sorts, considering where renters and the property market stood before the onset of coronavirus.
Renters were economically vulnerable
Even before the coronavirus hit, many renters were doing it tough.
In recent history, the composition of the private rental sector has changed. Many renters on middle to high incomes are finding it harder to buy a home, so they are staying as renters for longer. At the same time, the shrinkage of the social housing sector means that many more low-income households find themselves in the private rental sector.
Particularly if you are on a low-income, the private rental sector is a pretty rough place to be. In social housing, rents are often set as a proportion of income: you’ll never pay more than, say, 25% of your income on rent. In the private rental sector, rents are set to maximise returns for investors. As a consequence, about two in three low-income rental households spend more than 30% of their income on rent.
Productivity Commission. “Vulnerable Private Renters: Evidence and Options Productivity Commission Research Paper”, 2019.
These people are already on low incomes, so it’s a struggle to afford essentials on the amount that is left over. They are living on the edge of debt and homelessness: about one in five such households has less than $250 remaining after paying rent each week. A consequence of this is “material deprivation”. For example, about three in ten private rental households wouldn’t have at least $500 in savings for an emergency (like, say, coronavirus and losing your job). In contrast, only one in ten owner-occupier households is in a similar position.
Renters were vulnerable in other ways, too
But it’s not just low-income renters who are doing it tough. Rental laws in Australia mean that all renters, regardless of their income, are worse off because they are renting.
Australia’s rental laws make it much harder for renters to be confident of staying in their home long-term. The vast majority of renters are on short tenancies, typically less than 12 months. In most jurisdictions, a tenant who is not at fault can be evicted with just 4 weeks’ notice. Tenants are also vulnerable to ‘no grounds’ terminations, keeping them under the thumb of lessors who can take their home away without even having to provide a reason.
Low-income renters have less financial resilience if their tenancy is terminated, but all renters are in the position of being conscious that a letter in the mail could mean they have to find a new home. It’s not surprising that renters have worse mental health than owner-occupiers.
Another issue is the quality of rental housing. Generally, regardless of income, renters live in properties that are worse and kept in an inferior state of repair. For example, about one in ten rental homes is in “poor-derelict” condition, compared to just 3% of owner households. Renters also live in properties that are harder to cool in summer and heat in winter. Homeowners, even those in the same income brackets, do not face the same challenges.
Coronavirus has been a huge hit to the incomes and security of people who rent. But this hit is worse because people who rent their homes were already in a weakened position. All renters are caught in a system of rental laws where property is an investment first and a home second. Low-income renters, in particular, are kept poor through insufficient social housing and high rents in the private market. This was already a broken system: coronavirus just turned on the X-ray.
Landlords were on top
How were property investors positioned before coronavirus hit?
There’s no one answer to this question. A statistical average will always conceal individual situations. Invariably, some individual investors are worse off than some individual renters. What we can do, however, is try to understand the big picture. In general, were investors or renters in a better position to weather an economic storm?
We will get into the data, but let's start with some intuitions. One thing we know is that landlords have a stake in an investment property. This likely means they are in a better position than most renters. Given that these landlords likely own their own home, they probably have at least two properties. So they are in a better position than most home-owners, too.
On the other hand, this probably means that the landlords have significant debt and large mortgage repayments. The vast majority of landlords have an ongoing mortgage. Now, debt isn’t a good thing on its own, but the ability to access finance is a positive sign. Having this debt means that the property investors were able to stump up a hefty deposit. In general, housing debt could be considered ‘good debt’ that involves forced saving and a stake in an appreciating asset.
But what more can we say about property investors?
Firstly, investor households are much richer than other households. Much richer. The average landlord household has an annual disposable income more than $50,000 greater than non-landlords. That’s a lot of money.
What else do we know? According to an RBA analysis of HILDA data, about 80% of the ‘debt’ for investment properties is held by households in the top 40% of incomes. Further, these households service their debt using less than a quarter of their income; around half are “ahead of schedule on all their mortgage repayments.” What a life!
Reserve Bank of Australia. “Proportion of Investment Housing Relative to Owner-Occupied Housing,” June 2015.
An economic shock is going to be rough for any household: but these property investor households have much greater resilience. Whether or not they are “mums and dads”, property investor households are exceptional. Yes, they have mouths to feed, but, compared to most Australians, they find it a whole lot easier to feed those mouths.
Some landlords were vulnerable
'the tax treatment of investor housing, in particular, tends to encourage leveraged and speculative investment.... Housing is a potential source of systemic risk for the financial system and the economy'
Of course, not all property investors are so lucky. I can imagine a property investor who is lucky enough to have a deposit for a property, but maybe their ability to make mortgage repayments is utterly dependent on regular rental income. Or maybe the repayments are partly covered by rental income, and partly by the investor’s salary. These people might seem to be doing alright, but they could be vulnerable to a sudden reduction in rental income, especially if their own salary income was also taking a hit.
The aforementioned RBA analysis hints at this possibility. About 10% of investor housing debt is held by households in the bottom two income quintiles. These households are the least likely to be ahead on mortgage repayments, compared both to owner-occupiers on equivalent incomes, and also to higher-income property investors. They also pay a much greater proportion of their income on debt repayments.
To some extent, this group includes people who are quite comfortable, either because they have low living costs (such as people who’ve paid off their own home) or they may have non-taxable sources of income (such as superannuation). But this group also includes investors who should not have become property investors in the first place. The low proportion of such investors who are ahead on mortgage repayments suggests that some of these people are only just getting by. Indeed, many renters have had the astonishing experience of realising that their lessor doesn’t actually have the cash flow to undertake necessary repairs.
This phenomenon is an unfortunate outcome of the commodification of housing - a global trend - but also Australia’s peculiar obsession with investment residential real estate. Countless spruikers are out there running seminars telling people how to get rich by taking on debt and buying investment properties. When the market is going well - when property values are going up and rental incomes are flowing in - you can’t really lose. But investment carries risk. In addition to the wealthy and financially secure property investors, there are poorer property investors who have taken on huge debt. In the event of a significant downturn, they are at particular risk.
The situation pre-COVID
Before coronavirus hit, Australia’s housing system was already failing many Australians. About one in four Australians were renting in the private rental sector: locked out of home-ownership, and pushed out of the public housing sector. This includes many Australians whose low-incomes are chewed up by rental costs so they have little left over for essentials like electricity, phone bills, or healthcare.
The billions of dollars that flow out of renter households in the form of rents flow into the bank accounts of households that are, in general, much better off: property investors. Where renters face rising house prices and expensive rents, property investors experience appreciating assets and increasing incomes. In fact, these households have a disposable income that is about 60% higher than non-investor households.
But not all property investors are so well off. Hidden amongst the cigars and top hats, there are property investors who have made a terrible gamble. If the good times continue, they’ll use their tenants' income to make their mortgage repayments, and their bet will pay off. But if anything happens, in a twist of fate these property investors could find themselves sharing a common fate with renters: up against the wall, unsure how they can meet their financial obligations.
Unfortunately, something did happen.
For further reading, we recommend:
- Productivity Commission. “Vulnerable Private Renters: Evidence and Options Productivity Commission Research Paper,” September 2019.
- Reserve Bank of Australia. “Proportion of Investment Housing Relative to Owner-Occupied Housing,” June 2015.
- Hulse, Kath, Margaret Reynolds, and Chris Martin. “The Everyman Archetype: Discursive Reframing of Private Landlords in the Financialization of Rental Housing.” Housing Studies, July 29, 2019, 1–23.
- Martin, Chris. “Clever Odysseus: Narratives and Strategies of Rental Property Investor Subjectivity in Australia.” Housing Studies 33, no. 7 (October 3, 2018): 1060–84.
- Reserve Bank of Australia. “Financial Stability Review,” April 2020.