Rental Nation

Whilst the discussion on how to best support affordable housing in our cities grows, it is worth taking a look at what can be learnt from international models. Do long tenure rental agreements have currency in the Australian market? Will Brouwers looks at the options of mixed or part-ownership trialed in Denmark.

There is a school of thought that maintains Australian rental conditions are unfairly biased towards landlords and against tenants. That our peers in Europe and the United States offer more stability and dignity to tenants by offering leases with longer tenures and rent controls. Nevertheless, the rental market in Australia is in excellent shape, with an efficient Rental Tenancies Bond Authority (RTBA) and informal dispute resolution services available through VCAT and their interstate equivalents.

In fact, increased regulation of the rental market might lead to some undesirable consequences. Cities such as London and New York have tried to improve housing affordability by stabilising rents and providing tenants with increased rights. As a consequence of this, leasing residential property is seen as less attractive to investors and the cities have seen a reduction in the rental housing stock available. Furthermore, existing housing stock was found to be often poorly maintained when long-term agreements forced rent fell below market rates. This position was seconded by the NSW Department of Fair Trading’s recent review of tenancy legislation where in relation to increased rental tenure they noted they “could find no sufficient justification to introduce this measure… to do so would have serious implications on the rental market.”

The underlying issue is not that rental conditions are untenable and should be improved, but that commodification of housing has placed home ownership beyond the reach of young median wage workers. We have long since shifted out understanding of property from shelter to superannuation. The view of real estate as a financial product has been a driving force for property prices. This investment, both local and international, has buoyed our economy and arguably helped balance supply and demand leading to a more equitable rental market.

This leaves us stuck in a regrettable position. It is true that Victorians are renting for longer because they cannot afford to buy. Manipulating rental agreements may not solve the problem.

The solution may lie in providing would-be home owners with the opportunity to enter the property market by reducing the size of their purchase. There are innovative ways to achieve this, such as mixed freehold/rental agreements and housing cooperatives. Andelsbolig are a type of Danish housing cooperative in which a tenant purchases shares in the company, entitling them to occupy a particular apartment. The upfront cost is substantially discounted, but in addition to paying the mortgage, the occupiers must also pay ongoing rent. This is just one version of a mixed ownership model that has proven successful.

A version to suit the Australian disposition to detached dwellings could be as simple as allowing homebuyers the option to purchase a proportion of detached property and pay rent on the remainder. This could offer the stability of home ownership to the occupier in a property at the price they can afford. When time comes to sell their home, the hammer only falls of the proportion of the property they bought plus any improvements they have made to the home.

It’s an option with investment potential. Investors can purchase the remainder of many ‘half-held’ properties hence spreading their investment risk. Finding tenants and commissioning property managers is bypassed when there is a permanent tenant who is personally incentivized to keep the property in excellent condition. For an investor primarily interested in capital gains growth over yield, the ability to jettison responsibility for management at no cost is ideal. The ‘silent’ shares in the property could be bought and sold like shares in listed property trust from one investor to another.

The answer to improving the concomitant issue of rental tenure and housing affordability may well lie in the transition away from a binary opposition of renting vs owning. The addition of mixed or part ownership would offer the intermediary step that Australians priced out of the market need. The answer may lie beyond modifying rental tenure to make renting a home a permanent condition and instead broadening the choices available to occupiers.

Words: Will Brouwers