Sabtu, 06 November 2010

Agents get real (part 1)

The Real Estate Institute of NSW has just issued a new statement on tenancy law reform: its 'Real Tenancy Policy'. Whereas previous commentary by the REI on tenancy law reform was, with respect, somewhat shrill, this new statement shows promise.

We'll review it in detail in this and subsequent posts. The Real Tenancy Policy is reproduced below in blue; our comments are in black.


REINSW seeks amendments to the existing regulatory regime for residential tenancies to strike a proper balance between the legitimate interests of residential investors and the provision of proper safeguards for residential tenants.

Fair enough. We'd like residential tenancies law to strike a balance too. Of course, you have to keep in mind that the landlord-tenant relationship is unbalanced from the get-go, with landlords having the upper hand.

After all, it's always landlords and their agents who ask to see prospective tenants' references, bank statements and payslips, and run them through tenancy databases - never the other way round. Similarly, during a tenancy, landlords can generally enforce tenants' obligations by threatening to end their tenancies; tenants, however, can rarely make such threats effectively, because of the cost they bear (financial and emotional) if they end it and move. Compared to other types of consumers, tenants find it very difficult to shop around and take their custom elsewhere, and landlords feel very little pressure to compete with other landlords.

This means tenancies law strikes a balance when it is consciously directed to strengthening the position of tenants.

The REI goes on to propose that striking a proper balance involves three things. Here's point 1.

[1] Removal of unnecessary impediments for residential investors

“Everyone shares the right to a decent standard of living. Essential to the achievement of this standard and therefore to the fulfillment of human life beyond simple survival is access to adequate housing. Housing fulfills physical needs by providing security and shelter from weather and climate. It fulfills psychological needs by providing a sense of personal space and privacy. It fulfills social needs by providing a gathering area and communal space for the human family, the basic unit of society. In many societies, it also fulfills economic needs by functioning as a center for commercial production.”

We like this quote very much. The REI cites a human rights NGO as the author and, seriously, good on the REI for taking a look at their business - rental housing - from this perspective. Hopefully it's a perspective they'll be bringing to the training they do with their members. All agents and landlords should spend a little time reflecting on it.

In New South Wales, residential accommodation plays a key role in maximising access to adequate housing. There are currently some 800,000 residential rental properties in New South Wales, of which approximately 82% are held by private landlords (as distinct from social housing). The vast majority of landlords rely on the services of licensed real estate agents to let and/or manage the property on their behalf. Just under one third of the population live in rented premises.

All true – lots of people rent.

The past two decades in particular have seen a broadening of the available opportunities for investment of capital. The advice that “the best and safest investment is bricks and mortar” is no longer followed as frequently as it was last century.

Hang on a second - let's just have a look at some measure of investment in rental 'bricks and mortar' over the past two decades
(albeit Australia-wide measures, not just New South Wales). First, let's look at the number of persons making this sort of investment. As we said, lots of people rent, but over the last two decades, lots and lots of people have become landlords. Here's a graph from the ATO and Morgan Stanley, via the Unconventional Economist:

(Rental Property Investors as a Percentage of Tax Payers)

Yes - over the last two decades the number of Australian landlords has almost tripled!

And they've sunk an awful lot of money into housing. Not including whatever savings they've put into their investments, here's what they owe:

(Source: RBA Table D2 Credit Aggregates: Credit - Investor housing (non-seasonally adjusted))

Today's figure is $344 billion, and it's never been higher. Over the last two decades, then, about a million people have gotten into rental property investment, borrowing about $334 billion to do so.

Back to the policy.

Investments in shares or financial derivatives do not generate the positive financial by-product of providing accommodation for families.

Hang on here too. It's true that building a house is a productive and beneficial thing to do – much more so than speculating in the fictitious financial creations of contemporary casino capitalism. But how many of those property 'investors' actually produce houses - that is, build something new, rather than just buy something that already exists? A landlord buying an existing dwelling does not produce housing: at best it 'produces' rental housing at the expense of owner-occupied housing. The graph below shows how much money property investors borrow every month (so it's not aggregated like the graph above) and what they spend it on: whether they pay for new houses to be built (productive), or simply buy a house that already exists (non-productive).

(Source: RBA Table D6 Lending Commitments- All Lenders: Investment housing. $ million, seasonally adjusted.)

So, let's be clear: most of those 'investors' aren't really 'producing' any housing and, if you cast your eye back to that ATO/Morgan Stanley graph, you can see that most are not producing an income for themselves either - they're losing money. This means, of course, they're in it for capital gains. Sorry, but buying existing properties in the hope of later selling them for more is speculation, not productive investment.

Government should, at the very least, not take steps which actively discourage availability of housing stock. The adverse effects on the availability of accommodation as a result of the changes to the tax treatment of negative gearing interest expenses between mid-1985 and September 1987 should never be forgotten.

There's a couple of things to say about this. First there's the implicit comparison of tenancy law reform to tax law reform - that is to say, the REI is suggesting that tenancy law reform, like tax reform, can affect investment and the availability of housing. This is an apples and oranges comparison. Whenever anyone has researched the investment of decisions of landlords, economic factors, such as the tax treatment of housing, dominate their decision-making. Tenancy law, by contrast, barely rates a mention.

Secondly, the implicit connection between negative gearing and housing stock doesn't stack up either - as the graph of the RBA's Table D6 shows, so much of that negatively geared investment is in houses that already exist. True, if we were to scrap negative gearing we might expect that many of the current lot of speculators might want to get out of the market - but they won't dismantle the houses when they go. And we might expect to that fewer 'investors' would be so keen to pour so much borrowed money into the market for existing dwellings, giving would-be owner-occupiers a break... there's a thought.

Thirdly, the REI implicitly invokes the rent increases that occurred when negative gearing was restricted in 1985-87. But is there actually a causal connection? Another graph from the Unconventional Economist (and the article there is an excellent short analysis of negative gearing) shows that this is not clear at all. True, Sydney's rents did go up strongly at that time (the period is indicated on the graph by the two vertical dotted lines), and so did Perth's, but not the other capitals'.

(CPI Deflated Rents Index, 1972-2008, with focus on the period of the restriction of negative gearing, 1985-87)

Probably better to say that the effects of changes to negative gearing should never be misrepresented or misunderstood.

We'll return to points 2 and 3 later.